T h e g r e aT g l o b a l s h i f T

New world, New rules

Risk, opportunity and the seismic changes in the balance of power driving todays markets ian breMMer
President, eurasia Group

lisa shalett
Chief investment Officer, Merrill lynch Global Wealth Management

break, between the spiraling debt crisis in the eurozone, gridlock in Washington, slowing global growth, persistent unemployment and turmoil across the middle east. it can be both disorienting and discouraging. How do you make sense of the stream of apparently unrelated crises coming from so many directions? At merrill Lynch, we think a good place to start is with the understanding that these seemingly unconnected issues are very connected. they are all part of an ongoing, fundamental transformation in the worlds economic, political and social institutions. in this whitepaper, the eurasia Groups ian Bremmer and our own Lisa shalett offer a wide-angle view that brings to light the larger pattern of the global economy, revealing a rebalance of economic power on par with some of the most significant paradigm shifts in history. inevitably, change on this scale comes with a great deal of disruption and additional risks, along with new opportunities. in fact, whats happening in the world right now calls into question many tenets of investing and managing risk that have prevailed for decades. the quality of insight that merrill Lynch can provide is rareand especially importantin an era when around-the-clock news and instant analysis seem ever present. it is always our aim to give you a more thoughtful, forward-looking point of view, as well as real solutions that can help you make informed investment decisions. once youve read this whitepaper, i invite you to make it the foundation of your next conversation with your financial advisor. make use of its insights as you work together to adapt your financial life to a new world and its new rules.

ometimes it seems the world cant catch a

John thiel
HeAd of U.s. W eALtH m AnAGement And tHe PRi vAte BAnk inG And in v estment GRoUP

Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S) and other subsidiaries of Bank of America Corporation (BAC). Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value MLPF&S is a registered broker-dealer, a registered investment advisor and Member SIPC.

MarC bryan-brOWn

T h e g r e aT g l o b a l s h i f T

New world, New rules

Risk, opportunity and the seismic changes in the balance of power driving todays markets BY iAn BRemmeR & LisA sHALet t
t happened after a new round of global financial turmoil, with europe lurching deeper into its debt crisis, the dow soaring and plunging by more than 400 points on six different occasions, and the U.s. receiving an unprecedented blow to its sovereign credit rating: new York and Washington, d.C., the centers of American financial and political power, were literally shaken. Chandeliers swung in the Capitol. traders evacuated the new York stock exchange. the 5.8-magnitude earthquake on Americas east Coast actually caused little in the way of physical damage. But it was strong enough to reinforce a metaphor in the minds of people across the world: nothing seems to be stable anymore, not even the bedrock. the very real economic shocks that have rumbled through the U.s. and the rest of the developed world during the past four years may have at last begun to unsettle our

sense of equilibrium. the history of modern commerce has taught us all about cycles. Historically, recessions lead to the inevitable reflation. Crashes contain the seeds of comebacks. markets mend, GdPs rise again and job creation does become real rather than just a piece of political rhetoric. And yet, as much as wed like to believe otherwise, theres no denying that this time its different. since the end of World War ii, a powerful West, dominated by U.s. hegemony, grew accustomed to equating itself with the world. the preeminence of Western institutionsnAto, the World Bank, the international monetary fundmeant that global priorities were our priorities. the West set the conditions for economic reform, transparency and the rule of law. even the soviet Union, the U.s.s chief rival for global influence during the Cold War, was primarily a military rival that never posed a true threat to Western economic power.

all illustratiOns by bryan Christie

n e W WO r l d, n e W r u l e s

Americas place in the global economy was like that old New Yorker cover depicting the view from ninth Avenue, across the heartland, to a tiny distant Asia. on a personal level, when we invested for our families and our futures, operating in a West-centric, dollar-dominated world didnt eliminate the cyclical ups and downs, but it did at least make them seem familiar. so its only natural that as we talk about economic recovery, what we really want, beyond higher GdP and greater employment, is a return to that old, comfortable balance. When (we cant help but wonder) will we recover that old sense of equilibrium? the answer is becoming clearer every day: We wont. the rapid rise of China and other emerging nations has ushered in sweeping changes being felt from the bauxite mines of Asia to the gas pump on main street to the expensive office space in so Paulo. one of the great paradigm shifts in history appears to be upon us. such periods are always marked by enormous turbulenceand fear, as the markets recent wild swings may have already begun to express. As volatile as the past few years have felt, they are likely to be a mere prelude to a period of global disruption and uncertainty that will endure for years to come.

iAn BRemmeR
is the president of Eurasia Group, a leading consultancy on geopolitical risk, and is widely regarded as one of the most influential thinkers on global trends.

