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BOUTIQUE PERSPECTIVE Seix Investment Advisors Perspective ABOUT THE BOUTIQUE: Seix Investment Advisors LLC Seix Investment Advisors LLC (Seix) is a fundamental,credit-driven fixed income boutique specializing in both investment grade bond and high yield bond/leveraged loan management. Seix has applied its bottom-up, research-oriented approach to fixed income management for more than 20 years. The firm’s success can be attributed to a deep and talented group of veteran investment professionals, a clearly defined investment approach and a performanceoriented culture that is focused on delivering superior, risk-adjusted investment performance for our clients. The Authors: James F. Keegan Chairman and Chief Investment Officer Jim is Chairman and Chief Investment Officer of Seix. Prior to joining the firm in 2008, Jim was Head of Investment Grade Corporate & High Yield Bond Management for American Century Investments. Jim’s Investment Grade team subadvises several of the RidgeWorth Funds. He has appeared on CNBC and Bloomberg television, and has been quoted in a range of national publications. Jim has more than 30 years of investment management experience. Perry Troisi Senior Portfolio Manager U.S. Government/ Securitized Perry is a seasoned Senior Portfolio Manager focused on the GovernmentRelated and Securitized asset classes and a member of the Seix Investment Policy Group. Before joining Seix in 1999, he was a Portfolio Manager at GRE Insurance Group, where he was responsible for all North American fixed income assets within the group. Perry has more than 25 years of experience in the investment management industry. Review of Third Quarter 2015 WE’RE NOT IN KANSAS ANYMORE The third quarter was a classic risk-off environment that witnessed a multitude of macroeconomic themes impacting trading. Market volatility kicked off in July with Greece and its European partners negotiating yet another bailout after a referendum against additional austerity passed, threatening to derail the Euro project. The end result saw Greece’s new government capitulate yet again and accept still more austerity in exchange for even more unsustainable debt. This Euro victory for the sake of monetary union is sold as the best outcome for all parties, but only for as long as Greece agrees to keep wearing this monetary straightjacket. Debt sustainability is conveniently ignored, but rest assured it will ultimately exert a force that will derail the Euro project at some point. As quickly as the latest chapter in the Euro crisis dissipated, global growth concerns centering around a decelerating Chinese economy moved to center stage. The Chinese stock market had been rising at a torrid pace and the Shanghai Composite peaked on June 12th with a trailing year total return of 159.7% at that point. A reversal ultimately ensued that saw the index decline by nearly 43% in a little over two months (through the third quarter low established on August 26th). Amidst this swift reversal of equity market wealth, fears of a Chinese economy growing well below its 7% target growth rate incited fears of global growth slowdown. As the primary engine of growth and the ultimate marginal consumer of commodities worldwide, the ripple effect of a more substantial, or less controlled growth slowdown, stretches far and wide. Heightening market concerns was China’s decision in early August to modestly devalue its currency, an effort to maintain competitiveness in the global trade arena. With an implicit fixed exchange rate to the dollar, the Chinese currency, the yuan, appreciated along with the dollar as the advent of a Federal Reserve Bank (Fed) tightening cycle approached. By most measures, this left the yuan significantly overvalued. Markets were not anticipating any action on the currency, and volatility spiked after the devaluation as speculation soared about the real state of the Chinese economy. The quarter concluded with one of the most broadly anticipated Fed meetings in a long time, which speaks volumes when you consider the overwhelming presence and seeming omnipotence the Fed and other central banks globally have imposed on asset markets during the post-financial crisis era. Not to be outdone by other macro developments, the Fed delivered its own market surprise in mid-September, but when the market reaction was not as anticipated, revisions to said surprise were quickly rolled out to do damage control. More on that later… Given the risk-off nature of markets during most of the summer, excess returns of nearly all spread sectors of the bond market were negative for the third quarter. In fact, it turned out to be the worst quarter for U.S. risk assets since the third quarter of 2011 and the worst quarter for emerging markets since the financial crisis of 2008–2009. In general, the higher the beta of the asset class, the