PAGE 2

INVESTMENT COMMITTEE MEETING RECAP

PAGE 16 ALTERNATIVE INVESTMENT SNAPSHOT

PAGE 4

PAGE 16 CAPITAL MARKETS SNAPSHOT

ECONOMIC SNAPSHOT

PAGE 14 STRATEGIC ASSET ALLOCATION MODELS

PAGE 17 SECTOR SNAPSHOT

PAGE 15 TACTICAL ASSET ALLOCATION WEIGHTINGS

VOLUME 7 // ISSUE 4 // OCTOBER 2 0 1 5

INVESTMENT
STRATEGY
OUARTERLY

China:

Global perspectives
on change and challenge PAGE 5
Turn Off The Noise:
A
 re we back to

The Fed:

normal volatility?

Delayed, but
not forgotten

Oversupply:

PAGE 8

PAGE 10

PAGE 12

Not just oils

problem anymore

Investment Strategy Quarterly is intended to communicate current economic and capital market information along with the informed perspectives of our investment professionals. You may contact your
financial advisor to discuss the content of this publication in the context of your own unique circumstances. Published 10/01/2015. Material prepared by Raymond James as a resource for its financial advisors.

INVESTMENT STRATEGY QUARTERLY

SEPTEMBER 2015 INVESTMENT STRATEGY COMMITTEE MEETING RECAP

Similar to last quarter, the committee agrees that the Federal Reserve, which delayed the highly anticipated rate hike in
September, is the most influential macro-economic factor facing investors as we head into the final quarter of 2015 and early
2016. Other concerns include slowing global economic growth, particularly in China. The committees attitude toward real
U.S. GDP growth over the next 6-12 months is neutral, with expected annual growth registering in the 2-3% range.
ECONOMIC OUTLOOK

Recent volatility in the global equity markets

clearly suggests that uncertainty exists
among investors. Despite the extreme midquarter intraday price swings, the committee
is in agreement that the U.S. economic outlook remains bright. Weve had very strong
job growth, Augusts numbers notwithstanding, says Chief Economist Scott
Brown. I think the focus for U.S. investors
on China is misplaced, theyre not really
focusing on the real issue, which is our
domestic strength.

DOUG DRABIK, Senior Strategist,

Retail Fixed Income

What drives the markets is

not tied to a single event or
sentiment. The world's
economies are experiencing
proactive intervention from
their central banks including
some of the most influential
institutions: the Bank of Japan,
European Central Bank,
People's Bank of China and the
Federal Reserve. It is difficult
to attribute specific actions to
end results but it could be
argued that the Fed maintaining interest rates at near-zero
for seven years and increasing
their balance sheet to $4.5
trillion infused money into the
system. Equities swelled during
this period arguably not based
on pure profitability.

Citing concerns over structural reform in

Europe, European Strategist Chris
Bailey* agreed that, the clearest economic growth driver today is the United
States. Im still seeing a real implementation problem in Europe. European
governments may sound unified in their
rhetoric, but the implementation isnt
there at the moment. And ultimately this
will hurt the European economy. He is
more constructive on Chinas ability to successfully implement reforms: I think China ultimately may contribute [to
global growth] in a positive fashion.
FEDERAL RESERVE POLICY

When asked prior to the September FOMC meeting about the

timing of Fed action, Brown stated, Vice-Chair Fischer is
clearly suggesting the Feds on track to begin raising rates this
year. Whether thats September or not is an open question.
Citing recent global financial market turmoil as a potential
cause for delay, he assures that it will be temporary. Browns
comments held true, as Fed Chair Janet Yellen announced on
September 17 that rates would remain unchanged due to the
potential impact of soft global growth on the U.S. economy,
among other factors. As far as the financial markets fixation
on the topic, Brown expressed that, the stock market is overly
concerned about the Fed. This shouldnt be a big deal. The initial
increase in short-term rates would be a sign that the recovery is
well entrenched and the Fed expects that were going to see further improvement down the line.

From an international perspective, Chris Bailey*

sees the eventual rise in U.S. rates creating an
opportunity for the dollar to potentially retreat a
bit. A slightly lower dollar would actually be
really good for reinforcing the need for structural
reform in Europe. Additionally, it would help
reduce global imbalances which have negatively
impacted emerging markets and other areas
around the world.
ASSET ALLOCATION GUIDANCE
EQUITIES

The committee is neutral on equities overall in

the near term. Recent volatility has led to
mixed signals between fundamental and technical indicators. Chief Investment Strategist
Jeff Saut stated, Im having a real hard time
because we did get a Dow Theory Sell Signal
on August 25. While Im ignoring this one temporarily, if we go below those levels on a
closing basis, Im going to have to honor the
sell signal. I dont want to because I think were
in a secular bull market.

Due to market activity in the weeks following the third quarter

committee meeting, we are providing updated insights:
We have been a tad conflicted lately. On one hand, we
have long held the belief that we are in the midst of a longterm secular bull market that has years left to run, and that
any dips or corrections should be viewed within the context of this multi-year uptrend (and this view may still very
well end up being correct). However, the other hand has
thrown an unwanted variable into the equation by giving
us the Dow Theory Sell Signal that we have discussed
quite a bit over the last month.
When examining historical market activity similar to what
weve experienced over the last two months, the results, fortunately, do not indicate that the bottom is about to drop out
of this bull market. This bit of good news obviously isnt
enough for us to completely throw caution to the wind, but it
does put the current landscape into context.

-Andrew Adams, CMT, Equity Research

OCTOB E R 2015

INVESTMENT STRATEGY COMMITTEE MEMBERS

Each quarter, the committee members complete a detailed survey sharing their views on the investment environment, and their
responses are the basis for a discussion of key themes and investment implications.
Andrew Adams, CMT Research Associate,
Equity Research
Chris Bailey European Strategist,
Raymond James Euro Equities*
Scott J. Brown, Ph.D. Chief Economist,
Equity Research

Nick Goetze Managing Director, Fixed Income Services

Peter Greenberger, CFA, CFP Director,
Mutual Fund Research & Marketing
David Hunter, CFA, CAIA Officer, Institutional
Research, Asset Management Services

Richard Skeppstrom Managing Director

of Investments, Portfolio Manager, Eagle
Asset Management*
Scott Stolz, CFP Senior Vice President,
PCG Investment Products

Nicholas Lacy, CFA Chief Portfolio Strategist,

Asset Management Services

Jennifer Suden, CAIA Director of Alternative

Investments Research

James Camp, CFA Managing Director of Fixed

Income, Eagle Asset Management*

Ryan Lewenza, CFA, CMT Senior Vice President,

Private Client Strategist and Portfolio Manager,
Raymond James Ltd.*

Tom Thornton, CFA, CIPM Vice President,

Asset Management Services

Doug Drabik Senior Strategist,

Retail Fixed Income

Pavel Molchanov Senior Vice President,

Energy Analyst, Equity Research

J. Michael Gibbs Managing Director of Equity

Portfolio & Technical Strategy

Paul Puryear Director, Real Estate Research

Robert Burns, CFA, AIF Vice President,

Asset Management Services

Kevin Giddis Senior Managing Director, Fixed Income

Jeffrey Saut Chief Investment Strategist,

Equity Research

General consensus believes the equity market correction

was long overdue and much needed. Ryan Lewenza, SVP,
Private Client Strategist and Portfolio Manager* is confident
that were going to consolidate through this. A seasonally
weak September, perhaps even early October, should set us
up for a year-end rally. As we all know, October to December
is the strongest period for the equity markets, especially
when you come off a correction in late September.
Mike Gibbs, Managing Director of Equity Portfolio & Technical Strategy added, Im not ready to toss in the towel yet.
The U.S. economy is in good shape and the global economy
should give us better data down the road. We have to pay
attention to whats going on and see how things play out
just strap in and be prepared for the next month or two. It
could be a fairly volatile ride.
FIXED INCOME

The committee was evenly split between a neutral and slightly

underweight allocation to fixed income. Members suggested
that any imminent action by the Fed should not have a discernible effect on the overall fixed income markets. Nick Goetze,
Managing Director of Fixed Income Services stated, I think
that the impact of an eventual rate change really wont amount
to anything. As I understand it, anything short of 3.25% is
accommodative, so when they increase short-term rates by 20
or 50 basis points, I would imagine the Feds language thereafter will sound something a lot like, were going to stop now
and were going to watch and see what happens.
But in general, if you look at the overall bond market, it's still a
very, very safe asset [on a relative basis], added Goetze. I think
its telling you something when a lot of the world is still buying
bonds based on the most important premise - being able to get
your money back. Its return of principal, not return on principal.
*An affiliate of Raymond James & Associates and Raymond James Financial Services.