A World Under Stress

the Global Financial stress index, introduced by bofa Merrill lynch Global research late last year, was designed to attach a specific value to the symptoms of stress exhibited by the worlds financial markets during this period of profound global change. the index combines and tracks key measures of investor behavior, including volatility, hedging demand and investment flows in and out of telltale risk-off asset classes like stocks, bonds and money market funds.
Merrill lynch Global Financial stress index
1.4 1.2
Index composite value

1.0 0.8 0.6 0.4 0.2 0 -0.2

Less stress than normal December 2010 March 2011 June 2011 September 2011 tOP: blOOMberG/Getty iMaGes; bOttOM: COurtesy OF Merrill lynCh More stress than normal

LisA sHALett
is the chief investment officer for Merrill Lynch Global Wealth Management and head of Investment Management & Guidance.

September 2010

Source: BofA Merrill Lynch Global Research

Change has arrived so swiftly that our largest institutions, while still holding to the paternalistic model of the West as benefactor/protector, are being surpassed by the very countries they were set up to help. during the past two years, China offered more aid to developing nations than the World Bank did ($110 billion vs. $100.3 billion)even as China continued to receive billions of dollars in aid from the World Bank.1 if the World Bank has been thrust into such apparent contradictions, what are private investors to make of these developments? in disruptive times, even the most conservative strategies (buy-and-hold; stay close to home) may not be so conservative at all. navigating an age of risk requires meeting risk head-on, actively and dynamically, and
1

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Chinas Lending Hits New Heights, Financial Times, Jan. 17, 2011.

venturing into the strange landscape of a global economy. thats the tough way of looking at it. seen another way, disruption most always creates opportunities. to seize them, we must respond nimbly, adapt, adjust and, perhaps most important, come to terms with just how profoundly the world has changedand is changing.

A moRe insULAR West

ts hard to recall the sense of optimism (some might say smugness) with which the West greeted this century. the birth of the eurozone represented one of the most remarkable political and economic experiments ever attempted in the developed world. Yet what 11 years ago seemed like the next great step toward Western-style globalization now seems like a misstep. At the time they launched the euro, european leaders lacked the political means to give their new currency the backing of a europe-wide fiscal policy. Amid the euphoria, it was easy enough to kick that problem down the road. But down the road has come upon them much more quickly than they imagined. Rolling debt crises, market panics and austerity riots are now forcing europeans to focus less on global affairs and more on how to rework their compact to secure its very survival. meanwhile, Japan, once hailed as heir apparent to a post-U.s. global economy, has instead endured a long, painful economic stagnation. And this year, just when it seemed it might emerge from the doldrums, the nation was hit by an earthquake roughly 16,500 times more powerful than the recent east Coast temblor, followed by an even more devastating tsunami and nuclear accidents. While showcasing the countrys marvelous stability and resilience in the face of adversity, these combined disasters have rattled the countrys infrastructure and forced Japan, like europe, to turn inward. in the U.s., preoccupied at the turn of the century with its post-soviet responsibilities as the worlds lone superpower, we must now deal with less lofty but no less serious matters, including stubbornly high unemployment, yawning income disparities, flat wages, sagging infrastructure, a federal debt approaching $50,000 per person 2 and the inevitable comparisons with Japan. if the eventual accord over raising the debt ceiling held off the immediate threat of a government default, the subsequent credit rating downgrade and market turmoil only emphasized how deep and thorny the challenges remain. While none of these powers, least of all the U.s., will exit the world stage, all of this inward focus cant help but destabilize global leadership, financially and otherwise. former U.s. defense secretary Robert Gates, in his final speech to nAto on June 10, sounded a blunt warning that without a concerted effort by europeans to pitch in, Americans could question the wisdom of spending so much on the alliance, confronting nAto with the very real possibility of collective military irrelevance.3 Whether that situation comes to pass, clearly the balance is shifting. What will take the place of the old structures looms as the question of our times.
2 3

in disRUPtive times, even tHe most ConseRvAtive stRAteGies (BUY-And-HoLd; stAY CLose to Home) mAY not Be so ConseRvAtive At ALL.

US Debt Clock, usdebtclock.org. See Debt Per Citizen. Washington Wire, Wall Street Journal, June 10, 2011.

