Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Securitization wikipedia , lookup
Business valuation wikipedia , lookup
Land banking wikipedia , lookup
Financialization wikipedia , lookup
Syndicated loan wikipedia , lookup
Beta (finance) wikipedia , lookup
Stock trader wikipedia , lookup
Private equity secondary market wikipedia , lookup
Interbank lending market wikipedia , lookup
Public finance wikipedia , lookup
Financial economics wikipedia , lookup
Market Know-How Insights and Implementation Strategic Advisory Solutions Q1 2016 Q1 2016 GSAM’s ‘Market Know-How’ explains what investors should KNOW about current market conditions, and HOW they can implement an investable strategy. The ideas presented in the Market Know-How are based on our expectations of global macro conditions, asset class performance, and sound portfolio construction. 6 The Great ‘Rotate’ As developed economies enter a seventh year of expansion, the velocity of growth continues to be underwhelming yet resilient. In 2016, we believe that major economic data points may trend slightly higher, particularly in Europe and Japan, with economic leadership continuing to rotate from manufacturing to the consumer. Other ‘rotations’ include tighter monetary policy in the US and UK, clusters of volatility, muted US Dollar gains, and value arising in credit, energy, and select emerging markets. Here is what we do not expect to change in 2016: ■■ Pro-cyclical deployment: We continue to believe risk capital should be positioned in anticipation of economic broadening and earnings sustainability ■■ Income: The potential return-limiting influence of elevated valuations amplifies the role of income ■■ Idiosyncratic positioning: Manufactured earnings and increased leverage underscore the need for extensive research and security-specific positioning ■■ Headline risk: Whether technically, fundamentally, or geopolitically driven, we expect structurally higher volatility to reinforce the benefits of downside risk management and return differentiation Finally, as we share our insights for 2016 in the pages that follow, we remind investors that the most enduring answers to a complex market environment can be found in a commitment to strategic portfolio design. Macro GLOBAL GROWTH INFLATION Global Gross Domestic Product (GDP) likely bottomed last year and could rise moderately in 2016. Stability could be led by ongoing improvements in consumption. The depletion of slack in labor is most advanced in the US, but varies globally. Much of the world is still hampered by what can be termed “lowflation” and “high capacity.” MONETARY POLICY ENERGY RISK Central bank policy diverges with a focus on normalization in the US and UK, while the Euro Area and Japan commit to additional heavy lifting through policy easing. Traditional producers cede ground to a fragmented landscape of increasingly efficient shale producers. Supply and demand may find balance in late 2016. While we expect macro resiliency, the potential for a Chinese hard landing, plunge in oil demand, surge in the Dollar, and acceleration in policy tightening should be monitored. MARKETS MAY BE DOMINATED BY DIVERGENT RATE POLICY 3-Month Interbank Rates (%) 1.2 US Euro Area Japan UK Forecast 0.7 0.2 -0.3 2013 2014 2015 2016 2017 Source: Bloomberg and GSAM. As of November 30, 2015. The economic and market forecasts presented herein are for informational purposes. There can be no assurance that the forecasts will be achieved. Please see end disclosures for more information. 2 Market EQUITIES FIXED INCOME At full valuations, returns are likely to be dominated by earnings growth and cash flow generation more than multiple expansion. This bodes well for Europe and Japan, in particular. We believe government bonds remain expensive, impacted by low inflation expectations, excess savings, and central bank asset purchases. Regional rate divergence may occur. CREDIT CURRENCY VOLATILITY We see value in US corporate credit, where valuations are consistent with recession, but fundamentals are not. Increased leverage and illiquidity may warrant idiosyncratic emphasis. While an uncomfortable consensus view, the gradual pickup in inflation and realized monetary policy divergence may drive further Dollar appreciation, although at a slower pace. Following an extended period of low realized equity volatility, we may have entered a new phase of more frequent, yet more historically normal, bouts of volatility. S&P 500 OUTPERFORMANCE VS. OTHER ASSET CLASSES: HISTORICALLY UNUSUAL 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD US Large Cap (S&P 500 Index) Bank Loans (CS Leveraged Loan Index) Global High Yield (Barclays Global High Yield Index) International Stocks (MSCI EAFE Index) Commodities (S&P GSCI Commodity Index) Hedge Funds (HFRI Fund of Funds Index) US Aggregate Bonds (Barclays US Aggregate Bond Index) Emerging Market Debt (J.P. Morgan EMBI Global Index) International Real Estate (S&P Developed ex-US Property Index) US Real Estate (Dow Jones US Select Real Estate Securities Index) Emerging Market Equity (MSCI Emerging Markets Index) International Small Cap (S&P Developed ex US Small Cap Index) US Small Cap Equity (Russell 2000 Index) Source: Bloomberg, Barclays, and GSAM. As of November 30, 2015. All data represents total return. Past performance does not guarantee future results, which may vary. Market Know-How Q1 2016: The Great ‘Rotate’ | 3 Market Know-How Q1 2016 THE KNOW THE HOW 1 Economic expansions have been persistent Deploy pro-cyclically 2 China’s economy is in transition A bumpy road ahead 3 Non-US stocks and US rate hikes have historically moved together Understand domestic recoveries, globally 4 Economic growth may amplify smaller stock performance Don’t forget the ‘other 500’ 5 Credit spreads reflect pessimism A seasonal pattern emerges 6 Single sources of income entail tradeoffs Blending income has potential benefits 7 Oil prices have taken MLPs for a ride Attractive valuations, high cash flow potential 8 Liquid alternative sub-strategy returns have been variable Harness the power of diversification Views and opinions are current as of December 2015, and may be subject to change, they should not be construed as investment advice. Economic and market forecasts presented herein reflect our judgment as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs Asset Management has no obligation to provide updates or changes to these forecasts. Examples are for illustrative purposes only. 4 1 Economic expansions have been persistent. Investors should not be distracted by the age of the expansion. 100 Probability that a 6 Year Old Expansion Becomes a: 7 Year Expansion is 90% 90 The historical record suggests that age has little bearing on the prospects of a downturn. 