Anne B. Platt, AWMA, AIF Committee Chair

Vice President, Investment Strategy & Product
Positioning, Wealth, Retirement & Portfolio Solutions
Kristin Byrnes Committee Vice-Chair
Product Strategy Analyst, Wealth, Retirement &
Portfolio Solutions

ENERGY

Oil and gas prices are in a bear market, though some of oils
recent decline is sentiment-driven, as a result of Chinese
headlines that pushed equities down as well. Ultimately, we
think there will be an oil price recovery toward the end of 2016
as a supply response materializes.
U.S. HOUSING

Director of Real Estate Research Paul Puryear believes that

the U.S. housing market is in its best shape in the last 15
years. We had a great housing boom followed by a lot of
vacancy as a result of over financing and, of course, the crash.
Consequently, we havent seen the buckets of housing,
whether its rental or owner-occupied housing, line up fundamentally for quite some time. Still, we are in really good
shape directionally from an inventory standpoint.
From a job growth standpoint, the market is positive, yet not
as impactful as it has been historically due to the lower magnitude of builds compared to past periods. Nonetheless,
household formations and consumer trends should support
continued price appreciation. Unless the economy rolls over,
things should continue to be pretty good for housing.
SUMMARY

The fourth quarter will likely shed light on the long-term

direction of the economy and financial markets. The committee is hopeful that the consensus view of a positive
long-term outlook holds and that this recent correction does
not escalate into something worse.
Given the current environment of heightened volatility, our opinions
could change as market conditions dictate. Market updates and
guidance will be provided by Chief Investment Strategist Jeffrey
Saut, should a change of opinion occur in the coming months.

INVESTMENT STRATEGY QUARTERLY

ECONOMIC SNAPSHOT
The economic outlook is mixed. Softer global growth and a strong dollar are expected to restrain
export growth. However, the domestic economy appears to be in good shape, supported by strong
job growth, accommodative monetary policy, and low oil prices. Fed policymakers expect to begin

SCOTT BROWN
Chief Economist,
Equity Research

raising short-term interest rates by the end of the year, but the pace of tightening beyond the first
move, while data-dependent, is expected to be very gradual.

NEUTRAL OUTLOOK

POSITIVE OUTLOOK

ECONOMIC
STATUS INDICATOR

COMMENTARY

GROWTH

GDP growth is likely to be restrained somewhat by a fall in net exports and an inventory correction, but
consumer spending and business fixed investment should remain relatively strong in the near term.

EMPLOYMENT

Job losses remain limited. New hiring appears to have remained moderately strong, led by gains in
small and medium-sized businesses.

CONSUMER
SPENDING

Nominal wage growth has remained relatively lackluster, but the drop in oil prices has added
significantly to consumer purchasing power.

HOUSING AND
CONSTRUCTION

Job growth has been supportive and bank mortgage lending has gotten somewhat easier, but we still
have a long way to go for a full recovery.

INFLATION

Consumer price inflation has been close to 0% y/y, reflecting the drop in gasoline prices. Pipeline
inflation pressures are minimal.

MONETARY
POLICY

Fed officials believe that downward pressure on inflation will be transitory, and most expect that it will
be appropriate to begin raising short-term interest rates by the end of the year. The pace of tightening
should be gradual.

THE U.S. DOLLAR

The dollar has been largely range-bound against the major currencies since mid-March, but rallied
significantly against the smaller currencies in the late spring and summer.

BUSINESS
INVESTMENT

The contraction in energy exploration and the soft global economy have been restraints, but orders
have picked up somewhat following a poor first half.

MANUFACTURING

Auto production has remained strong, but factory output has been mixed and generally lackluster
otherwise (reflecting the impact of a strong dollar).

LONG-TERM
INTEREST RATES

Long-term interest rates should drift gradually higher as the economy improves and the Fed starts to
raise short-term rates. However, we may continue to see a flight to safety (lower bond yields) on global
concerns.

FISCAL POLICY

There is a strong likelihood of a government shutdown over the federal budget and debt ceiling by the
end of the year.

REST OF
THE WORLD

The outlook for China and other emerging market economies has grown more uncertain, rattling
investor nerves. Its difficult to gauge how much the global economy may slow over the near term.

OCTOB E R 2015

China:

Global perspectives
on change and challenge
Scott J. Brown, Ph.D., Chief Economist, Equity Research
Ryan Lewenza, CFA, CMT, Senior Vice President, Private Client Strategist and Portfolio Manager, Raymond James Ltd.*
Chris Bailey, European Strategist, Raymond James Euro Equities*
A U.S. PERSPECTIVE

Scott J. Brown, Ph.D.

vention from the government. History has shown that if such a

China has been a key concern for investors in recent months. The

transition is not carefully coordinated, there can be severe con-

countrys stock market correction and currency adjustment added

sequences. The governments clumsy efforts to prevent share

to market volatility worldwide. After the Shanghai

Composite Index more than doubled in a year, the
decline in share prices appears to be the unwinding

SCOTT BROWN
Chief Economist,
Equity Research

of a speculative bubble. The currency decline was

not intended to be a competitive devaluation.
Rather, it was an ill-fated attempt to move to a
more market-driven exchange rate. Chinas leaders
want the yuan to be seen as one of the worlds key
reserve currencies. The International Monetary
Fund ("IMF") was reported to be considering

What would a slowdown

in China mean for the
U.S. economy? Not much
directly. China accounted
for a little over 7% of U.S.
exports in 2014, less than
1% of GDP.

whether to add the yuan to its benchmark basket

(along with the dollar, pound, euro, and yen). However, to do so

prices from falling and to keep its currency from

weakening too rapidly illustrate the difficulties
and have undermined confidence.
What would a slowdown in China mean for the
U.S. economy? Not much directly. China accounted
for a little over 7% of U.S. exports in 2014, less than
1% of GDP. However, China has been a major
importer of raw materials and many commodity
exporters, such as Australia, Brazil and Canada,
are seeing weakness. So, slower growth in China
will have broad effects on the global economy.

would require that the exchange rate be set by the market, rather

Its not all bad news. Lower commodity prices, especially the

than at the whim of Chinese officials. This exchange rate experi-

drop in oil prices, should be beneficial to U.S. consumers and

ment didnt last long, as the currency fell sharply in just two days,

businesses. That should add to domestic strength in the

and officials declared the adjustment to be essentially com-

months ahead.

plete. These developments were a sideshow, however, to the

more important issue, which is slower growth.

A COMMODITY MARKET PERSPECTIVE

Ryan Lewenza

China is making two difficult and potentially dangerous tran-

Chinas economic growth and commodity prices are inextri-

sitions. The first is that the economy needs to transform from

cably linked. We often say that China is the marginal price

one being led by export growth and infrastructure spending

setter of commodities. We say this for a number of reasons.

to one being led by consumption. That will take some time

First, the combination of Chinas large population, rising stan-

and growth could be bumpy along the way. Moreover, sustain-

dards of living, and urbanization has led to an insatiable

able growth at the end of the transition is likely to be slower.

demand for commodities. Second, related to this point, China

Chinas growth has averaged about 10% per year over the last

represents roughly 50% of annual global demand for key com-

couple of decades, but may slow to 4-6% in the years ahead.

modities like steel, cement, and copper among others. Third,

The second is the liberalization of Chinas capital markets. Asset

prices need to be determined by the markets, with limited inter*An affiliate of Raymond James & Associates and Raymond James Financial Services.