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Rising Influence of Emerging Markets

On a purchasing-power parity basis, which levels the purchasing power of average consumers across different countries, emerging markets have increasingly contributed a greater percentage to global GdP over the past decade than developed nations have.
aMOunt OF GdP GrOWth COntributed by... year-over-year growth in total global GdP
6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0%
1980 1985 1990 1995 2000 2005 2010

advanced

emerging

Source: International Monetary Fund, World Economic Outlook Database, April 2011

ts almost too easy to say that emerging nations are driving world growth. the international monetary fund projects that on a purchasing-power parity basis,4 emerging and developing markets will account for two-thirds of the growth in global GdP this year. still, that trend, striking as it is, masks extraordinary complexity. emerging markets dont make up a unified bloc, but rather are vastly different countries with competing goals, standards and agendasnot to mention enormous challenges of their own. thus far, the remarkable growth of developing countries has been tempered by their unwillingness to accept a proportional share of the responsibilities of global leadership. Whether its european-style environmental reforms, U.s.-style peace brokering in the middle east or coordinating antiterrorism policies, most of the comprehensive initiatives for solving the worlds problems continue to initiate in the West. While China may have developed into a banker and benefactor to Western and developing nations alike, it often tries to attach manifold strings to those trillions it sends overseas. this fall, Chinese Premier Wen Jiabao suggested his nation might be willing to step up its monthly lending and other investments in europe to help the eurozone out of its debt crisisif the europeans extended a way around the antidumping regulations that prevent Chinese companies from flooding the continent with low-priced goods.5 to be sure, the U.s. and europe often act with self-interest when pursuing their international policies, but China seems to be especially shameless about it.
The purchasing-power parity ratedefined as the number of units of a countrys currency that are required to buy the same amount of goods and services as one U.S. dollar would buy in the U.S.is intended to allow for apples-to-apples comparisons between average consumers in different nations. 5 World Economic Forums fifth Annual Meeting of the New Champions, Sept. 14, 2011.
4

WAitinG on tHe emeRGinG WoRLd

Because of its size and spectacular growth, discussions of emerging markets inevitably start with the Peoples Republic. the Chinese today arent just producing every kind of goods, and doing it with precision; as tens of millions of Chinese move into the middle class, theyve also begun consuming vast quantities, last year purchasing more cars than did Americans,6 and recently overtaking the U.s. as the biggest PC consumer in the world.7 Why, then, are the Chinese so worried? With the Wests buying power shrinking and their own citizens demanding a greater share of the wealth, Chinas top-down economic planners are struggling with whether they must fundamentally restructure their nations economy from what is still principally a state-driven, export-oriented system to a more consumption-driven one. Chinas state Council has made the growth of the consumer sector a theme of the countrys latest five-year plan. At the same time, it has shown zero willingness to dismantle the network of state-run giants (and some private ventures) that have benefited from the special financing and regulatory shields that the central government has long bestowed on them. this system of privilege was meant to fuel the countrys old export-driven growth, and clearly it succeeded. But while the furious development has lifted millions of Chinese out of poverty, it has nonetheless come at a significant cost. With the arrival of a new class of state-sponsored entrepreneurs and bureaucrats, the gap between rich and poor has widened, and the resulting imbalances have spurred what could become a massive power struggle between reformists and entrenched interests that reaches into every strata of Chinese society. As if to illustrate the challenges, the countrys exports as a percentage of GdP have ballooned back to pre-financial-crisis levels, at around 39%, the highest ever.8 China may indeed move toward a more self-focused economy, but we would do well to remember that every Chinese five-year plan is designed as just one step in a 25-year plan. Beyond China, india and indonesia deserve more serious attention than they get. Both countries have compelling demographics and commodity wealth, plus political and economic systems that arent in need of a wholesale overhaul. Here again, though, attempts to classify countries en masse fall short. Umbrella acronyms such as BRiC (for Brazil, Russia, india and China) have a handy ring but convey a level of uniformity that doesnt exist. Russia, for example, while rich in commodities, is actually losing population and labors under a sluggish bureaucracy and opaque corporate governance. some other, less likely names, meanwhile, may present investors with opportunities at least as BRiC-like. despite a recent uptick in religious conservatism and a disconcerting crackdown on free speech, turkey saw its economy surge 10.2% in the first six months of this year.9 even nigeria, with 155 million people and a burgeoning entrepreneurial spirit, deserves a serious look. still, none of these nations is jumping at the chance to fill the vacuum that will be left by the inward turn of the traditional Western powers. many observers see a new era characterized by uncoordinated policies from both developed nations and emerging markets. We will experience a world that is multispeed and multidirectional, with varied responses from lawmakers in every spot on the globe, like loose molecules. this has already had an obvious effect, with massive dislocations in commodities, currencies, credit spreads and asset prices. the takeaway is to expect
China Ends U.S.s Reign as Largest Auto Market, Bloomberg, Jan. 11, 2010. China Tops U.S. as Worlds Largest PC Market, Forbes, Aug. 23, 2011. 8 tradingeconomics.com/china/exports. 9 BofA Merrill Lynch Global Research, Sept. 13, 2011.
6 7