weaker the performance in the third quarter. Flight-to-quality flows led to lower Treasury yields across the board with five-, 10- and 30-year rates declining by 29, 32 and 27 basis points (bps), respectively. The 10-year Treasury note ended the quarter at 2.04%, still below the 2.17% rate at the start of the year. Corporate credit spreads widened during the quarter, producing the worst excess returns amongst the primary investment grade spread sectors. The sector still posted modest total return gains since nominal Treasury rates declined enough to offset the widening. As a result of more volatile market conditions, a significant part of the quarter saw little to no supply in new issue corporate bonds. Going forward, periods of lower volatility will likely be met by a robust new issue calendar to complete 2015’s funding needs, particularly as it relates to the many mergers and acquisitions that have been announced this year. Securitized bonds (residential (RMBS), commercial (CMBS) and asset-backed (ABS) securities) experienced a less eventful quarter where spreads were only marginally wider and excess returns were less penal. In the RMBS market, lower Treasury yields and higher prepayments pushed spreads wider, as did slightly-higher-than-consensus net supply. An active new issue calendar in commercial mortgage and asset-backed markets also pressured spreads wider, as investors are not adding to overall exposures and instead are BOUTIQUE PERSPECTIVE SEIX PERSPECTIVE Page 2 selling older holdings in order to participate in the new deals. The supply condition in the residential market will shift as we move into the winter months, a normal seasonal dynamic, supporting the market. The commercial and asset-backed markets will remain well supplied as the new issue calendar remains active, so spreads are likely to remain under pressure in the short term. Exhibit 1 below delineates the total and excess returns for the third quarter as well as the trailing 12-month period for the broader domestic bond market as well as the S&P 500 stock market index. Exhibit 1: Lower Quality Suffers in Q3 Q3 Total Return (%) Q3 Excess Return (%) 1-Yr Total Return (%)* 1-Yr Excess Return (%)* Aggregate 1.13 -0.57 2.94 -1.18 Treasury 1.76 n/a 3.76 n/a Agency -0.22 -1.46 1.10 -1.91 RMBS 1.30 -0.22 3.43 -0.70 ABS 0.74 0.16 2.38 0.60 CMBS 1.54 -0.05 3.72 0.23 Corporate 0.83 -1.46 1.66 -3.26 High Yield -6.98 -4.86 -6.31 -3.43 HY - Ba/B -4.31 -5.84 -2.09 -5.79 HY - Ba -3.10 -3.46 0.03 -3.96 HY - B -5.62 -7.00 -4.26 -7.68 HY - Caa -7.29 -8.39 -8.68 -11.52 HY - Ca-D -28.64 -29.55 -57.00 -59.33 HY - Loans -1.48 n/a 0.97 n/a S&P 500 Index -6.44 n/a -0.62 n/a *As of 9/30/2015 Source: Barclays, Bloomberg, data pulled 10/1/2015 Past performance is not indicative of future results. The Travails of Transparency The Fed meeting in mid-September produced an out-of-consensus “dovish hold” (no hike or any indication the first hike was likely in 2015) that took the market by surprise. In what seems to be all too frequent an outcome, when the market essentially provided a window for the Fed to embark on the long anticipated liftoff (first rate hike), the Fed chose to “move the goalposts” again and provide a litany of new concerns that policy deliberations are focusing on, which led to another delay of the most talked about and anticipated tightening cycle ever. The Fed had ample opportunity to prepare the market for a delay, but by choosing to keep expectations focused on the inevitability of liftoff through its communications over the summer, the market was seemingly ready for the move. Consensus had settled on two primary outcomes for the September 17th meeting, either a “hawkish hold” (no hike, but telegraphing the first hike before year end) or a “dovish hike” (25 bps hike and guidance, emphasizing an exceptionally incremental and gradual tightening cycle). The meeting ultimately delivered both a statement and press conference that was decidedly neither, with the Fed opting instead for a “dovish hold” (no hike and yet another set of variables driving policy deliberations). Suddenly it wasn’t just the unemployment rate or the inflation rate, but also global economic developments, financial conditions, market instability, China/emerging market growth and U.S. dollar strength. Policy shifts now hinged on far more than the normal scope of domestic fundamental factors, seemingly offering at least one if not several reasons at any future meeting to defer hiking rates. This out-of-consensus decision surprised the market and risk assets reacted negatively, an unlikely outcome that was probably unexpected by the Fed. Its surprise and displeasure was ratified in short order as several Fed members almost immediately followed the meeting with speeches in an attempt to revise expectations yet again. Chair Janet Yellen herself gave a speech the following week that reverted back to a very “hawkish” policy stance, going so far as to identify her individual forecast as one of the committee members who anticipates a 2015 liftoff. Every quarter, the Fed updates target rate forecasts for all its members and the now infamous “dot plots,” as the market has taken to calling them, are eagerly awaited and overanalyzed with the zeal of Fox Mulder from the “X-Files” in search of the truth. The identity behind each individual forecast is not typically revealed (Chair Yellen only did so for herself), hence the market fascination with assigning names to specific dots. By the end of September it was clear that the Fed was managing market expectations aggressively and intervening with commentary where necessary if it was not satisfied with the market’s interpretation of its policy prognostication. Had the Fed known way This out-of-consensus decision back when what it knows now, perhaps the move to surprised the market and risk transparency would not assets reacted negatively, an have been embraced in the unlikely outcome that was first place. Remember, Fed statements are still relatively probably unexpected by the Fed. new in the context of over 100 years of the central bank’s history. It was only in 1994 that the Fed began releasing a formal statement disclosing the changes it desired in the federal funds target rate. Some market participants (ourselves included) may recall the days before this change when the market was left to debate the interpretation of the Fed’s open market operations as a formal loosening or tightening of reserve conditions in the funds market. Depending on where the funds rate was trading, a particular action in the market by the Fed (e.g., a repurchase agreement or a reverse repurchase agreement) would ultimately be interpreted as an implicit action by the central bank to loosen or tighten monetary policy. No statements declaring the new target rate, never mind additional language the market could then interpret as “dovish” or “hawkish” regarding future policy. Even formal appearances by the Fed Chair before Congress (which was commenced back in 1975) were distinctly full of obfuscation so as to leave anyone listening no more informed than they were before the Chair’s appearance. It was in 2000 that the central bank began releasing a full statement after every meeting (meetings occur eight times a year), which included an assessment of the balance of risks it observes to achieving its objectives. 2002 saw the Fed add the roll call vote to the post-meeting statement. 2004 was when the Fed reduced the time lag for release of its meeting minutes, allowing the market to see details of the debate in only three weeks after the meeting versus six weeks. By 2007, the Fed decided to release its economic projections quarterly, thereby giving everyone a formal paper trail of how accurate, or more appropriately inaccurate, its economic projections typically are over time. In 2011, quarterly press conferences by the Fed Chair were added to formally present the updated economic projections in addition to providing additional context for policy decisions. Finally, in 2012, the Fed also began releasing a yearly statement of the long run goals of monetary policy, including an explicit two percent inflation target; this update also included the release of information about the SEIX PERSPECTIVE BOUTIQUE PERSPECTIVE policy paths that underlie the economic projections of participants (including the aforementioned “dot plots”). The above timeline is the formal evolution of transparency by the Fed over the last 20+ years, but empirically we have a slightly different way of describing this evolution. Specifically, the decision body within the Fed for monetary policy is the Federal Open Market Committee (FOMC). Over time, and particularly as it relates to the last 10 or so years, the FOMC has become what some loosely refer to as the Fed “Open Mouth” Committee, where its members habitually offer their own version of policy deliberations as they occur as well as pontificate about the likely future path of policy at any given point in time. There was a time when an economic data release calendar was one of the more important schedules market participants needed to be cognizant of, but today it is just as important to know the FOMC calendar of speeches. There is a one-week black out period that precedes each of the eight FOMC meetings, which restricts any of the FOMC participants from speaking to the media. Outside of that, rest assured every other week we will hear from a multitude of Fed speakers opining on all things policy related, leaving the market vulnerable to the inherent “tape bomb” when an FOMC talking head uses words or phrases prone for misinterpretation. The FOMC in total comprises 17 participants (it’s normally 19 but the Fed’s Board of Governors still has two vacant seats), which means that the market is subject to 