China has been investing in infrastructure at an incredible

rate, building roads, airports, and high-speed rail, to support

INVESTMENT STRATEGY QUARTERLY

China

(continued)

the continued urbanization and growth of the country. To put

activity. The other key drag on economic growth has been the

this into context, Chinas investment as a percentage of GDP is

notable decline in export growth. Following Chinas inclusion in

51%, compared to the U.S. at 17%. While some of these invest-

the World Trade Organization in 2001, real exports rose at a stag-

ments were surely dubious (i.e., Chinas ghost cities), many of

gering 25% per year until 2007. Since 2014, real export growth has

these investments were critical in the advancement and growth

slowed significantly to 3.5%. Our view is that while China should

of the nation. Finally, as the saying goes a picture is worth a

avoid a hard landing, economic growth should continue to slow,

thousand words. In the chart below, Chinas GDP growth is

possibly to a more sustainable mid-single digit growth rate.

overlayed with the year-over-year change in commodity prices.

Note the high correlation between the two. As Chinas growth
accelerated, commodity prices rose, and as China has slowed,
commodity prices have come under pressure. Putting it all

Given this slowdown, we have maintained a cautious view of

commodities, which is one factor in our recommendation to
underweight the materials sector. It is also why we continue

together, it becomes clear that the outlook for China will largely
drive the outlook for commodities. And on that, it should come
as no surprise that as Chinas GDP growth has slowed from an
average of 9.4% in the 2000s to 7% in 2015, that demand for commodities has waned, and prices have fallen.
The question then is what is the outlook for Chinas growth?
China is currently undergoing a massive transformation. This
transformation in part explains the deceleration of economic

1. The combination of Chinas large population, rising

standards of living, and urbanization has led to an
insatiable demand for commodities.

2. China represents roughly 50% of annual global

demand for key commodities such as steel, cement,
and copper, among others.

3. China has been investing in infrastructure at an

COMMODITY PRICES
MIRROR CHINA'S ECONOMIC GROWTH
16%

50%

REASONS WHY CHINA IS THE MARGINAL

PRICE SETTER OF COMMODITIES

40%

incredible rate, building roads, airports and highspeed rail, to support the continued urbanization
and growth of the country.

4. As Chinas growth accelerated, commodity prices

30%
12%

20%
10%
0%

8%

-10%

rose, and as China has slowed, commodity prices

have come under pressure.
INVESTMENT AS A PERCENTAGE OF GDP

-20%
-30%
4%

-40%
1996

1998

2001

2004

2006

2009

2012

Commodity Research Bureau Commodity Index Y/Y % Chg (left axis)

China GDP Y/Y % Chg (right axis)

UNITED STATES

17%

CHINA

51%

OCTOB E R 2015

to recommend to our Canadian clients to look outside of

Out of danger, however, comes opportunity. Policy makers

Canada more, focusing on the better positioned U.S. and

especially in the euro area seem more enthused by crisis

European equity markets.

moments. Europe probably needs a second (or extended)

A EUROPEAN PERSPECTIVE

Chris Bailey

dose of quantitative easing support and it certainly needs

structural reform initiatives that improve the regions flexibility, dynamism and competitiveness. A Chinese slowdown

When written in Chinese, the word crisis is composed of two

should boost the likelihood of both events. The most difficult

characters. One represents danger and the other represents

aspect to predict is timing. The fastest agents of change are

opportunity - John F. Kennedy

once again likely to be individual companies rather than gov-

Europes economic revitalization strategy over the past couple

of years has been as much about stimulating exports via a low
euro as it has been about expanding unorthodox monetary

ernments and that should support a more thematic or specific

investment approach to European assets versus a more blunt
index-wide approach.

policy via quantitative easing and other support measures. A

Europes trade links with China remain a medium-term tailwind

by-product of this has been the rapid build-up in the share of

rather than a headwind as the ending of recent over-reliance on

exports to emerging markets as a percentage of European

the Middle Kingdoms economic development can actually be

countries GDP. Last year, German exports to emerging mar-

turned into an impetus for further required European reform. In

kets were equivalent to over 10% of their GDP and for the

the meantime, it also implies the announcement of a further slug

broader euro area, just over 8% of regional GDP. By contrast,

of quantitative easing support, making the economic and finan-

the equivalent statistic for the U.S. is 4%. Unsurprisingly, the

cial policy-making debate in the region a continued differentiator

majority of demand for European exports comes from China.

from current policy in the United States.

The current Chinese economic challenges are therefore poorly

timed for European economies as it lessens one of the positive
growth drivers for the region and therefore places more
emphasis on local regional drivers. Given we have previously
chronicled challenges with coordinating pan-European stimulus and structural reform policies, this development is a
headwind for European growth levels. Earlier in the month, the
President of the European Central Bank, Mario Draghi, reduced
expectations for 2015-17 euro area growth, citing the challenging global backdrop. There is little doubt that the
combination of a Chinese slowdown and a disappointing application of European structural reform initiatives has impacted
this action. Little wonder that rumors about a second wave of
quantitative easing in Europe have heightened.

KEY TAKEAWAYS:
A slowdown in China would not mean much for the
U.S. economy directly. China accounted for a little over
7% of U.S. exports in 2014, less than 1% of GDP.
Putting it all together, it becomes clear that the outlook
for China will largely drive the outlook for commodities.
Given the slowdown in China, we have maintained a
cautious view of commodities.
Europes trade links with China remain a medium-term
tailwind rather than a headwind as the ending of recent
over-reliance on the Middle Kingdoms economic
development can actually be turned into an impetus for
further required European reform.

INVESTMENT STRATEGY QUARTERLY

Turn Off The Noise:

Are we back to normal volatility?

Kristin Byrnes, Committee Vice-Chair, Product Strategy Analyst, Wealth, Retirement & Portfolio Solutions
WHAT HAPPENED LAST QUARTER?

June 12, 2015 marked the beginning of a significant correction in Chinas stock market which
spanned most of the summer months. Despite several attempts by the Chinese government to
halt the sell-off, the Shanghai Composite Index lost nearly 43%, peak-to-trough. Roughly two
months later, on August 17, the Dow Jones Industrial Average embarked on a more muted correction, losing 10% over the course of seven consecutive trade days.
Further complicating matters for China, government officials made a surprising move by devaluing
the yuan, Chinas national currency. Chief Economist Scott Brown, Ph.D. explains the failed experiment: They were not trying to boost exports by weakening their currency. What they were trying to do
was move towards a free-floating currency - to have a market-based determination of the exchange

General consensus
believes that recent
market activity,
while unpleasant, is
a healthy correction
and a normal part
of the equity
market cycle.

rate. What was actually an attempt to implement positive structural reform quickly turned into a
misinterpreted signal by investors that further economic slowdown was to be expected.
WHERE ARE WE NOW?

The Shanghai Composite Index continues to display height-

the markets become saturated with investors attempting to

ened volatility, yet remains up around 30% over the last year,

take advantage of inflated asset prices rather than trading

as of late-September. Brown makes an important point, noting

on fundamentals. Eventually, the bubble bursts, removing

that, Chinas stock market decline is not really indicative

speculators from the market and paving the way for a return

of economic weakness, nor is it necessarily going to cause

to a normal investment environment.

economic weakness. That said, Chinese growth has slowed.

European Strategist Chris Bailey opines that, President
Xi of China is actually making pretty good progress on its
structural reform. Furthermore, Bailey finds the likelihood of
successful reform much greater for China than for Europe.

Turbulent markets following a quiet period of general price

appreciation with low interest rates can be troublesome for
investors who have become complacent with the current environment. In turn, they may have overextended their portfolios
risk profile in an attempt to stretch for yield or increase total

U.S. equity markets have since followed suit, with the Dow

return. Director of Mutual Fund Research & Marketing Peter

Jones Industrial Average recovering from late-August lows,

Greenberger reminds us that it is in moments like this that

but volatility remains elevated. General consensus believes

Warren Buffetts investment acumen holds true: Only when

that recent U.S. market activity, while unpleasant, is a healthy

the tide goes out do you discover whos been swimming naked.

correction and a normal part of the equity market cycle.