desPite A ReCent UPtiCk in ReLiGioUs ConseRvAtism, tURkeY sAW its eConomY sURGe 10.2% in tHe fiRst HALf of 2011.

n e W WO r l d, n e W r u l e s

Reversals of Sovereign Fortunes

As of AUGUst 2011, AttitUdes in tHe U.s. ABoUt tHe BUsiness CLimAte And PeRsonAL finAnCes
italy u.s. eurOzOne GerMany FranCe sPain u.K. 67.3 87.1 82.1 85.6 65.8 120.7 68.9 18.6 China india 114.0 59.9 24.0 indOnesia 25.9 arGentina KOrea sinGaPOre brazil 65.4

twenty years ago, it was the fiscal crises in south america and the asian tiger Cub economies that riveted investors. today its more of the developed nations that are rattling global markets with their high levels of debt and deficits.

48.1

WeRe At neAR A 30-YeAR LoW.

2011 debt as a % of GdP Source: BofA Merrill Lynch Global Research

even more of the same, at least for the time being. that includes trade wars, industrial piracy and the hoarding of resources la Chinas recent stockpiling of vital rare-earth metals. so while investors rightly move to emerging markets for growth opportunities, the search for stability and equilibrium goes on.

tHe deBt, no-deBt PARAdiGm

in the debt World, as you can see above, there are the U.s. and europe. While all of the major players in europe are committed to the eurozone, the continent has a long, hard slog ahead. for the immediate future, markets are likely to punish the europeans, even as they begin to turn things around through austerity programs and tentative steps toward greater fiscal unity. the U.s. position, despite the sting of its own downgrade by standard & Poors, has the built-in advantages of a single government (however fractious) rather than many, and a single muscular central bank in the federal Reserve. that said, Americas fiscal problems are real, and the resolve it has shown in facing and overcoming the challenges has so far seemed modest at best. moreover, as in europe, the struggle to ease the public debt burden is complicated by private debt. in simple terms, the U.s. workforce and economic base were built to be sustained by consumer borrowing and rising home values. the model helped to fuel U.s. GdP by roughly 3%

ne crucial group of actors in this volatile global shift is the central banks, as nations and markets naturally divide more and more along new fault lines. instead of a world marked by developed and emerging, we may be entering the age of debt vs. no debt.

COMMOdities by any Other naMe

With the world clamoring for raw materials, here are three ways to add them to a portfolioeach with its own benefits and risks. n a world of finite resources and rapid growth in developing countries, many investors may benefit from buying commodities. the question is how. taking ownership of the actual shiploads of grain, oil, steel or gypsum presents obvious challenges. in most cases, then, when we talk about buying commodities, what were really talking about is buying the rights to purchase commodities or, more commonly still, buying shares in funds whose managers buy and sell the rights to purchase commodities. For investors who may be looking to incorporate commodities as part of a long-term allocation strategy, these approaches can boil down to three main categories:

missionand lower fees, plus the ability to target more specific objectives. For example, to hedge against the impact a rise in oil prices could have on the rest of your portfolio, you might purchase shares in an oil-linked etF. One potential drawback is the underlying methods these funds use to generate their returns. although etFs generally seek to match the spot, or current price for immediate delivery of their commodity, most actually do so by trading longer-dated futures contracts. Periodically, when the price of futures outpaces the spot price, as during the big run-up in oil prices in the first half of 2011, the cost of buying new contracts after the old ones expire can eat deeply into the performance of the fund, even if the commodity itself is doing very well. 2. Actively Managed Funds actively managed commodity funds rely on managers skill in pursuing more complex objectives, such as outperforming commodities indexes or countering the effects of volatility. historically the leading purveyors of active management strategies were hedge funds (see even More targeted solutions for Qualified investors, page 16), which limited the approach to a relatively select group of clients. but in recent years more mutual funds have been getting into the arena. though these nontraditional mutual funds