17 different versions of how policy is being formulated, in addition to how it is likely to evolve in the future. This begs the question, was this really what the Fed intended when it introduced “transparency?” The market is done a disservice by 17 different FOMC members thinking out loud about monetary policy deliberations. Given the overt market manipulation and intervention that central banks have engaged in during this cycle, it has never been more necessary for the FOMC to have an inner monologue. Markets are already addicted to easy monetary policy, and we have spilled plenty of ink reminding readers of the dangers, unintended consequences and mal-investment this aggressive monetary policy enables, facilitates and promotes. Never has the “central bank put” been so valuable, and never have asset markets been so dependent on the kindness of central bankers. However, the current communication channel couldn’t be any less clear about the path of policy as we approach the first shift to tightening in over nine years. A Method to the Madness The Fed should not be surprised by the markets’ reaction to unexpected developments regarding central bank policy in the era of transparency. Transparency is particularly problematic in this instantaneous information age, dominated by electronic and algorithmic trading strategies that are based on the historical movements, correlations and co-variances of all asset classes where words, phrases, paragraphs and full transcripts are scrutinized and overanalyzed to detect any hints, subtle changes or nuances that can give an information advantage to high frequency traders, investors Transparency is and speculators trying to profit from this “transparent” policy. particularly problematic Moreover, another issue with a more in this instantaneous transparent central bank is the information age. danger of articulating thresholds and criteria against which policy Page 3 will be reassessed and then changing those thresholds and criteria once they have been achieved. This speaks to the “move the goalposts” reference made above regarding the September FOMC surprise that introduced a litany of new variables impacting the policy debate. This is hardly the first time the Fed engaged this strategy. Recall that the original “exit strategy” from extreme monetary accommodation was predicated on the unemployment rate reverting back to 6.5%, only to see the target lowered to 6%. After the unemployment target was achieved, the Fed shifted the focus to returning to a 2% inflation target over the medium term. Most recently, in another shift to global economic developments, China, emerging markets and broad financial conditions (stock prices, credit spreads and the dollar) were introduced as critical to policy deliberations, seemingly creating a diverse backdrop that will always offer at least one if not several reasons for pause if the Fed so desires. The introduction of financial conditions seems somewhat circuitous when one considers that Fed policy itself is one of the main determinants of overall financial conditions. As you know, our base case has been that the Fed would not raise rates in 2015, and this remains our central tendency forecast. When viewed in the context of such economic data as nominal gross domestic product (GDP), inflation, industrial production, personal income and national activity indices, the Fed has never commenced a tightening cycle with economic conditions and data at the levels they are at today. The only economic metric that is consistent with prior Fed tightening cycles is the 5.1% unemployment rate. In our view, the unemployment rate overstates the current strength in the labor market as the decline to this level is largely a function of participants dropping out of the labor force as indicated by the labor force participation rate being at a 38-year low. Part So why is the Fed considering of this decline is related to a tightening cycle against this demographics, but not entirely economic backdrop? as the vast majority of the jobs created over this cycle have been taken by the 55 and older age cohort as they are forced to go back to work or take second jobs after suffering through almost seven years of earning zero on their savings, an income stream that they expected to supplement their social security benefits. So why is the Fed considering a tightening cycle against this economic backdrop? We believe the Fed realizes that the economic cycle is extended, and from a risk management perspective it would like to have some flexibility to lower rates when the next downturn comes and it has no flexibility from the traditional policy channel with a zero interest-rate setting still in place. However, the Fed is concerned that the dollar will continue to strengthen (as it has over the past year) thereby negatively impacting the emerging markets, particularly those that levered up during