Still, it can be alarming for those who dont understand the

WHERE ARE WE HEADED?

phenomenon of a correction. Any sustained period of price

So what does this say about the future state of the equity mar-

appreciation, as seen in China as stocks began skyrock-

kets? Chief Investment Strategist Jeff Saut reiterated his

eting in mid-2014, is a warning to many astute investors that

long-term bullish stance, stating, To a long-term bull, which

a correction may be near. Corrections are necessary when

is what I am, what happened over the last several weeks is just

OCTOB E R 2015

noise. Our belief is that this is a pull-back in an ongoing sec-

opportune time to reevaluate current portfolio positioning. In

ular bull market that still has another eight or nine years left to

particular, comparing the current risk profile of the portfolio to

run, providing the averages don't close below August 25 lows of

that of the investors risk tolerance can identify mismatches that

15,666 on the Dow and 7,466 on the Dow Transportation Index.

require repositioning. Whether its paring back or mitigating

Managing Director of Equity Portfolio & Technical Strategy

Michael Gibbs agreed that this was an ordinary correction,
pointing out that it takes time for markets to settle after a significant loss. During this period, over the next three-six-nine
months possibly, the markets have the potential to be more

current risk levels, participating in the glut of buying opportunities available in oversold markets, or simply staying on track;
managing expectations surrounding risk/return objectives
is central to reducing investor surprise, panic, and emotional
decision-making during volatile market environments.

volatile as investors wait and try to get clarity on just what is

really happening around the world. He is confident that as
time plays out, Everything will be fine with economic growth.

KEY TAKEAWAYS:

The global economy is still set to grow at 2-3%, as is the U.S.

Chinas stock market decline is not really indicative of economic weakness, nor is it necessarily
going to cause economic weakness. That said,
Chinese growth has slowed. - Scott Brown, Ph.D.

economy, and typically you do not see a bear market in stocks

when the economy is growing. Brown concurs, assuring that
despite all of this noise, underlying it all is a domestic outlook
from the U.S. which is still very, very promising.
As Gibbs emphasized, The one thing that investors despise
is uncertainty. Given that the short-term market outlook is
unclear - as policies unfold at home and abroad - now is an

CBOE VOLATILITY INDEX (VIX)

Through September 2015

During this period, over the next three-six-nine

months possibly, the markets have the potential
to be more volatile as investors wait and try to get
clarity on just what is really happening around the
world.- Mike Gibbs
Given that the short-term market outlook is unclear - as
policies unfold at home and abroad - now is an opportune time to reevaluate current portfolio positioning.

80
60

General consensus believes that recent market

activity, while unpleasant, is a healthy correction and
a normal part of the equity market cycle.

VIX
20-Year Average

40
20
0

Aug.
1995

Aug.
1997

Aug.
1999

Aug.
2001

Aug.
2003

Aug.
2005

Aug.
2007

Aug.
2009

Aug.
2011

Aug.
2013

Aug.
2015

The CBOE Volatility Index

(VIX) is based on the S&P
500 Index (SPX), and estimates expected volatility by
averaging the weighted prices
of SPX puts and calls over a
wide range of strike prices.

INVESTMENT STRATEGY QUARTERLY

The Fed:

Delayed but not forgotten

NON-TRADITIONAL FIXED INCOME (continued)

Scott J. Brown, Ph.D., Chief Economist, Equity Research

The Federal Reserve has not raised short-term interest rates since June 2006. The U.S. central bank last
lowered the target range for federal funds (the overnight lending rate) to 0-0.25% in December 2008
and has kept it there since. The economic recovery, now more than six years along, has made substantial
progress. Job growth has been strong in the last couple of years and slack in the labor market has been
reduced considerably with further slack expected to be removed over the next year. Fed officials need
to set monetary policy based on where the economy is expected to be 12 to 18 months ahead. Hence,
it is appropriate for policymakers to consider embarking on a gradual normalization. The first step is to
raise the federal funds target range.
Fed officials believe that the precise timing
of the initial move should not be important.
What matters is the pace of tightening, and
officials expect rate hikes to be very gradual.
However,

financial

market

participants

believe that timing matters a lot. Recent

signs of softness in emerging-market economies suggest that the global economy may
be fragile and that a Fed rate hike could
make conditions worse, adding to recent
market volatility. The Feds focus is clearly
on the domestic economy, which appears to
be in good shape, but officials do need to

DOUG DRABIK
Senior Strategist,
Retail Fixed Income

The decision is not so

easy given all the data that
contests the policy. The
Fed has extended a very
open and accessible policy
and will likely raise by year
end; however, there are
compelling reasons to
think they will not have
too many consecutive
or significant increases.

take into account how overseas reactions to

Fed action might influence things here.
If this sounds vaguely familiar, its because we went through
a similar situation in 2013. At that time, the Fed was in the
middle of its third large-scale asset purchase program, also
known as QE3. The Fed was contemplating reducing the
current monthly pace of $85 billion in asset purchases, but it
couldnt stop all at once and decided to taper the rate of
asset purchases over time. Simply mentioning the reduction
in the pace of purchases sent financial markets into a taper

10

tantrum. Bond yields rose, emerging economies experienced financial strains, and the
Fed ultimately delayed, but did not permanently postpone, its tapering of QE3.
This time around, bond yields havent taken off,
but stock market participants here and abroad are
still nervous. If not for the recent global financial
volatility, the Fed would likely have begun raising
short-term interest rates in September.
Why raise rates? The Fed would not be hitting the brakes so much as starting to take
the foot off the gas pedal. Inflation isnt
really a problem. The strong dollar and lower

commodity prices put downward pressure on consumer

price inflation in the near term, but the Fed views that as
transitory. Oil prices wont fall forever and should stabilize. The dollar has been range-bound against the major
currencies since March, but has rallied sharply against
other currencies in recent months. Those currencies
accounted for 57% of U.S. imports in 2014. A rate increase
would boost the dollar somewhat, adding downward pressure on inflation, but much of that may already be priced
into the markets.

OCTOB E R 2015

The labor market is the widest channel for inflation pressure. Wage growth has remained lackluster, but should
eventually pick up as the job market improves further. A
number of Fed officials have been surprised that we
havent seen strong wage growth, given the drop in the
unemployment rate and strong pace of growth in nonfarm
payrolls over the last year. There may be a number of factors (for example, the decline in union power or the ability
of firms to cast a wider net when hiring) that are limiting
wage pressures.
Fed officials are divided on the perceived risks. The
hawks always seem to see inflation around every bend

KEY TAKEAWAYS:
Fed officials believe that the precise timing of the
initial move should not be important. What matters
is the pace of tightening, and officials expect rate
hikes to be very gradual.
The Feds focus is clearly on the domestic economy, which appears to be in good shape, but officials do need to take into account how overseas
reactions to Fed action might influence things here.
Monetary policy will still be very accommodative
even after the first few Fed rates hikes.

and want to tighten sooner rather than later. The doves

see few signs of upward pressure in inflation in the near
term and are more concerned with signs of slack in the
labor market. Monetary policy will still be very accommodative even after the first few Fed rate hikes.
While global concerns may delay the Feds initial rate
increase, it wont postpone it permanently. As Fed Vice
Chair Stanley Fischer put it in late August, by meeting the
Feds objectives (low inflation and maximum sustainable
employment), and so maintaining a stable and strong
macroeconomic environment at home, we will be best
serving the global economy as well.