typically dont offer the same alpha, or added upside potential of hedge funds, their fees are generally quite a bit lower and investors face far fewer restrictions on eligibility and liquidity. 3. Market-Linked Investments While all forms of commodity exposure can be effective at adding diversification and reducing overall portfolio risk, these investments provide a way to explicitly manage the risk of a commodity allocation itself. theyre essentially market-linked bonds (issued by banks and other companies) whose returns can be linked to another asset. using one type of Market-linked investment, for example, you might buy a five-year note tied to the spot price of gold. if the metal continues its rise of recent years, youd receive a payout at maturity reflecting all or a portion of those returns. but if the price of gold goes down, youd still get back your original investment. Purchasers of Market-linked investments take on other riskschiefly the credit risk of the issuerand because payouts are usually subject to a cap, returns may be less than with a direct investment in the underlying asset. nonetheless, for many investors, they remain another way of buying commodities today that can help meet their specific objectives. no vault or grain elevator required.

1. Index and Exchange-Traded Funds the simplest and least expensive way of gaining commodity exposure, index funds seek to match the performance of the major commodity composite indexes, such as the dow Jonesubs or standard & Poors GsCi. because the funds are passively managed to hew to their indexes, management fees tend to be lower than for most mutual funds. and daily trading makes the investments highly liquid. exchange-traded funds (etFs) offer similar ease of investmenttheyre bought and sold on stock exchanges for a com-

a year from 1996 to 2008.10 But the levels of demand projected going forward are waningBofA merrill Lynch Global Research recently lowered its U.s. GdP forecast to 1.6% for 2012 and 1.4% for 2013.11 that missing 1.5% is at the core of the tragically high structural unemployment that is itself a major drag on growth weighing on the efforts to bring government spending in line with revenues. in the meantime, look for more years of low economic growth, constrained fiscal policy responses and a central bank forced into ever more extreme monetary fixes that, from an investors perspective, all amount to the same outcome: lower interest rates.
10 11

International Monetary Fund; Merrill Lynch GWM Investment Management & Guidance. BofA Merrill Lynch Global Research, Global Economic Weekly, Sept. 23, 2011.

n e W WO r l d, n e W r u l e s

A Nation of Labor Renters

by steadily increasing their reliance on temporary workers, american businesses are able to treat labor as just another variable costaggressively cutting when demand for products is low.

124
Number of full-time workers (in millions)

30
Number of part-time workers (in millions)

122 120 118 116 114 112 110 108 106 104
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

29 28 27 26 25 24 23 22 21 20

Full-time

Part-time

Source: Bureau of Labor Statistics and Merrill Lynch GWM Investment Management & Guidance. Data as of Aug. 31, 2011.

tHe CHALLenGe is to deveLoP A stRAteGY tHAt CAn BotH WitHstAnd tHe CRises And Ride tHe tide tHAt is LikeLY to dominAte tHe next CentURY.

the question now is: What replaces the 1.5%? even as America pays down its debts, public and private, it must begin to tackle the even more fundamental issues glossed over during the housing boom: An enormous baby boomer generation whose entitlements must in large part be borne by younger people facing a less-than-certain financial future. Wealth inequality that hasnt been this severe since the 1920s. A similarly intensifying disparity between skilled and unskilled workers, with the latter group both growing in size and falling further behind. A social compact that increasingly treats labor as just another variable cost to be shed whenever demand is low. Underpinning all of those specific issues is something less easy to define but no less real: a lingering crisis of confidence. According to the University of michigan Consumer sentiment index, as of August 2011, attitudes in the U.s. about the business climate and their personal finances were at near a 30year low.12 these findings, bolstered by similar numbers from the Conference Board,13 came at a time when the country was not even technically in a recession. the matter of which must happen firsta return of confidence, or progress on the hard work aheadis a classic chicken-or-egg question. either way, theres no denying that reinvigorated capital markets require a bit of swagger, a return of the animal spirits that drive capitalism. no doubt that can happen. the worlds biggest economy has too much creativity, too much resilience to stay down forever. Yet the rebound could still be a ways off, and investors must realize that when the American economic giant reawakens, it will be to a global economy governed by new rules and populated by new highly motivated and highly competitive players. By contrast, China and (bizarrely enough, considering the trillions they have defaulted on in the past) much of the rest of Asia and south America have already begun to exercise the flexibility that comes with membership in the no-debt World. Gradually, fitfully weaning themselves from
12 13

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Surveys of Consumers, Thomson Reuters, University of Michigan, Aug. 26, 2011. Consumer Confidence Survey, The Conference Board, Aug. 30, 2011.