the carry trade era when the dollar was the funding currency and borrowing in the dollar market was easy and cheap. This pressure on emerging markets is but one example of the negative feedback a stronger dollar implies. The carry trade era fostered significant risk taking in financial markets that can get unwound as the dollar strengthens. This may have a strong negative impact on risk assets more broadly and further tighten financial conditions through lower stock prices and wider credit spreads that create a negative feedback loop the Fed is not eager to trigger. BOUTIQUE PERSPECTIVE SEIX PERSPECTIVE While the consensus currently expects the next move by the Fed to be an increase in rates, it was only a few weeks ago that many discussions revolved around the possibility of, or even advocating for, a further easing in monetary policy. How would the Fed ease policy from here with interest rates at zero? The ideas being bandied about include Quantitative Easing (QE) 4.0, Operation Twist 2.0, negative interest rate policy (NIRP), and even the proverbial “helicopter money” to finance economic objectives such as infrastructure investment. In thinking about some of these initiatives we are reminded of one of America’s old film classics, “The Wizard of Oz,” and a particular line from that film immediately comes to mind. As you may recall the scene in the film where Dorothy and her dog get carried off, house and all, by a tornado and end up in the magical kingdom called Oz, where Dorothy finally steps out of the house and utters that famous line “Toto, I’ve a feeling we’re not in Kansas anymore.” After seven years of zero interest-rate policy (ZIRP), multiple rounds of QE, too big to fail bailouts, massive asset inflation that has further exacerbated income and wealth inequality and the weakest economic recovery in the postwar period, perhaps policymakers need to step back and consider that maybe, just maybe, these policies did not create the wealth effect and virtuous cycle that was expected. Instead, discussions just gravitate to doing more of the same radical, unconventional policies that may have been counterproductive, if not outright negative, and offer no path to solving the structural problems (excessive debt, low productivity, persistent underemployment, low employment participation, demographic headwinds, rising inequality, etc.) that exist in our economy. Unlike Dorothy in “The Wizard of Oz” who eventually got back to Kansas, one has to wonder if the Fed will ever get back to the Kansas of conventional rather than unconventional monetary policy. By continuing down this radical, unconventional path, the Fed risks having its credibility called into question (what little it may have left), which said another way, is the risk the market finally says “pay no attention to that man behind the curtain” to borrow another line from the classic Frank Baum novel. Before discounting policies as radical as negative interest rates, let’s not forget that NIRP is already being employed in Europe. The European Central Bank (ECB) deposit rate is -0.20% and in countries such as Switzerland, Denmark and Sweden, policy rates are even more negative. These countries are not part of the monetary union and as the ECB has lowered rates, these countries have responded in kind so as to prevent their currencies from appreciating versus the euro, thereby hurting their export competitiveness. The Seix Shadow Investment Policy Group (IPG) is currently studying and analyzing NIRP and examining how it has been implemented in Europe, the economic reaction in the specific Before discounting policies countries and its impact on the as radical as negative banking system, lending channels, interest rates, let’s not forget deposit channels and asset markets that NIRP is already being to see how it could be implemented in the U.S. and the ramifications employed in Europe. such a radical policy might have here at home. Since tasking the Shadow IPG with this project, various Fed officials have talked increasingly about NIRP while saying that now is not the time to implement such an unconventional policy. We will leave the “helicopter money” discussion for another time, but offer the link to former Fed Chair Ben Bernanke’s infamous 2002 speech referencing a drop of dollar bills from a helicopter that inevitably led to his nickname “Helicopter Ben.” (read speech here). No, you can’t make this stuff up. Page 4 Global Concerns The major global central banks will continue to pursue ultraaccommodative policy as the global economy continues to slow and faces headwinds stemming from China’s decelerating growth. China and the emerging markets have been responsible for a disproportionate share of growth in global GDP. So as China continues to decelerate while it shifts from an investment-driven export model to a domestic, consumption-driven services model, its demand for