11

INVESTMENT STRATEGY QUARTERLY

Oversupply:

Not just oils problem anymore

Q
 &A with Pavel Molchanov, Senior Vice President, Energy Analyst, Equity Research
Q: U
 .S. and international oil stockpiles are near record highs.
Why is the market so saturated on the supply side?
A: T
 here are three fundamental reasons why the physical
oversupply of oil is so visible globally. First, Saudi Arabias
oil production is running at record-high levels, up 7% yearover-year, as it continues its price war with non-OPEC
producers such as the U.S., Russia, and Brazil. Saudi
behavior is starting to become irrational, and of course it
cannot keep worsening the oil glut forever. However, as
things stand, we have to assume that its record production
will continue into 2016. Second, Iraqs production has
soared which may seem counterintuitive, given the
ongoing headlines about the war with ISIS. On a percentage basis, Iraq stands out as the fastest-growing major
oil producer of 2015: up more than 15% year-over-year,
ahead of most expectations. Third, non-OPEC oil supply
which is two-thirds of the world total hasnt yet begun to
exhibit significant declines. To be clear, this will eventually
happen, given the extent to which the entire industry is in
austerity mode, but it will likely be the second half of 2016
before the non-OPEC declines become meaningful.
Q: W
 hat will ultimately trigger price recovery in the oil
market, and do you see volatility being a common theme
going forward?

12 to 18 months to rebalance the

There is no escaping
the fact that volatility
will persist.

market via a decline in nonOPEC supply. Across non-OPEC

countries, we are seeing huge
declines in oil and gas invest-

ment, drilling activity and project approvals. This will

gradually trigger a supply response so much so, in fact,
that its even possible to imagine points of time towards
the end of this decade when the oil market might be undersupplied, especially in the event of geopolitical supply
disruptions. In the meantime, however, there is no
escaping the fact that volatility will persist. The negative
economic headlines from China, for example, spurred a
dramatic downturn in equities and commodities alike
even though the actual impact on Chinese oil demand is
small. On the other hand, in late August, oil prices had
their biggest three-day gain since 1990 amid rumors that
OPEC might be rethinking its production strategy.
Q: W
 hat about natural gas? Is it looking better or worse than oil?
A: U
 nlike oil, there is no such thing as a global market for natural gas. North America is a single gas market, but Europe
consists of three separate ones, and Asia-Pacific countries also have different gas price dynamics. It is well
understood that oversupply of shale gas in North America

A: I t is overwhelmingly supply that is the culprit behind the oil

has pushed prices to historically low levels, but whats less

selloff. The 2015 global oil demand picture (up 2%) looks

well known is that international gas economics are also

much better than we would have predicted a year ago. So it

starting to look more bearish. Case in point: European gas

is supply that will have to fix the oil market. The quickest

demand has had a stunning fall to a 20-year low, due to a

solution would be for Saudi Arabia to ease off on its over-

combination of more wind and solar as well as cheap coal.

production, because lets be honest it is already winning

Europe still relies, to a large extent, on buying gas from

the price war. But if that does not happen, then it may take

Russia, but its falling consumption means imports are

12

OCTOB E R 2015

down. In Asia, gas demand is growing, but not as fast as

the industry would have hoped. In the meantime, Australian gas exports are ramping up, and for the first time, the
U.S. Gulf Coast will be exporting some gas to Asia in 2016.
Thus, we cannot blame OPEC for the weakness in gas
prices worldwide, but rather its an issue of structural
changes in both supply and demand.
Q: W
 hy are agricultural commodity prices so low, and who are
the winners and losers?
A: M
 any investors tend to be more familiar with whats hap-

KEY TAKEAWAYS:
It is overwhelmingly supply that is the culprit behind
the oil selloff. So it is supply that will have to fix
the oil market.
There is no escaping the fact that volatility will persist.
Over the past year weve seen close correlations
among just about all commodities. In the case of the
main staple crops, prices are at or near the lowest
levels since the global financial crisis of 2008-2009.

pening in energy and metals as compared to the agricultural

sector. While they dont always trade in parallel, over the
past year weve seen close correlations among just about all
commodities. In the case of the main staple crops corn,
wheat, soybeans, sugar cane prices are at or near the
lowest levels since the global financial crisis of 2008-2009.
As of July, for example, the United Nations global food price
index was down 19% year-over-year. Part of the reason is
ample supply. Favorable weather in the Midwest has boosted
U.S. output and exports, though the strong dollar has been a
headwind. In Russia and Ukraine and, to a lesser extent,
Brazil weak currencies are enabling especially cheap
exports. Meanwhile, Chinese demand has not been as robust
as expected as is true of all commodities leaving global
stockpiles at elevated levels. Low energy prices are also
helping by reducing the cost of fertilizer and transportation.
All this is great news for countries that depend on imported
food: for example, China, Japan and Egypt. On the flip side,
farmers in the top food exporters the U.S. and Canada,
much of South America, and Russia are feeling the pressure of lower revenues.

13

INVESTMENT STRATEGY QUARTERLY

STRATEGIC ASSET ALLOCATION MODELS

Raymond James asset allocation targets are based on the contributors changing views of the risk and return in the various
asset classes, looking out over three or more years. These models assume fully allocated portfolios and do not take into
account outside assets, additional cash reserves held independent of these fully allocated models or any actual investors
unique circumstances. Investors should consult their financial advisor to decide how these models might assist in the
development of their individual portfolios.

CONSERVATIVE

CONSERVATIVE
BALANCED

BALANCED

BALANCED
WITH GROWTH

GROWTH

EQUITY

31%

51%

67%

78%

93%

U.S. Large Cap Equity

18%

31%

35%

35%

42%

U.S. Mid Cap Equity

4%

7%

9%

10%

11%

U.S. Small Cap Equity

2%

3%

5%

6%

7%

Non-U.S. Developed Market Equity

7%

10%

14%

17%

21%

Non-U.S. Emerging Market Equity

0%

0%

4%

6%

8%

Publicly-Traded Global Real Estate

0%

0%

0%

4%

4%

67%

47%

31%

15%

0%

0%

0%

0%

0%

0%

39%

27%

17%

15%

0%

Investment Grade Short

Maturity Fixed Income

5%

0%

0%

0%

0%

Non-Investment Grade
Fixed Income (High Yield)

4%

5%

4%

0%

0%

Global (non-U.S.) Fixed Income

4%

4%

4%

0%

0%

Multi-Sector Bond*

15%

11%

6%

0%

0%

ALTERNATIVE INVESTMENTS

0%

0%

0%

5%

5%

CASH & CASH ALTERNATIVES

2%

2%

2%

2%

2%

FIXED INCOME
Investment Grade Long
Maturity Fixed Income
Investment Grade Intermediate
Maturity Fixed Income

14

*Refer to page 18 for multi-sector bond asset class definition.

OCTOB E R 2015

TACTICAL ASSET ALLOCATION WEIGHTINGS

For investors who choose to be more active in their portfolios and make adjustments based on a shorter-term outlook, the
tactical asset allocation dashboard below reflects the Raymond James Investment Strategy Committees recommendations
for current positioning relative to our longer-term strategic models. Your financial advisor can help you interpret each

July 2015

Oct. 2015

OVERALL EQUITY

U.S. Large Cap Equity

Equities showed increased volatility in 3Q with elevated valuations and negative momentum. Despite these characteristics, it remains one of the few places with positive
expected return potential in the near term.
In sustained periods of volatility, large caps tend to hold up better than their smaller counterparts. Valuations are not as expensive as mid and small caps, and if the USD continues
to rise, it will likely be at a slower growth rate than experienced over the last 12 months.

Mid caps have seen a substantial run up in valuations over the past 6 years and are currently
trading at stretched multiples. The strong momentum tailwind has abated this quarter, suggesting that expected returns may not compensate investors for the risk exposure of this segment.

U.S. Mid Cap Equity

TACTICAL COMMENTS

UND
ERW
EIGH
T
SLIG
H
T
UND
ERW
EIGH
T
NEU
TRA
L
SLIG
OVE HT
RWE
IGHT
OVE
RWE
IGHT

recommendation relative to your individual asset allocation policy, risk tolerance and investment objectives.

U.S. small caps have been more isolated from the global economy relative to their larger
brethren. Pockets of relative attractiveness exist in this space, particularly on the value side.
Growth-style, on the other hand, look very expensive making them less attractive.

Non-U.S. Developed Market Equity

Double-digit returns earned in H1 this year were erased in 3Q due to concerns over
global growth. Positive growth prospects and quantitative easing remain tailwinds
while political unity and structural reform remain concerns.