80 Probability (%) 70 10 Year Expansion is 60% 60 50 40 30 20 10 0 6 8 10 12 14 Years of Expansion 16 18 20 In the same way that one can derive lifespan probabilities from an actuarial table, we calculate the probability that our current six-year-old economic expansion enters its seventh year at about 90%. Indeed, there is a 60% probability that our current cycle may avoid recession for another four years—maturing into a 10 year cycle. Source: Goldman Sachs Global Investment Research and GSAM. Deploy pro-cyclically. US activity remains sturdy as measures of broader economic health suggest a solid macro foundation. Current 1 Year Ago N AT I O INF L EA R RY Payroll Job Growth Change in Unemployment Rate Unemployed per Job T Output Gap When we look beyond the actuarial lifespan of an economy, and more at its fundamental health, we arrive at the conclusion that the US economy may be poised for additional growth. In the accompanying chart, high frequency economic indicators and financial metrics point to a slowly aging, but still mid-cycle expansion. EN G Total Employment Gap PLO YM DP BBB Credit Spread EM INDUS T D Manufacturing Inventory/Supply Ratio R LY Industrial Production ION ES EC S E MI L AT L Credit Standards ISM Manufacturing Real Gross Domestic Product (GDP) Growth CIA Change in Inflation Rate AN S&P 500 Volatility We would put the odds of a US recession in 2016 at about 10–15%. F IN Term Spread Real Federal Funds Rate Source: Goldman Sachs Global Investment Research and GSAM. Top Section Notes: As of November 9, 2015. The chart shows the cumulative probability that an expansion will last longer than six years (the duration of the current US expansion). Cumulative probability refers to the unconditional probability based on US business cycle data since 1950. Expansion refers to the period during a business cycle when the economy moves from a trough to a peak. Bottom Section Notes: As of October 30, 2015. The chart reveals the individual positions of 15 economic indicators across the four stages of the business cycle (early, mid, late, and recession). Please see end disclosures for more information on credit. Market Know-How Q1 2016: The Great ‘Rotate’ | 5 2 % of Total GDP 50 China’s economy is in transition. The rotation to a consumerdriven, freer Chinese economy may help drive global GDP growth. Industrial Sector Service Sector Regardless of recent slowdown fears, China is increasingly the largest contributor to global real GDP growth. 45 40 Service Sector Now the Largest Part of China's Economy 35 30 1990 1994 1998 2002 2006 2015 Global GDP Growth 39% China 2010 2014 22% China 2005 Global GDP Growth 7% Chinese GDP Growth in 2015 Could Contribute More to Global GDP than 11% in 2005 Top Chart Source: Bloomberg, National Bureau of Statistics of China, and GSAM. Bottom Chart Source: International Monetary Fund World Economic Outlook Database and GSAM. While China’s industrial economy continues to slow, services continues to grow, becoming the largest contributor to the Chinese economy. Typically, as consumer wealth increases, spending rises. But, productivity falls, and therefore GDP growth may decelerate during this economic transition. A bumpy road ahead. We expect China to be a continued source of market volatility. Monetary Policy Flexibility Interest Rate Liberalization Financial Regulation Greater Regulatory Coordination Renminbi Internationalization IMF SDR Basket Inclusion Source: GSAM. Broader Access to Chinese Equities Shanghai-Hong Kong Link Connect Financial Liberalization Chinese Debt Market Instruments Diversification in Bond Financing State Owned Enterprise (SOE) Reform Improving Corporate Governance of SOEs China is not only undergoing an economic transition, but also a financial transition from a controlled to a more open market economy. China is progressively liberalizing its economy with market policy changes, driven by desires for political stability. While these changes have been underway for some time, they have come sporadically, leaving investors with little warning. We believe investors should expect further volatility. Top Section Notes: Top chart analysis is from 1990 until year-end 2014. The chart shows that China is at a turning point in its economic transition as the service sector overtakes the industrial sector as the largest part of the economy. The industrial sector includes goods produced in construction and manufacturing. The service sector includes the production of intangible goods. Bottom chart as of October 31, 2015. This chart shows China’s contribution to global GDP growth. Bottom Section Notes: As of November 2015. Image for illustrative purposes only, providing examples of China’s liberalization. IMF stands for International Monetary Fund. SDR stands for Special Drawing Rights. An SDR review is conducted every 5 years by the IMF’s Executive Board to ensure the SDR basket reflects the relative importance of major currencies and to enhance the SDR’s usability as a reserve asset. 6 3 Non-US stocks and US rate hikes have historically moved together. Major international markets fared well after Fed actions. Average Price Performance After Initial US Rate Hike in Major Global Markets: 3 Months 6 Months 12 Months 13 13 Economic recoveries in the Euro Area and Japan have trailed the US expansion. But today, we believe these regions offer an attractive combination of earnings growth and relative valuations. Major global equity markets in Europe and Asia have the potential to outperform US equities in this hiking cycle. Performance (%) 10 9 8 7 5 4 International equities have shown resilience following US rate hikes. 5 3 1 0 US Asia Pacific Ex-Japan Europe Japan Source: Bloomberg and GSAM. Understand domestic recoveries, globally. The international market recovery is now being driven by domestic growth. The domestic recoveries in Europe and Japan bear watching. Net Exports GDP (%) Euro Area Recovery Has Recently Been Driven by Consumption 6 Consumption Capital Formation GDP, % Year over Year 4 2 0 -2 -4 -6 2005 2007 2009 2011 2013 2015 Japanese Corporate Reforms May Have A Long-Term Benefit ROE (%) 15 Return on Equity (ROE) 10 Year Average 9.2% 10 5 0 -5 2005 2007 2009 2011 2013 Economic indicators show that Euro Area growth is being driven primarily by domestic consumption. While in Japan, Prime Minister Shinzo Abe‘s “three arrows” reform platform continues to fuel the domestic economy and corporate profitability. At the same time, accommodative monetary policy is supportive in both regions. 