commodities will naturally decline. Amidst the investment-led China boom, both China and the emerging markets levered up significantly (particularly within their respective corporate sectors), but that is not likely to be the case going forward. Consequently, China will import fewer commodities, emerging economies will be forced to retrench, and both those factors will be a significant headwind to overall global growth. It’s important to remember how we got to this point in the cycle and it is our view that this is just one big rolling crisis that started in the U.S. in 2008–2009, hit Europe in 2011–2012 as the Euro crisis took hold and now has worked its way to China and the emerging markets starting back in 2014. The rebalancing in China likely puts further deflationary pressure on the emerging markets and by extension exports disinflationary pressures to the developed economies. The ECB is missing its inflation target and will likely extend its QE program beyond its original September 2016 expiration as well as increase the original 1.1 trillion Euro program size. It seems reasonable to also expect a lowering of the deposit rate further into negative territory and an expansion of the asset types eligible to be purchased via the QE program (like corporate bonds). The benefits of a weaker Euro and lower oil prices that provided a boost in the first half of 2015 are dissipating in the second half, and while some of the peripheral countries seem to be performing better, the core countries, and Germany in Is the global economy just another particular, have surprised to the downside, in all word for China and thus as China likelihood owing to their goes so goes global growth? strong trade links to China. Japan’s growth has decelerated quite a bit and arguably is already in a technical recession, or very close to one, in spite of the very aggressive Bank of Japan (BoJ) policy. While the BoJ appears reluctant to engage in more QE at this point with the economy growing below 1% on a year-over-year basis, we think that the BoJ will announce even more QE, but it is more likely a 2016, rather than a 2015, event. An interesting theme we are hearing more frequently from various officials of major central banks across the globe is the characterization of their domestic economies as being strong, resilient or in a virtuous cycle while it is the global economy that is weak. Is the global economy just another word for China, and thus as China goes so does global growth? As previously mentioned, China and its suppliers have provided the bulk of global growth since the financial crisis, so it stands to reason that the world needs a different engine of growth going forward. This new engine of growth is proving hard to predict given the massive debt overhang, lack of productivity growth and demographic issues facing so much of the developed economies. BOUTIQUE PERSPECTIVE SEIX PERSPECTIVE Outlook & Portfolio Positioning Portfolio weightings in the primary spread sectors were little changed in the third quarter with exposure to the primary spread sectors, RMBS and corporate bonds remaining close to their respective index weightings. Corporate bond spreads widened again, closing the quarter at 169 versus 145 at the end of the second quarter. While there was a significant period in August amidst the heightened volatility that the corporate syndicate machine was idle as conditions improved modestly in September, the supply quickly returned. Even with this extended dormant period, year-to-date supply is still running well ahead of 2014’s record pace and 2015 will be another record year for new issuance. Wider spreads have made valuations more compelling, but our base case anticipates, at best, a trading range as lower volatility will elicit more issuance, but should volatility spike again, spreads will widen further and offer a better valuation in which to allocate more client capital. Within the Corporate sector, valuations are most compelling in Transportation, Energy and Communications, while Electric Utilities, Consumer NonCyclicals and Banking offer the least value. The securitized sectors (residential, commercial and asset-backed) experienced a less eventful quarter with less spread volatility than witnessed in the corporate credit markets. As a consequence, spreads were only marginally wider and excess returns were consequentially less penal. Our overall RMBS exposure rose modestly over the quarter from 0.9x the benchmark weighting to 1.0x, and collateralized mortgage obligation exposure remains on the low end of recent history. Our primary convexity advantage within the RMBS sleeve remains our exposure to Agency CMBS, which we hold in lieu of current coupon pass-through holdings. We remain overweight in private CMBS and ABS, a continuation of our safe income at a reasonable price strategy in the short-to-intermediate parts of the yield curve, but