Non-U.S. Emerging Market Equity

This space is oversold from a market-sentiment standpoint and is due for an eventual
rebound. While long-term prospects are attractive, volatility will likely continue in the near
term. Opportunities exist for investors who can tolerate near-term instability.

Publicly-Traded Global Real Estate

Real estate securities provide diversification benefits against equity risk, but impending rising interest rates could negatively impact these rate-sensitive investments. Still, pockets of
growth do exist, particularly outside of the U.S. Active management is recommended here.

U.S. Small Cap Equity

Investment Grade Long

Maturity Fixed Income

Fixed income will likely react negatively to the Fed raising short-term rates over the
next 6-12 months, however, we do not recommend abandoning strategic allocations
altogether. A slight underweight in this space seems prudent at this time.

OVERALL FIXED INCOME

This is the most attractive part of the yield curve based on forward markets, due in part to expectations that long-term rates will fall as the Fed raises short-term rates. Potential for positive
returns in the near term and strong diversification benefits relative to equities make us neutral.

Investment Grade Intermediate

Maturity Fixed Income

Intermediate-term bonds are unattractive relative to the long end of the curve and
will likely be impacted, to some degree, by the potential rise in short-term rates.

Investment Grade Short

Maturity Fixed Income

Short-term fixed income has the lowest duration, but is also the most expensive and
overbought. This is a crowded trade and does not have positive prospects once the
Fed begins raising short-term rates.

Non-Investment Grade
Fixed Income (High Yield)

Spreads are somewhat tight here suggesting investors are not being adequately
compensated for the embedded equity risk taken on by these holdings.

Global (non-U.S.) Fixed Income

While QE can be viewed as a headwind for many global bond markets, this low
yielding environment does not offer the necessary protection against currency risk.
Active management is recommended here.

Multi-Sector Bond*

Multi-strategy bonds are likely to outperform core fixed income as interest rates
rise. However, they are relatively expensive and tend to provide less diversification
from equity downturns due to the embedded equity risk within these strategies.

ALTERNATIVE INVESTMENTS

CASH & CASH ALTERNATIVES

Alternatives have the potential to offer diversification benefits, and profit from market
dislocations. Declining intra-stock correlations bode well for L/S Equity strategies while
heightened volatility is typically a tailwind to Global Macro/Managed Futures.

Volatility within the capital markets leads to buying opportunities for those who have
cash reserves available to invest.

Refer to back page for model definitions. *Refer to page 18 for multi-sector bond asset class definition.

15

INVESTMENT STRATEGY QUARTERLY

ALTERNATIVE INVESTMENTS SNAPSHOT

This report is intended to highlight the dynamics underlying seven major categories of the alternatives
market, with the goal of providing a timely assessment based on current economic and capital market
environments. Our goal is to look for trends that can be sustainable for several quarters; yet given the

JENNIFER SUDEN
Director of Alternative
Investments Research

dynamic nature of financial markets, our opinion could change as market conditions dictate. Investors should
consult their financial advisors to formulate a strategy customized to their preferences, needs, and goals.

ALTERNATIVE
INVESTMENTS

Certain alternative investments could provide valuable diversification benefits and profit from market dislocations.
Long/Short Equity strategies have the potential to benefit from declining intrastock correlations. Additionally, elevated
levels of volatility are typically a tailwind to Global Macro/Managed Futures strategies.

EQUITY LONG/SHORT

When markets are driven by fundamentals as opposed to various macro policies and technical factors, correlation among
stocks decline and Long/Short Equity managers can potentially benefit from both long and short positions. If headed into
a more difficult equity environment, short positions have the ability to protect on the downside.

MULTI-MANAGER/
MULTI-STRATEGY

The Multi-Manager, Multi-Strategy category tends to be a more conservative approach to alternative investing. Many
products have relatively low betas and correlation to equities, displaying a volatility profile more akin to fixed income.
These strategies may be appropriate for those looking to diversify existing low-volatility holdings.

MANAGED FUTURES

Managed futures typically benefit from elevated levels of volatility. Dislocations in the global financial markets and
diverging economic policies bode well for these strategies.

EVENT DRIVEN

Event-driven funds include various strategies. Currently, the environment is challenging for Distressed managers given the
decreased opportunity set. Merger Arbitrage managers have found it difficult to generate noteable performance given tight
credit spreads and regulatory concerns. Activism, on the other hand, is a substrategy in which we have high conviction.

EQUITY
MARKET NEUTRAL

Similar to Equity Long/Short, Equity Market Neutral funds are likely to perform better in periods when stock prices are
trading based upon fundamentals with low intrastock correlation.

COMMODITIES

Global growth concerns and a glut in oil supply make this a difficult area to be constructive in. Long-Short or Managed
Futures strategies may have the ability to profit here, while Long-Only positions are not attractive at this time.

GLOBAL MACRO

Similar to managed futures funds, global macro funds typically benefit from elevated levels of volatility. Dislocations in
the global financial markets and diverging economic policies bode well for these strategies.

CAPITAL MARKETS SNAPSHOT

EQUITY*
Dow Jones Industrial Average

3Q15 RETURN

12-MONTH RETURN

16,284.70

-6.98%

-2.11%

S&P 500

1,920.03

-6.44%

-0.61%

NASDAQ

4,620.16

-7.26%

-0.71%

MSCI EAFE

1,644.40

-10.23%

-8.66%

AS OF 6/30/2015

AS OF 9/30/2014

RATES

AS OF 9/30/2015

Fed Funds Target Rate

0.25

0.25

0.25

3-Month LIBOR

0.33

0.28

0.24

2-Year Treasury

0.64

0.64

0.58

10-Year Treasury

2.06

2.34

2.51

30-Year Mortgage

3.84

4.17

4.12

Prime Rate

3.25

3.25

3.25

3Q15 RETURN

12-MONTH RETURN

$1,114.00

-4.87%

-8.43%

$45.09

-24.18%

-50.54%

COMMODITIES
Gold
Crude Oil
*Total Return

16

AS OF 9/30/2015

AS OF 9/30/2015

OCTOB E R 2015

SECTOR SNAPSHOT
This report is intended to highlight the dynamics underlying the

These recommendations will

10 S&P 500 sectors, with a goal of providing a timely assessment

be displayed as such:

to be used in developing your personal portfolio strategy. Our

Overweight: favored areas

time horizon for the sector weightings is not meant to be shortterm oriented. Our goal is to look for trends that can be sustainable
for several quarters; yet given the dynamic nature of financial
markets, our opinion could change as market conditions dictate.
Most investors should seek diversity to balance risk versus

J. MICHAEL GIBBS
Director of Equity Portfolio
& Technical Strategy

to look for ideas, as we expect

relative outperformance
Slight Overweight: next favored areas to look for ideas
Equal Weight: expect in-line relative performance

reward. For this reason, even the least-favored sectors may be

Slight Underweight: expect relative underperformance in

appropriate for portfolios seeking a more balanced equity

general, but opportunities exist within select subsectors

allocation. Those investors seeking a more aggressive invest-

Underweight: unattractive expectations relative to the other

ment style may choose to overweight the preferred sectors

sectors; exposure might be needed for diversification

and entirely avoid the least favored sectors. Investors should

consult their financial advisors to formulate a strategy customized to their preferences, needs and goals.
RECOMMENDED
WEIGHT

OVERWEIGHT

SECTOR

S&P WEIGHT

For a complete discussion of the sectors, please ask your financial

advisor for a copy of Portfolio Strategy: Sector Analysis.

COMMENTS

INFORMATION
TECHNOLOGY

20.2%

Technology remains a favored sector due to attractive relative valuations and

healthy balance sheets. Reductions to expected 2015 earnings stabilized and are
expected to outpace the flattish earnings for the S&P 500. The jump in relative
strength during recent market weakness builds our confidence here.

FINANCIALS

16.5%

Our overweight is driven by attractive relative valuation, solid expected earnings growth,
and positive benefits to some subsectors (banks) should interest rates rise. The sector
was hard hit during the recent market decline. It will need to quickly regain performance.