2015 Top Chart Source: Haver and GSAM. Bottom Chart Source: Bloomberg and GSAM. Top Section Notes: As of November 2015. US refers to the S&P 500 Index, Asia Pacific Ex-Japan refers to the MSCI Pacific Ex-Japan Index, Europe refers to the United Kingdom’s FT 30 Index, and Japan refers to the TOPIX Index. Performance analysis based on nine historical US rate hikes, except for the MSCI Pacific Ex-Japan Index which captures four US rate hikes (maximum available data). Bottom Section Notes: Top chart analyzes data from 2005 Q1–2015 Q2. GDP is calculated by the sum of expenditures, namely consumption, gross capital formation, and net exports. Bottom chart as of 2005 Q3–2015 Q3. The chart shows that return on equity (ROE) is nearing double-digit levels for the first time in about a decade. The “three arrows” refers to Prime Minister Shinzo Abe’s platform of fiscal stimulus, monetary easing, and structural reforms. Past performance does not guarantee future results, which may vary. Market Know-How Q1 2016: The Great ‘Rotate’ | 7 4 Economic growth may amplify smaller stock performance. Historically, performance has been tightly linked to expansions. The US expansion in our view remains supportive of smaller caps. Real GDP Growth Forecast and Contributions by Component (Q4 2015–Q4 2016) 3.0% 2.3% 1.8% 0.5% 0.5% 0.5% GDP Total PCE Capex Housing -0.8% Gov't Net Exports Domestic Final Sales Revenues Generated in the US Correlation of Earnings Growth to US Economic Growth 68% 82% S&P 500 Russell 2000 0.7 0.4 S&P 500 Russell 2000 The outlook for US growth remains healthy as signs of improving data provide a supportive backdrop. This is an environment in which smaller capitalization equities may thrive going forward, as smaller caps have historically provided amplified exposure to domestic revenues and earnings. Top Chart Source: Department of Commerce, Goldman Sachs Global Investment Research, and GSAM. Bottom Left Chart Source: Bureau of Economic Analysis, BofA Merrill Lynch Small Cap Research, and GSAM. Bottom Right Chart Source: FactSet and GSAM. Don’t forget the ‘other 500.’ In the past, small- and midcap stocks have outperformed small caps alone. Rolling 3 Year Returns (Basis Points) 500 Investors who move down the market cap spectrum may consider “SMID”—a combination of small and mid-sized stocks. Performance: Small- and Midcap Relative to Small Cap 400 300 200 100 0 -100 -200 -300 1982 1986 Source: FactSet and GSAM. 1990 1994 1998 2002 2006 2010 2014 We believe SMID caps are an important component of a diversified portfolio. On a rolling 3 year basis since 1979, adding a “midcap” bias (from the “other 500” names captured in the Russell 2500 beyond the Russell 2000) has generated higher returns 84% of the time versus small caps alone. Top Section Notes: Top chart as of November 2015. Domestic final sales contribution to real GDP growth is composed of Personal Consumption Expenditure (PCE), Capital Expenditure (Capex), Housing, and Government. PCE is a measure of price changes in consumer goods and services. Capex refers to funds used by a company to acquire or upgrade physical assets. Net exports refers to the difference in value between exports and imports. Correlation is defined as the extent to which two or more variables fluctuate together. Economic growth is represented by the four-quarter average of Gross Domestic Product (GDP). Bottom left and right charts as of September 2015. Small Cap refers to the Russell 2000 Index. Large Cap refers to the S&P 500 Index. The economic and market forecasts presented herein have been generated by Goldman Sachs Global Investment Research for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Past correlations are not indicative of future correlations, which may vary. Bottom Section Notes: Data is from January 1, 1979 to August 31, 2015. Small/Midcap performance is represented by the Russell 2500 Index and Small Cap is represented by the Russell 2000 Index. One basis point (bps) is 1/100th of a percent. Past performance does not guarantee future results, which may vary. 8 5 Credit spreads reflect pessimism. Markets have painted a range of high yield bonds with the same wide brush. Tightest Ever Year-End 2014 Widest Ever Current Spread US High Yield Energy EM Corporates US Investment Grade US High Yield US High Yield Ex-Energy Euro Investment Grade EM External Debt Asia High Yield Euro High Yield 0 25 50 75 100 Percentile Source: Bloomberg, Barclays, J.P. Morgan, and GSAM. Higher spreads, leverage, and price dispersion belie a steady macro backdrop. We believe macro conditions should support credit performance, particularly in the US, where oilrelated names have contaminated broader credit spreads. Beyond energy, wider credit spreads, in our view, can compensate investors for concerns about volatility, liquidity, and leverage. But investment still requires significant balance sheet expertise and idiosyncratic scrutiny. Average High Yield Monthly Excess Return (Basis Points) A seasonal pattern emerges. High yield may be particularly attractive as it enters a historically favorable period. The US high yield market has demonstrated patterns of seasonal strength and weakness. 200 150 100 As we enter the new year, wide credit spreads are converging with a historically strong period for credit returns, advancing our enthusiasm for credit-oriented pro-cyclical implementation. 50 0 Seasonally Strong Periods of Returns -50 -100 -150 Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Source: Barclays and GSAM. Top Section Notes: Data shows various economic indices as of November 30, 2015 from Bloomberg. US High Yield Energy, US Investment Grade, and US High Yield Ex-Energy are all spliced from the Barclays US Corporate Index. EM Corporates is represented by the J.P. Morgan Emerging Market Bond Index Global Diversified. Euro Investment Grade is represented by the Barclays Euro Corporate Index. EM External Debt is represented by the J.P. Morgan Corporate Emerging Market Bond Index. Euro High Yield is represented by the Barclays Euro High Yield Index. Asia High Yield is represented by the J.P. Morgan Corporate Emerging Markets Bond (CEMBI) Broad Asia High Yield Index. Bottom Section Notes: Data is from January 1989 to December 2014 and measures the average monthly returns of the Barclays US High Yield 2% Issuer Cap Index over US Treasuries. Past performance does not guarantee future results, which may vary. Market Know-How Q1 2016: The Great ‘Rotate’ | 9 6 Single sources of income entail tradeoffs. Higher yield may bring varying levels of volatility, returns, and rate sensitivity. Yield Ann. Return Volatility Rising Rates Strength Weakness MLPs 7.4% 2.1% 18.5% 1.0% Yield Return Global High Yield 5.8% 7.6% 11.6% 0.8% Yield Rising Rates S&P 500 Buy-Write 4.5% 6.8% 13.4% 1.1% Rising Rates Volatility US REITs 4.5% 5.6% 24.6% -0.1% Yield Volatility Emerging Market Debt (USD) 4.1% 7.5% 9.0% 0.1% Volatility Rising Rates Emerging Market Debt (Local) 4.1% 4.9% 13.0% 0.1% Volatility Rising Rates Leveraged Loans 3.7% 4.1% 7.8% 0.7% Volatility Return US Large Cap Value 1.5% 6.1% 16.3% 1.2% Rising Rates Yield Source: Bloomberg, Morningstar, and GSAM. Income-generating asset classes rarely offer the full package of yield, return, a smooth ride, and management of interest rate risks. Historically, income-oriented asset classes have often required tradeoffs. For instance, Master Limited Partnerships’ (MLPs) high yield came with higher volatility. Rarely can investors find all the attributes they may seek in a single asset class. Blending income has potential benefits. Historically, a broad basket of income drivers has helped blunt the unwanted tradeoffs. Yield 4.6% Higher Yield than Stocks and Bonds 2.1% 2.5% 6.2% Comparable Return to Stocks 7.7% 5.0% Ann. Return 11.9% Lower Volatility than Stocks 15.4% Volatility 3.2% Rising Rate Performance Diversified Income Portfolio S&P 500 Barclays Agg 0.8% Comparable Return to Stocks during Rising Rates 1.5% -0.3% Source: Bloomberg, Morningstar, and GSAM. A diversified approach to income sources historically has offered a number of benefits. Spreading an allocation across a range of income drivers historically