we took the opportunity to capitalize on the resilience of the ABS sector during the quarter and decreased this particular overweight moderately. A government-related sector underweight persists as the spread offered on a significant portion of this sector fails to compensate for the underlying risk. Our core plus portfolios remain void of any strategic non-investment grade exposure. Having sold our 5% allocation to bank loans back in the first quarter, our limited exposure to high yield since then has been through selective crossover credits that are specific upgrade stories rather than a strategic allocation to the sector. After a respectable first half, the high yield market significantly underperformed high grade credit in both excess and total return terms over the third quarter, more than offsetting the positive excess return earned over the first and second quarters. High yield valuations ended the quarter significantly cheaper, particularly when viewed over shorter time periods. Over the longer term, high yield valuations remain only fair. Given the improved risk/reward profile, we are clearly closer to a strategic allocation to the sector and will look for longer term valuation measures to turn cheap, as well to offer us a better opportunity to redeploy capital to the sector for our core plus clients. Page 5 Market focus has been locked on the Fed as we approach the first tightening cycle in nearly 11 years. Given the Fed’s conventional and unconventional policies during this cycle, and the disproportionate influence these policies have had on asset prices, the focus is understandable. The expectation for rising rates is a natural extension of this focus, but its outcome is far from certain in our view and the real impact of even a modest tightening cycle will likely reverberate more in the risk markets. The death of the secular Market focus has been locked decline in interest rates has been written about many on the Fed as we approach the times over the last several first tightening cycle in nearly years and our “lower for 11 years. longer” thesis, developed after the Great Recession, remains our base case. A combination of lower potential growth (domestically and globally), a demographic shift leaving investors in need of high quality income producing assets, a regulatory backdrop pushing financial institutions into higher quality fixed income and a behavioral shift by investors away from equity market participation all support the current term structure of interest rates. Current wisdom ignores these structural forces, implying that Fed purchases singlehandedly suppressed rates and the inevitable reversal of said policy will force rates much higher. Through the combination of its ZIRP and QE, the Fed has aggressively pushed investors to take on more risk. Institutions, particularly pension funds, trying to meet high expected return assumptions responded accordingly and flocked to alternative strategies far afield from the conventional stock/bond balanced portfolio approach. This liquidity-induced inflation in risk assets stands to face significant headwinds when our central bank backs away from the zero bound. It is this second derivative impact that the market is ignoring. As a result, our investment strategy of safe income at a reasonable price emphasizing high quality and high liquidity remains in place. The 10-year U.S. Treasury should remain in a short term trading range of 2% to 2.5% with a longer term range of 1.5% to 2.5%. Given the downside skew implied by our longer term range, we remain steadfast that we see a better than 50/50 probability that the July 2012 low yield (1.38%) is taken out as the disinflationary pressures become more apparent and spread. High quality U.S. fixed income continues to represent good relative value in the global markets that will continue to be supported by a stableto-strengthening U.S. dollar given divergent central bank policies. BOUTIQUE PERSPECTIVE SEIX PERSPECTIVE Page 6 Asset-Backed Security (ABS) is a financial security backed by a loan, lease or receivables against assets other than real estate and mortgage-backed securities. For investors, asset-backed securities are an alternative to investing in corporate debt. A Basis Point is equal to 0.01%. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Collateralized Mortgage Obligation is a type of mortgage-backed security in which principal repayments are organized according to their maturities and into different classes based on risk. Commercial Mortgage-Backed Securities (CMBS) are a type of mortgage-backed security that is secured by the loan on a commercial property. A CMBS can provide liquidity to real estate investors and to commercial lenders. Convexity is a measure of the curvature in the relationship between bond prices and bond yields that demonstrates how the duration of a bond changes as the interest rate changes. Coupon is the interest rate stated on a bond when it’s issued. Credit Ratings noted herein are calculated based on S&P, Moody’s and Fitch ratings. Generally, ratings range from AAA, the highest quality rating, to D, the lowest, with BBB and above being called investment grade securities. BB and below are considered below investment grade securities. If the ratings from all three agencies are available, securities will be assigned the median rating based on the numerical equivalents. If the ratings are available from only two of the agencies, the more conservative of the ratings will be assigned to the security. If the rating is available from only one agency, then that rating will be used. Ratings do not apply to a fund or to a fund’s shares. Ratings are subject to change. Credit Spreads are the difference between the yields of sector types and/or maturity ranges. Federal Open Market Committee (FOMC) is the Federal Reserve Board that determines the direction of monetary policy. Gross Domestic Product (GDP) refers to the market value of all final goods and services produced within a country in a given period. GDP per capita is often considered an indicator of a country’s standard of living. Negative Interest Rate Policy (NIRP) is an unconventional monetary policy tool whereby nominal target interest rates are set with a negative value, below the theoretical lower bound of zero percent. Quantitative Easing (QE) is an unconventional monetary policy used by some central banks to stimulate their economies when conventional monetary policy has become ineffective. Residential Mortgage-Backed Security (RMBS) is a type of security whose cash flows come from residential debt such as mortgages, home-equity loans and subprime mortgages. This is a type of mortgage-backed security that focuses on residential instead of commercial debt. Standard & Poor’s 500 Index is an unmanaged index of 500 selected common large capitalization stocks (most of which are listed on the New York Stock Exchange) that is often used as a measure of the U.S. stock market. Yield Curve is a curve that shows the relationship between yields and maturity dates for a set of similar bonds, usually Treasuries, at any given point in time. Zero Interest-Rate Policy (ZIRP) is a method of stimulating growth while keeping interest rates close to zero. Investors cannot invest directly in an index. This information and general market-related projections are based on information available at the time, are subject to change without notice, are for informational purposes only, are not intended as individual or specific advice, may not represent the opinions of the entire firm, and may not be relied upon for individual investing purposes. Information provided is general and educational in nature, provided as general guidance on the subject covered, and is not intended to be authoritative. All information contained herein is believed to be correct, but accuracy cannot be guaranteed. This information may coincide or conflict with activities of the portfolio managers. It is not intended to be, and should not be construed as investment, legal, estate planning, or tax advice. Seix Investment Advisors LLC does not provide legal, estate planning or tax advice. Investors are advised to consult with their investment professional about their specific financial needs and goals before making any investment decisions. All investments involve risk. Debt securities (bonds) offer a relatively stable level of income, although bond prices will fluctuate providing the potential for principal gain or loss. Intermediate term, higher quality bonds generally offer less risk than longer-term bonds and a lower rate of return. Generally, a fund’s fixed income securities will decrease in value if interest rates rise and vice versa. There is no guarantee a specific investment strategy will be successful. Past performance is not indicative of future results. An investor should consider a fund’s investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information about the RidgeWorth Funds can be found in a fund’s prospectus. To obtain a prospectus, please call 1-888-784-3863 or visit www.ridgeworth.com. Please read the prospectus carefully before investing. ©2015 RidgeWorth Investments. All rights reserved. RidgeWorth Investments is the trade name for RidgeWorth Capital Management LLC, an investment adviser registered with the SEC and the adviser to the RidgeWorth Funds. RidgeWorth Funds are distributed by RidgeWorth Distributors LLC, which is not affiliated with the adviser. Collective Strength. Individual Insight. is a federally registered mark of RidgeWorth Investments. Seix Investment Advisors LLC is a registered investment adviser with the SEC and a member of the RidgeWorth Capital Management LLC network of investment firms. All RCBP-SA-0915 third party marks are the property of their respective owners.