CONSUMER
DISCRETIONARY

13.0%

It is our belief the consumer will spend (job growth, lower energy costs, generally growing
economy) thus allowing many subsectors to benefit. Double-digit earnings growth and
a declining stock market have pushed relative valuations to a less elevated position.

INDUSTRIALS

10.2%

If the global fears are overdone (our opinion) this group is set up to provide relative
performance. The strong USD remains a headwind for manufacturing on the global
stage. Any uptick in the fundamentals leaves this sector with plenty of runway before
valuation becomes an issue. If recent momentum continues to build, our overweight
position may finally be rewarded.

HEALTH CARE

15.3%

Fundamental momentum and M&A activity justify our equal weight stance.
Relative valuation remains elevated; but rising earnings estimates and M&A
activity are supportive of valuation.

CONSUMER
STAPLES

9.6%

Potential for less downside keeps us at equal weight during this period of market
volatility. Earnings are still anemic at only 1.9% growth.

ENERGY

6.9%

Excess supply will continue to weigh on fundamentals in the energy space. Lack of
clarity as to where fundamentals will bottom results in less confidence in current
valuations. The intermediate trend still suggests avoidance of the sector.

UTILITIES

2.9%

Earnings are expected to advance meagerly in 2015. The sector has been held back by a
general consensus that rising interest rates will negatively pressure stock prices.

MATERIALS

2.9%

Deflationary trends in commodities (includes energy) and metals will have a

negative impact on the sector. Valuation is compelling as the sector has reached
one standard deviation below the long-term average.

TELECOM

2.4%

Two stocks, VZ and T make up over 85% of the index. Valuation has pushed below
one standard deviation below the average. Relative performance for the intermediate
term is still weak, however the sector does offer capital preservation and quality high
dividends for those expecting market weakness.

EQUAL WEIGHT

UNDERWEIGHT

17

INVESTMENT STRATEGY QUARTERLY

ASSET CLASS DEFINITIONS

U.S. Large Cap Equity
Russell 1000 Index: Based on a combination of their market cap and current index
membership, this index consists of approximately 1,000 of the largest securities
from the Russell 3000. Representing approximately 92% of the Russell 3000, the
index is created to provide a full and unbiased indicator of the large cap segment.
U.S. Mid Cap Equity
Russell Midcap Index: A subset of the Russell 1000 index, the Russell Midcap
index measures the performance of the mid-cap segment of the U.S. equity
universe. Based on a combination of their market cap and current index
membership, includes approximately 800 of the smallest securities which
represents approximately 27% of the total market capitalization of the Russell
1000 companies. The index is created to provide a full and unbiased indicator of
the mid-cap segment.
U.S. Small Cap Equity
Russell 2000 Index: The Russell 2000 Index measures the performance of the
small-cap segment of the U.S. equity universe. The Russell 2000 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 2000 Index is constructed to provide a comprehensive and unbiased
small-cap barometer and is completely reconstituted annually to ensure larger
stocks do not distort the performance and characteristics of the true small-cap
opportunity set.
Non U.S. Developed Market Equity
MSCI EAFE: This index is a free float-adjusted market capitalization index that
measures the performance of developed market equities, excluding the U.S.
and Canada. It consists of the following 22 developed market country indices:
Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway,
Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
Non U.S. Emerging Market Equity
MSCI Emerging Markets Index: A free float-adjusted market capitalization index
that is designed to measure equity market performance of emerging markets. As
of December 31, 2010, the MSCI Emerging Markets Index consists of the following
21 emerging market country indices: Brazil, Chile, China, Colombia, Czech
Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco,
Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.
Real Estate
FTSE NAREIT Equity: The index is designed to represent a comprehensive
performance of publicly traded REITs which covers the commercial real estate
space across the US economy, offering exposure to all investment and property
sectors. It is not free float adjusted, and constituents are not required to meet
minimum size and liquidity criteria.
Commodities
Bloomberg Commodity Index (BCOM): Formerly known as the Dow Jones-UBS
Commodity Index, the index is made up of 22 exchange-traded futures on physical
commodities. The index currently represents 20 commodities, weighted to
account for economic significance and market liquidity with weighting restrictions
on individual commodities and commodity groups to promote diversification.
Performance combines the returns of the fully collateralized BCOM Index with
the returns on cash collateral (invested in 3 month U.S. Treasury Bills).
Investment Grade Long Maturity Fixed Income
Barclays Long US Government/Credit: The long component of the Barclays
Capital Government/Credit Index with securities in the maturity range from 10
years or more.
Investment Grade Intermediate Maturity Fixed Income
Barclays US Aggregate Bond Index: This index is a broad fixed income index
that includes all issues in the Government/Credit Index and mortgage-backed
debt securities. Maturities range from 1 to 30 years with an average maturity of
nearly 5 years.
Investment Grade Short Maturity Fixed Income
Barclays Govt/Credit 1-3 Year: The component of the Barclays Capital
Government/Credit Index with securities in the maturity range from 1 up to (but
not including) 3 years.
Non-Investment Grade Fixed Income (High Yield)
Barclays US Corporate High Yield Index: Covers the universe of fixed rate,
non-investment grade debt which includes corporate (Industrial, Utility, and
Finance both U.S. and non-U.S. corporations) and non-corporate sectors. The

18

index also includes Eurobonds and debt issues from countries designated as
emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the
middle of Moodys, S&P, and Fitch) are excluded, but Canadian and global bonds
(SEC registered) of issuers in non-EMG countries are included. Original issue
zeroes, step-up coupon structures, 144-As and pay-in-kind bonds (PIKs, as of
October 1, 2009) are also included. Must publicly issued, dollar-denominated
and non-convertible, fixed rate (may carry a coupon that steps up or changes
according to a predetermined schedule, and be rated high-yield (Ba1 or BB+ or
lower) by at least two of the following: Moodys. S&P, Fitch. Also, must have an
outstanding par value of at least $150 million and regardless of call features have
at least one year to final maturity.
Global (Non-U.S.) Fixed Income
Barclays Global Aggregate Bond Index: The index is designed to be a broad
based measure of the global investment-grade, fixed rate, fixed income
corporate markets outside of the U.S. The major components of this index are 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.
Multi-Sector Bond
The index for the multi-sector bond asset class is composed of one-third the
Barclays Aggregate US Bond Index, a broad fixed income index that includes
all issues in the Government/Credit Index and mortgage-backed debt securities;
maturities range from 1 to 30 years with an average maturity of nearly 5 years,
one-third the Barclays US Corporate High Yield Index which covers the universe
of fixed rate, non-investment grade debt and includes corporate (Industrial,
Utility, and Finance both U.S. and non-U.S. corporations) and non-corporate
sectors and one-third the J.P. Morgan EMBI Global Diversified Index, an
unmanaged index of debt instruments of 50 emerging countries.
The Multi-Sector Bond category also includes nontraditional bond funds.
Nontraditional bond funds pursue strategies divergent in one or more ways
from conventional practice in the broader bond-fund universe. These funds have
more flexibility to invest tactically across a wide swath of individual sectors,
including high-yield and foreign debt, and typically with very large allocations.
These funds typically have broad freedom to manage interest-rate sensitivity,
but attempt to tactically manage those exposures in order to minimize volatility.
Funds within this category often will use credit default swaps and other fixed
income derivatives to a significant level within their portfolios.
Alternatives Investment
HFRI Fund of Funds Index: The index only contains fund of funds, which invest
with multiple managers through funds or managed accounts. It is an equalweighted index, which includes over 650 domestic and offshore funds that have
at least $50 million under management or have been actively trading for at least
12 months. All funds report assets in US Dollar, and Net of All Fees returns
which are on a monthly basis.
Cash & Cash Alternatives
Citigroup 3 Month US Treasury Bill: A market value-weighted index of public
obligations of the U.S. Treasury with maturities of 3 months.
KEY TERMS
Long/Short Equity
Long/short equity managers typically take both long and short positions in
equity markets. The ability to vary market exposure may provide a long/short
manager with the opportunity to express either a bullish or bearish view, and to
potentially mitigate risk during difficult times.
Global Macro
Hedge funds employing a global macro approach take positions in financial
derivatives and other securities on the basis of movements in global financial
markets. The strategies are typically based on forecasts and analyses of interest
rate trends, movements in the general flow of funds, political changes, government
policies, inter-government relations, and other broad systemic factors.
Relative Value Arbitrage
A hedge fund that purchases securities expected to appreciate, while simultaneously selling short related securities that are expected to depreciate.
Multi-Strategy
Engage in a broad range of investment strategies, including but not limited
to long/short equity, global macro, merger arbitrage, statistical arbitrage,
structured credit, and event-driven strategies. The funds have the ability to
dynamically shift capital among the various sub-strategies, seeking the greatest
perceived risk/reward opportunities at any given time.