has enjoyed a higher yield than core stocks and bonds, higher returns than bonds, and lower volatility than stocks. Critically, this allocation also has exhibited resiliency in the face of rising rates. A diversified income portfolio could potentially offer the full package. Top Section Notes: As of November 2015. Abbreviations in the top chart and the corresponding allocations of the asset classes comprising the Diversified Income Portfolio in the bottom chart: MLPs refers to the Alerian MLP Index (13.2%). Global High Yield refers to the Barclays Global High Yield Index (17.4%). Emerging Market Debt (USD) refers to the J.P. Morgan EMBI Global Diversified Index (7.8%). Emerging Market Debt (Local) refers to the J.P. Morgan GBI-EM Global Diversified Index (6.8%). S&P 500 Buy-Write refers to the CBOE S&P 500 BuyWrite Index (30%). Leveraged Loans refers to the Credit Suisse Leveraged Loan Index (6.8%). Ex-US REITS refers to the FTSE EPRA/NAREIT ex US TR index (3.7%). US REITs refers to the FTSE NAREIT Composite TR Index (4.3%). US Large Cap Value refers to the Russell 1000 Value Index (10%). Yield assumptions are represented by the asset-weighted average 12-month yield of the Institutional and No-Load Shares, excluding those funds with 12-b(1) fees, in the Morningstar peer groups, respectively, through November 30, 2015. Bottom Section Notes: These illustrative results do not reflect any GSAM product and are being shown for informational purposes only. No representation is made that an investor will achieve results similar to those shown. The S&P 500 refers to the S&P 500 Index and Barclays Agg refers to the Barclays US Aggregate Bond Index. Yield shown is the current dividend yield for the S&P 500 and yield to worst is for the Barclays US Aggregate Bond Index as of November 2015. Yield assumption for the Diversified Income Portfolio is the aggregate yield of the top chart asset class yields weighted at the respective weights from the top chart notes. Return and Volatility are annualized using monthly returns from June 2006 to November 2015. Rising Rate Performance represents the average monthly return when the 10-Year Treasury Yield rises. Diversification does not protect an investor from market risk and does not ensure a profit. Please see end disclosures for additional definitions. Past performance does not guarantee future results, which may vary. 10 12 Month Moving Average of 3 Month Rolling Correlations 7 Oil prices have taken MLPs for a ride. Their correlation has recently soared above historical averages. In the short term, the correlation between MLPs and energy prices has spiked beyond the relatively low long term correlation. 1.0 0.8 10 Year Correlation between MLPs and West Texas Intermediate (WTI) Oil Is Only 0.28 6 Month Correlation between MLPs and WTI Has Surged to 0.85 0.6 We believe the recent tight linkage between MLPs and energy is not sustainable in the long run, and we expect the recent unusually high correlation to revert closer to the long-term average. In our view, MLPs should not be fundamentally tied to the price of oil. 0.4 0.2 0 -0.2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Bloomberg and GSAM. Distribution Growth (%) Attractive valuations, high cash flow potential. We view the oil selloff’s aftermath as an investment opportunity for MLPs. 15 7% Total Projection 5 0 0–2 % Current Market Pricing 2007 2008 2009 2010 2011 2012 15 Yield Spread (%) Distribution Growth: 2% Global Financial Crisis Distribution Growth 10 0 2014 2015 2016 Outlook 5.6% October 31, 2015 Level 10 5 2013 Higher 3.7% Historical Average Lower 2007 2008 2009 2010 Source: Bloomberg, Alerian, and GSAM. 2011 2012 2013 2014 2015 MLPs potentially offer strong distribution growth and currently trade at a meaningful discount. MLP valuations today suggest an implied distribution growth of 0-to-2%—similar to levels last seen during the global financial crisis and a fraction of their average historical distribution growth of 7.6%. Additionally, current yields may provide investors with considerable levels of cash flow, well above their historical average. Top Section Notes: Chart is based on data from August 31, 2005 to August 31, 2014. Correlation is defined as the extent to which two or more variables fluctuate together. Rolling correlations are calculated for 12 month periods, based on 3 month correlations between the Alerian MLP Index and West Texas Intermediary (WTI) crude oil price. Bottom Section Notes: Top chart as of October 31, 2015. Distribution growth rates are market-cap weighted and reflect year-over year growth rates on a rolling basis. Past correlations are not indicative of future correlations, which may vary. Bottom chart as of October 31, 2015. Yield spread reflects the market cap weighted yield of the Alerian MLP Index over the yield of the 10-Year Treasury Note yield. Please see end disclosures for additional information. Market Know-How Q1 2016: The Great ‘Rotate’ | 11 8 Liquid alternative sub-strategy returns have been variable. Predicting category leadership has been challenging. 2010 2011 2012 2013 2014 7.63 2.71 6.64 14.20 5.31 5.85 0.30 6.02 6.09 3.01 5.76 0.03 3.68 4.74 2.29 4.84 -1.44 2.33 2.95 1.83 0.46 -2.89 1.52 1.92 0.06 GSAM Liquid Alternative Investment (LAI) Peer Groups: Equity Long/Short Event Driven Relative Value Tactical Trading/Macro The relative performance of alternative sub strategies has not been predictable over time. Multistrategy “Timing” an allocation to liquid alternatives based solely on recent past performance may lead to poor results. There has been little persistence in the returns of singlestrategy liquid alternative mutual funds. Source: Morningstar and GSAM. Harness the power of diversification. Increasing the number of strategies may lower volatility, without detracting from returns. Historically, groupings of 8 to 12 liquid alternative funds have shown reduced volatility of returns. Historical Volatility, 2012–2014 (%) 12 The reduction in returns volatility historically achieved by holding just 8-12 funds is 87% of the reduction achieved by holding as many as 35 funds. 10 8 6 4 2 0 5 10 15 20 25 Number of Funds Owned during Period 30 35 Adding an increasing number of liquid alternative funds reduced the volatility of returns in our analysis over the period 2012–2014. Notably, in our view, groups of 8 to 12 funds did not sacrifice returns (~4% average annualized) for lower volatility. Source: Morningstar and GSAM. Top Section Notes: For illustrative purposes only. As of calendar year-end 2014. Current performance may be lower or higher than the performance quoted. In order to help investors make sense of the myriad of LAI offerings, we analyzed the 642 mutual funds that Morningstar, Inc. categorizes as liquid alternatives to identify those that employed an investment style that we deemed to be “hedge fund-like.” We eliminated funds that used certain nontraditional investment styles that do not closely resemble a traditional hedge fund investment strategy. Our elimination process narrowed the universe of liquid alternative investments to 331 funds. Once we identified our universe of “hedge fundlike” LAI funds, we then assigned each fund to one of the five standard hedge fund buckets based on fund information: Equity Long/Short, Event Driven, Relative Value, Tactical Trading/Macro, and Multistrategy. See “Appendix: GSAM Liquid Alternative Investments Selection Methodology” for detail on GSAM’s liquid alternative investments category methodology. Diversification does not protect an investor from market risk and does not ensure a profit. Bottom Section Notes: For illustrative purposes only. As of December 31, 2014, based on historical returns of 121 single-strategy liquid alternative investment funds which make up the GSAM LAI Peer Groups and possess track records over the period January 1, 2012 to December 31, 2014. The line represents the average annualized volatility of the combined monthly returns of a given number of funds. The shading represents the annualized volatility of 90% of the combined monthly returns of a given number of funds. The returns represent past performance. Past performance does not guarantee future results, which may vary. 12 2 Q1 2016 Market Know-How Q1 2016: The Great ‘Rotate’ | 13 Our Contributors Heather Kennedy Miner, CFA John Tousley, CFA James Ashley Managing Director, Global Head of Strategic Advisory Solutions Managing Director, Head of US Market Strategy E xecutive Director, Head of International Heather is the global head of Strategic Advisory Solutions, which delivers GSAM’s perspectives on global markets, strategic asset allocation, and innovative business practices. John leads the Market Strategy team, focusing on global capital markets, macro strategy, and implementation. He specializes in developing tactical and strategic investment insights within a risk-aware framework. James is the head of the international market strategy team, with responsibility for providing actionable investment ideas and perspectives on the latest international market developments. Candice Tse Allen Sukholitsky, CFA Brendan Conway Vice President, Senior Market Strategist Vice President, Senior Market Strategist Vice President, Senior Financial Writer Candice is responsible for economic and market strategy, along with client engagement on investment solutions. Her areas of expertise include Womenomics and emerging markets. Allen focuses on economic and market strategy as well as client engagement on investment implementation. He is responsible for helping clients make sense of the markets and turning insights into actionable strategies. Brendan helps drive content production for Market Strategy, Portfolio Strategy, and Business Practices, as well as for other teams across GSAM. Davide Andaloro Associate, Market Strategist Davide is responsible for analyzing macroeconomic dynamics and developing timely market views across different asset classes. 14 Market Strategy Risk Disclosures Investors should also consider some of the potential risks of alternative investments: Alternative Strategies. Alternative strategies often engage in leverage and other investment practices that are speculative and involve a high degree of risk. Such practices may increase the volatility of performance and the risk of investment loss, including the entire amount that is invested. Manager experience. Manager risk includes those that exist within a manager’s organization, investment process or supporting systems and infrastructure. There is also a potential for fund-level risks that arise from the way in which a manager constructs and manages the fund. Leverage. Leverage increases a fund’s sensitivity to market movements. Funds that use leverage can be expected to be more “volatile” than other funds that do not use leverage. This means if the investments a fund buys decrease in market value, the value of the fund’s shares will decrease by even more. Counterparty risk. Alternative strategies often make significant use of over-thecounter (OTC) derivatives and therefore are subject to the risk that counterparties will not perform their obligations under such contracts. Liquidity risk. Alternative strategies may make investments that are illiquid or that may become less liquid in response to market developments. At times, a fund may be unable to sell certain of its illiquid investments without a substantial drop in price, if at all. Valuation risk. There is risk that the values used by alternative strategies to price investments may be different from those used by other investors to price the same investments. The above are not an exhaustive list of potential risks. There may be additional risks that should be considered before any investment decision. Equity securities are more volatile than fixed income securities and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies. Dividends are not guaranteed and a company’s future ability to pay dividends may be limited. Master Limited Partnerships (“MLPs”) may be generally less liquid than other publicly traded securities and as such can be more volatile and involve higher risk. Investments in securities of an MLP involve risks that differ from investments in common stocks, including risks related limited control and limited rights to vote on matters affecting the MLP, risks related to potential conflicts of interest between the MLP and the MLP’s general partner, cash flow risks, dilution risks and risks related to the general partner’s right to require unitholders to sell their common units at an undesirable time or price. MLPs are also generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns. MLPs may also involve substantially different tax treatment than other equity-type investments, and such tax treatment could be disadvantageous to certain types of investors, such as retirement plans, mutual funds, charitable accounts, foreign investors, retirement accounts or charitable entities. In addition, investments in MLPs may trigger state tax reporting requirements. Generally, a master limited partnership (“MLP”) is treated as a partnership for Federal income tax purposes. Therefore, investors in an MLP may be subject to certain taxes in addition to Federal income taxes, including state and local income taxes imposed by the various jurisdictions in which the MLP conducts business or owns property. In addition, certain tax-exempt investors in an MLP, such as tax-exempt foundations and charitable lead trusts, may incur unrelated business taxable income (“UBTI”) with respect to their investment. UBTI may result in increased Federal, and possibly state and local, tax costs, and may also result in additional filing requirements for tax exempt investors. Non-US investors may be subject to US taxation on a net income basis and have US filing obligations as a result of investing in MLPs. The tax reporting information for MLPs generally is provided to investors on an annual IRS Schedule K-1, rather than an IRS Form 1099. To the extent the Schedule K-1 is delivered after April 15, you may be required to request an extension to file your tax returns. MLP distributions consist largely of return of capital and not of current income. The ultimate composition of these distributions may vary due to a variety of factors including projected income and expenses, depreciation and depletion, and any tax elections made by the MLP. The final characterization of such distribution will be made when an MLP can determine each investor’s share of the MLP’s income, expenses, gains and losses. The final tax status of the distribution may differ substantially from this information. An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate. Investments in fixed-income securities are subject to credit and interest rate risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than their original cost upon redemption or maturity. Although Treasuries are considered free from credit risk, they are subject to interest rate risk, which may cause the underlying value of the security to fluctuate. Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT). Multimanager Approach Risk. A multimanager fund’s performance may depend on the ability of its investment adviser in selecting, overseeing, and allocating fund assets to underlying managers. The underlying managers’ investment styles may not always be complementary. Underlying managers make investment decisions independently of one another, and may make decisions that conflict with each other. For example, it is possible that an underlying manager may purchase an investment for the fund at the same time that another underlying manager sells the same investment, resulting in higher expenses without accomplishing any net investment result; or that several underlying managers purchase the same investment at the same time, without aggregating their transactions, resulting in higher expenses. Moreover, a fund’s multimanager approach may result in the fund investing a significant percentage of its assets in certain types of investments, which could be beneficial or detrimental to the fund’s performance depending on the performance of those investments and the overall market environment. A fund’s underlying managers may underperform the market generally or underperform other investment managers that could have been selected for the fund. Some underlying managers have little experience managing registered investment companies which, unlike the private investment funds these underlying managers have been managing, are subject to daily inflows and outflows of investor cash and are subject to certain legal and tax-related restrictions on their investments and operations. Subject to the overall supervision of a fund’s investment program by its investment adviser, each underlying manager is responsible, with respect to the portion of the fund’s assets it manages, for compliance with the fund’s investment strategies and applicable law. An investment adviser and a fund may have received an exemptive order from the Securities and Exchange Commission that permits the investment adviser to engage additional underlying managers, to enter into subadvisory agreements with those underlying managers, and to materially amend any existing subadvisory agreement with underlying managers, upon the approval of a fund’s board of trustees and without shareholder approval. Investments in Liquid Alternative Funds expose investors to risks that have the potential to result in losses. These strategies involve risks that may not be present in more traditional (e.g., equity or fixed income) mutual funds. These Funds generally may seek sources of returns that perform differently from broader securities markets. Market Know-How Q1 2016: The Great ‘Rotate’ | 15 Risk Disclosures continued However, correlations among different asset classes may shift over time, and if this occurs a Fund’s performance may track broader markets. In addition, if returns are in fact uncorrelated to the broader securities markets, a Fund may underperform those markets. For example, in periods of robust equity market returns, returns from a Fund may be lower or negative. The use of alternative investment techniques such as shorting or leveraging creates an opportunity for increased returns but also creates the possibility for greater loss. Losses on short positions are potentially unlimited, since the positions lose value as the asset that was sold short increases in value. Taking short positions leverages a Fund’s assets, because the Fund is exposed to market movements beyond the amount of its actual investments. Derivative instruments may involve a high degree of financial risk. These risks include the risk that a small movement in the price of the underlying security or benchmark may result in a disproportionately large movement, unfavorable or favorable, in the price of the derivative instrument; risks of default by a counterparty; and liquidity risk. There is risk that alternative funds hold investments that may be difficult to value and as a result the values used by alternative funds to price investments may be different from those used by others to price the same investments. At times, a Fund may be unable to sell certain of its illiquid investments without a substantial drop in price, if at all. There is also the risk that funds will not be able to pay redemption proceeds within the allowable time period because of unusual market conditions, an unusually high volume of redemption requests or other reasons. There may be additional risks that the Funds do not currently foresee or consider material. The opinions expressed in this research paper are those of the authors, and not necessarily of GSAM. The investments and returns discussed in this paper do not represent any Goldman Sachs product. This research paper makes no implied or express recommendations concerning how a client’s account should be managed. This research paper is not intended to be used as a general guide to investing or as a source of any specific investment recommendations. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. 16 General Disclosures This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes. Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. United Kingdom and European Economic Area (EEA): In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. Asia Pacific: Please note that neither Goldman Sachs Asset Management International nor any other entities involved in the Goldman Sachs Asset Management (GSAM) business maintain any licenses, authorizations, or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore, Malaysia, and India. This material has been issued for use in or from Hong Kong by Goldman Sachs (Asia) L.L.C, in or from Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W), in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad (880767W), and in or from India by Goldman Sachs Asset Management (India) Private Limited (GSAM India). Australia: This material is distributed in Australia and New Zealand by Goldman Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948 (’GSAMA’) and is intended for viewing only by wholesale clients in Australia for the purposes of section 761G of the Corporations Act 2001 (Cth) and to clients who either fall within any or all of the categories of investors set out in section 3(2) or sub-section 5(2CC) of the Securities Act 1978 (NZ) and fall within the definition of a wholesale