OCTOB E R 2015

Event-Driven
Event-driven managers typically focus on company-specific events. Examples of
such events include mergers, acquisitions, bankruptcies, reorganizations, spinoffs and other events that could be considered to offer catalyst driven investment
opportunities. These managers will primarily trade equities and bonds.
Special Situations
Managers invest in companies based on a special situation, rather than the
underlying fundamentals of the company or some other investment rationale.
An investment made due to a special situation is typically an attempt to profit
from a change in valuation as a result of the special situation, and is generally
not a long-term investment.
Managed Futures
Managed futures strategies trade in a variety of global markets, attempting to
identify and profit from rising or falling trends that develop in these markets.
Markets that are traded often include financials (interest rates, stock indices and
currencies), as well as commodities (energy, metals and agriculturals).
INDEX DEFINITIONS
Barclays U.S. Aggregate Bond Index
A broad-based benchmark that measures the investment grade, U.S.
dollar-denominated, fixed-rate taxable bond market, including Treasuries,
government-related and corporate securities, MBS (agency fixed-rate and hybrid
ARM passthroughs), ABS, and CMBS. Securities must be rated investmentgrade or higher using the middle rating of Moodys, S&P and Fitch. When a rating
from only two agencies is available, the lower is used. Information on this index is
available at INDEX-US@BARCLAYS.COM.
DISCLOSURE
All expressions of opinion reflect the judgment of Raymond James & Associates,
Inc. and are subject to change. Past performance may not be indicative of future
results. There is no assurance any of the trends mentioned will continue or
forecasts will occur. The performance mentioned does not include fees and
charges which would reduce an investors return. Dividends are not guaranteed
and will fluctuate. Investing involves risk including the possible loss of capital.
Asset allocation and diversification do not guarantee a profit nor protect against
loss. Investing in certain sectors may involve additional risks and may not be
appropriate for all investors.
International investing involves special risks, including currency fluctuations,
different financial accounting standards, and possible political and economic
volatility. Investing in emerging and frontier markets can be riskier than investing
in well-established foreign markets.
Investing in small- and mid-cap stocks generally involves greater risks, and
therefore, may not be appropriate for every investor.
There is an inverse relationship between interest rate movements and fixed
income prices. Generally, when interest rates rise, fixed income prices fall and
when interest rates fall, fixed income prices rise.
U.S. government bonds and Treasury bills are guaranteed by the U.S. government
and, if held to maturity, offer a fixed rate of return and guaranteed principal value.
U.S. government bonds are issued and guaranteed as to the timely payment of
principal and interest by the federal government. Treasury bills are certificates
reflecting short-term obligations of the U.S. government.
While interest on municipal bonds is generally exempt from federal income tax, it may
be subject to the federal alternative minimum tax, or state or local taxes. In addition,
certain municipal bonds (such as Build America Bonds) are issued without a federal
tax exemption, which subjects the related interest income to federal income tax.
Municipal bonds may be subject to capital gains taxes if sold or redeemed at a profit.
If bonds are sold prior to maturity, the proceeds may be more or less than
original cost. A credit rating of a security is not a recommendation to buy, sell or
hold securities and may be subject to review, revisions, suspension, reduction
or withdrawal at any time by the assigning rating agency.
Commodities and currencies are generally considered speculative because of
the significant potential for investment loss. They are volatile investments and
should only form a small part of a diversified portfolio. Markets for precious
metals and other commodities are likely to be volatile and there may be sharp
price fluctuations even during periods when prices overall are rising.
Investing in REITs can be subject to declines in the value of real estate. Economic
conditions, property taxes, tax laws and interest rates all present potential risks
to real estate investments.

High-yield bonds are not suitable for all investors. The risk of default may
increase due to changes in the issuer's credit quality. Price changes may occur
due to changes in interest rates and the liquidity of the bond. When appropriate,
these bonds should only comprise a modest portion of your portfolio.
Beta compares volatility of a security with an index.
Alternative investments involve specific risks that may be greater than those
associated with traditional investments and may be offered only to clients who meet
specific suitability requirements, including minimum net worth tests. Investors
should consider the special risks with alternative investments including limited
liquidity, tax considerations, incentive fee structures, potentially speculative
investment strategies, and different regulatory and reporting requirements.
Investors should only invest in hedge funds, managed futures, distressed credit
or other similar strategies if they do not require a liquid investment and can bear
the risk of substantial losses. There can be no assurance that any investment will
meet its performance objectives or that substantial losses will be avoided. The
S&P 500 is an unmanaged index of 500 widely held stocks.
The companies engaged in business related to a specific sector are subject to fierce
competition and their products and services may be subject to rapid obsolescence.
Investing in the energy sector involves risks and is not suitable for all investors.
The performance mentioned does not include fees and charges which would
reduce an investors returns. The indexes are unmanaged and an investment cannot
be made directly into them. The Dow Jones Industrial Average is an unmanaged
index of 30 widely held securities. The NASDAQ Composite Index is an unmanaged
index of all stocks traded on the NASDAQ over-the-counter market. The S&P 500
is an unmanaged index of 500 widely held securities. The Shanghai Composite
Index tracks the daily price performance of all A-shares and B-shares listed on the
Shanghai Stock Exchange.
MODEL DEFINITIONS
Conservative Portfolio: may be appropriate for investors with long-term income
distribution needs who are sensitive to short-term losses yet want to achieve
some capital appreciation. The equity portion of this portfolio generates capital
appreciation, which is appropriate for investors who are sensitive to the effects
of market fluctuation but need to sustain purchasing power. This portfolio, which
has a higher weighting in bonds than in stocks, seeks to keep investors ahead of
the effects of inflation with an eye toward maintaining principal stability.
Conservative Balanced Portfolio: may be appropriate for investors with
intermediate-term time horizons who are sensitive to short-term losses yet want
to participate in the long-term growth of the financial markets. The portfolio,
which has an equal weighting in stocks and bonds, seeks to keep investors well
ahead of the effects of inflation with an eye toward maintaining principal stability.
The portfolio has return and short-term loss characteristics that may deliver
returns lower than that of the broader market with lower levels of risk and volatility.
Balanced Portfolio: may be appropriate for investors with intermediate-term
time horizons who are sensitive to short-term losses yet want to participate in
the long-term growth of the financial markets. This portfolio, which has a higher
weighting in stocks, seeks to keep investors well ahead of the effects of inflation
with an eye toward maintaining principal stability. The portfolio has return and
short-term loss characteristics that may deliver returns lower than that of the
broader equity market with lower levels of risk and volatility.
Balanced with Growth Portfolio: may be appropriate for investors with
long-term time horizons who are not sensitive to short-term losses and want
to participate in the long-term growth of the financial markets. This portfolio,
which has a higher weighting in stocks seeks to keep investors well ahead of the
effects of inflation with principal stability as a secondary consideration. The
portfolio has return and short-term loss characteristics that may deliver returns
slightly lower than that of the broader equity market with slightly lower levels of
risk and volatility.
Growth Portfolio: may be appropriate for investors with long-term time
horizons who are not sensitive to short-term losses and want to participate in
the long-term growth of the financial markets. This portfolio, which has 100%
in stocks, seeks to keep investors well ahead of the effects of inflation with little
regard for maintaining principal stability. The portfolio has return and shortterm loss characteristics that may deliver returns comparable to those of the
broader equity market with similar levels of risk and volatility.

19

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