client for the purposes of the Financial Service Providers (Registration and Dispute Resolution) Act 2008 (FSPA) and the Financial Advisers Act 2008 (FAA) of New Zealand. GSAMA is not a registered financial service provider under the FSPA. GSAMA does not have a place of business in New Zealand. In New Zealand, this document, and any access to it, is intended only for a person who has first satisfied GSAMA that the person falls within the definition of a wholesale client for the purposes of both the FSPA and the FAA. This document is intended for viewing only by the intended recipient. This document may not be reproduced or distributed to any person in whole or in part without the prior written consent of GSAMA. This information discusses general market activity, industry or sector trends, or other broad based economic, market or political conditions and should not be construed as research or investment advice. The material provided herein is for informational purposes only. This presentation does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it would be unlawful to make such offer or solicitation. Canada: This material has been communicated in Canada by Goldman Sachs Asset Management, L.P. (GSAM LP). GSAM LP is registered as a portfolio manager under securities legislation in certain provinces of Canada, as a non-resident commodity trading manager under the commodity futures legislation of Ontario and as a portfolio manager under the derivatives legislation of Quebec. In other provinces, GSAM LP conducts its activities under exemptions from the adviser registration requirements. In certain provinces, GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts and is not offering to provide such investment advisory or portfolio management services in such provinces by delivery of this material. Japan: This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd. Confidentiality No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. Goldman, Sachs & Co., member FINRA. © 2016 Goldman Sachs. All rights reserved. Date of first use: 12/7/2015. 22612-OTU-133246. Market Know-How Q1 2016: The Great ‘Rotate’ | 17 Glossary Equities Fixed Income The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. The S&P Developed ex US Small Cap Index covers the smallest 20% of companies from developed countries (excluding the US) ranked by total market capitalization. The Barclays US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers. The US Corporate Index is a component of the US Credit and US Aggregate Indices, and provided the necessary inclusion rules are met, US Corporate Index securities also contribute to the multicurrency Global Aggregate Index. The S&P Developed ex-US Property Index measures the performance of real estate companies domiciled in countries outside the United States. The S&P GSCI Commodity Index is a composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. 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 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Japan TOPIX, also known as the Tokyo Stock Price Index, is a capitalizationweighted index of all companies listed on the First Section of the Tokyo Stock Exchange. The index is supplemented by the subindices of the 33 industry sectors. The MSCI AC Asia ex Japan Index captures large and mid cap representation across 2 of 3 Developed Markets countries (excluding Japan) and 8 Emerging Markets countries in Asia. With 610 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 2500 Index measures the performance of the small to mid-cap segment of the U.S. equity universe, commonly referred to as “SMID” cap. The Russell 2500 Index is a subset of the Russell 3000 Index. It includes approximately 2500 of the smallest securities based on a combination of their market cap and current index membership. The Russell 1000 Value Index is an unmanaged index of common stock prices that measures the performance of the large-cap value segment of the US equity universe. The FTSE NAREIT Composite Total Return Index is a free-float weighted index that tracks US REITs and publicly-traded real estate companies. The FTSE EPRA/NAREIT Developed ex US Index is a subset of the FTSE EPRA/ NAREIT Developed Index and is designed to track the performance of listed real estate companies and REITS. The Dow Jones US Select Real Estate Securities Index is a float-weighted index that measures US publicly traded real estate securities. 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 unmanaged MSCI EAFE Index (unhedged) is a market capitalization weighted composite of securities in 21 developed markets. 18 The 10-Year Treasury is a US Treasury debt obligation that has a maturity of 10 years. The Barclays Euro Corporate Bond Index is a broad-based benchmark that measures the investment grade, euro-denominated, fixed-rate corporate bond market. Inclusion is based on the currency denomination of a bond and not the country of risk of the issuer. The Euro Corporate Index is a subset of Barclays broader-based flagship indices, such as the Euro Aggregate and the multi-currency Global Aggregate Index. The Barclays Euro High Yield Index measures the market of non-investment grade, fixed-rate corporate bonds denominated in Euro. Inclusion is based on the currency of issue, and not the domicile of the issuer. The index excludes emerging market debt. The Barclays Global High Yield Index provides a broad-based measure of the global high-yield fixed income market. The J.P. Morgan Corporate Emerging Markets Bond Index (CEMBI) is a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities. The J.P. Morgan Emerging Markets Bond Index Global is an unmanaged market capitalization Index that tracks total returns for USD-denominated debt instruments issued by emerging market sovereign and quasi-sovereign issuers. The J.P. Morgan Emerging Market Debt Index is an unmanaged index tracking foreign currency denominated debt instruments of 31 emerging markets. The J.P. Morgan GBI-EM Global Diversified Composite Index tracks local currency bonds issued by emerging market sovereign issuers. The J.P. Morgan Government Bond Index-Emerging Markets (GBI-EM) indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging Market governments. The J.P. Morgan Emerging Market Global Bond Index (EMBI) is a benchmark index for measuring the total return performance of international government bonds issued by emerging market countries that are considered sovereign (issued in something other than local currency) and that meet specific liquidity and structural requirements. The J.P. Morgan Corporate Emerging Market Bond Index (CEMBI) Broad Asia High Yield Index is a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities. The corporate CEMBI is a liquid basket of emerging markets corporate issues with strict liquidity criteria for inclusion in order to provide replicability, tradability, robust pricing and data integrity. The Barclays Global Aggregate Index provides a broad-based measure of the global investment-grade fixed income markets. The three major components of this index are the U.S. Aggregate, the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities, and USD investment grade 144A securities. The Barclays Global High Yield Index provides a broad-based measure of the global high-yield fixed income markets. The Barclays US Corporate High Yield 2% Issuer Capped Bond Index is an issuer-constrained version of the flagship US Corporate High Yield Index, which measures the USD-denominated, high yield, fixed-rate corporate bond market. The index follows the same rules as the uncapped version, but limits the exposure of each issuer to 2% of the total market value and redistributes any excess market value index wide on a pro rata basis. The Barclays US Credit Index measures the investment grade, US dollardenominated, fixed-rate, taxable corporate and governmentrelated bond markets. It is comprised of the US Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities. The Barclays Aggregate Bond Index represents an unmanaged diversified portfolio of fixed income securities, including U.S. Treasuries, investment-grade corporate bonds, and mortgage backed and asset-backed securities. Other The Alerian MLP Index is a composite of the 50 most prominent energy MLPs calculated by Standards & Poor’s using a float-adjusted market capitalization methodology. “Alerian MLP Index”, “Alerian MLP Total Return Index”, “AMZ” and “AMZX” are trademarks of Alerian. The CBOE S&P 500 BuyWrite Index is a benchmark designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. The S&P 500 Global Infrastructure Index tracks 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability. The Credit Suisse Leveraged Loan Index is mirror the investable universe of the USD denominated leveraged loan market. The HFRI Fund of Funds Index is an equal weighted, net of fee, index composed of approximately 800 fund-of-funds which report to HFR. Alternative Strategies Index Benchmarks GSAM Liquid Alternative Investments Selection Methodology, in order to draw the line between liquid alternatives and other nontraditional investments, we started with GSAM’s definition of what it means to be a liquid alternative investment, as detailed on page 2. We then identified conditions that we believe are necessary for nontraditional mutual funds to behave in a manner similar to hedge funds. Our first criterion was that liquid alternatives should provide more than just long-only exposure to asset classes, namely: equities, fixed income, commodities, or currencies. Secondly, they seek to significantly hedge against potential downside risk via short positions (we used 20% of net assets as a threshold, the same threshold that Morningstar, Inc. uses). We believe that, without considering this narrower universe, investors could end up investing in a fund with an investment strategy that is inconsistent with their investment goals or objectives. Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices. The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein. For the GSAM LAI Equity Long/Short Peer Group, we included all funds that select stocks long, using a bottom-up, top-down, fundamental, or quantitative process, and then hedge by shorting stocks, stock-index futures, ETFs, or long put options (again using the 20% minimum threshold). Most of these funds were sourced from Morningstar’s Long/Short Equity category, and a few were found in the Morningstar Market Neutral category. For the GSAM LAI Event Driven Peer Group, we included all funds that invest in equity or debt securities in order to potentially profit from corporate events, such as mergers or bankruptcies. These strategies included the merger arbitrage funds from the Morningstar Market Neutral category, and the long/short credit strategies from the Morningstar Nontraditional Bond category. For the GSAM LAI Relative Value Peer Group, we included all funds that seek to capture the price differential between two similar securities. Therefore, we selected the equity market neutral and (non-merger) arbitrage funds from the Morningstar Market Neutral category. For the GSAM LAI Tactical Trading/Macro Peer Group, we chose all funds that take dynamic directional (long or short) views on at least three of four asset classes (equities, fixed income, commodities, currencies) using systematic or discretionary approaches. We combined the systematic managed futures funds from the Morningstar Managed Futures category with the global macro strategies (which consistently short 20%) from the Morningstar Multialternative category. And finally, for the GSAM LAI Multistrategy Peer Group, we selected all funds which employ strategies consistent with at least two of the other LAI peer groups using a multimanager or single-manager approach, using active management or hedge fund replication. We found most of these funds in Morningstar’s Multialternative category. Market Know-How Q1 2016: The Great ‘Rotate’ | 19 A Long-term Partnership Strategic Advisory Solutions provides a comprehensive suite of integrated solutions designed to help our clients grow and enhance their businesses. Our global team of experienced strategists aims to deliver in-depth expertise to help clients understand dynamic markets, design well-diversified strategic portfolios, and implement industry best practices through programs tailored to each organization. We partner with our clients to develop actionable solutions to help them achieve their goals. For more information, contact us at [email protected]. New York San Francisco Los Angeles Salt Lake City Chicago Toronto Miami Greenwich Burlington Boston Lafayette São Paulo Buenos Aires London Madrid Paris Amsterdam Geneva Zurich Frankfurt Milan Stockholm Dubai Riyadh Mumbai Bengaluru Hong Kong Kuala Lumpur Singapore Beijing Shanghai Seoul Tokyo Melbourne Sydney GSAMFUNDS.com Goldman Sachs Asset Management is one of the world’s leading investment managers. With more than 2,000 professionals across 35 offices worldwide, GSAM provides institutional and individual investors with investment and advisory solutions, with strategies spanning asset classes, industries, and geographies. Our investment solutions include fixed income, money markets, public equity, commodities, hedge funds, private equity, and real estate. Our clients access these solutions through our proprietary strategies, strategic partnerships, and our open architecture programs. Our investment teams represent over 800 investment professionals, capitalizing on the market insights, risk management expertise, and technology of Goldman Sachs. We help our clients navigate today’s dynamic markets and identify the opportunities that shape their portfolios and long-term investment goals. We extend these global capabilities to the world’s leading pension plans, sovereign wealth funds, central banks, insurance companies, financial institutions, endowments, foundations, individuals, and family offices, for whom we invest or advise on more than $1 trillion of assets. As of September 30, 2015. GSAM leverages the resources of Goldman, Sachs & Co. subject to legal, internal, and regulatory restrictions. Assets Under Supervision (AUS) includes assets under management and other client assets for which Goldman Sachs SASMARKETQ116 does not have full discretion.