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dependence on the West, these economies will continue to grow, giving their central bankers increasing sway over the worlds markets. And as their inflation picture sharpens, they may continue on a path much different from that of Western countries.

AdAPtinG to tHe neW WoRLd oRdeR

s nations become more insular, investors, understandably, may be tempted to do the same. Yet while that might seem a more conservative approach, the insularity of nations actually compels investors to look ever outward, not just to different countries but also to new and different asset classes that they might not have considered before. from late 2008 through 2009, some investors swore that diversification had stopped working. After all, markets and regions all seemed to drop and then rise on the same tide. Under the circumstances, it hardly seemed to matter whether you invested in hometown bonds or stocks on the German dAx. But, as shown on the next page, in 2010, natural cycles did start creeping back into the marketsrevealing once again the distinct advantages, disadvantages, risks and rewards of different assets and geographiesat least until the latest round of global economic turbulence sent markets around the world into another correlated downdraft. the so-called riskon/risk-off trade became the rhythm of the markets once again. if the recent period of distress demonstrates anything, however, its the long-term trends that have taken hold. its possible that episodes of ultra-volatility will continue to rise up and dissipate again and again, giving way to periods of relative calm when the fundamental strengths of emerging markets reassert. the challenge for investors is to develop a long-term strategy that can both withstand the unexpected crises and ride the tide that is likely to be the dominant trend for the next century. Yet today, while most of us must admit the apparent logic of going global, emotions intervene. the science of investor psychology confirms what most observers of financial history already know: investing and clear thinking dont always go hand in hand. if they did, panic would never grip markets, and euphoria wouldnt cause investors to disregard fundamentals. But its not just emotion that keeps us from making the most of fresh opportunities in a changing world. traditional modes of thinkingindeed, some of the most basic orthodoxies of our investing logicnow require serious reconsideration. According to meir statman, the economist and expert in behavioral finance, investors tend to think about risk only in literal, dictionary terms: the possibility of suffering losses. But that can be a limited view. the biggest risk for an investor, statman says, is to find oneself locked into a position that makes it impossible to achieve ones goals.14 take, for instance, the traditional Western view of what have historically been considered the safe havens of sovereign debt. investing in bonds issued by emerging-market nations like China or even malaysia and indonesiathose former Asian tiger Cub economies that suffered their own financial crises and collapses not so long ago, in the late 1990smight seem like pure folly in times of chronic uncertainty, especially as compared with U.s. treasuries. But, in fact, if one takes into account
14

investinG in Bonds of tHe foRmeR AsiAn tiGeR CUB eConomies dURinG times of CHRoniC UnCeRtAintY CAn seem Like PURe foLLY. BUt it isnt.

Meir Statman, What Investors Really Want, McGraw-Hill, 2010.

t h e e l O b a l as h ia d th GrOad he Ft

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mAnAGinG Risks in tHis enviRonment ReqUiRes WHAt miGHt onCe HAve seemed BetteR sUited to mARket sPeCULAtoRs.

ones actual income needs, todays low treasury yields and the relatively strong balance sheets of the Asian countries, the opposite may be true.

tHe AGe of mAnAGinG Risks

he first step in going global is to recognize our emotional inclinations and reflexive choices. Are government bonds really the best choice when debt is rising and interest rates are plummeting? is buying and holding a handful of traditional investments really a prudent course when risks and opportunities move restlessly around the globe? the global economy has made volatility structurally highermeaning that instead of thinking of turmoil as a temporary situation to be endured before the return of a calmer normal, we have to adjust to the reality that the world is more turbulent, and that it will almost certainly stay that way. during a time of change, portfolios must adapt to meet new challenges and opportunities. Risk management is something investors and their financial advisors have to incorporate into each investment decision, giving it as least as much thought as efforts to maximize returns.

Why Diversification Still Matters

during times of economic stress, the patterns of financial markets tend to converge in something more closely approximating a 1:1 correlation, before natural cycles eventually return. as global disruptions potentially squeeze the interims between such periods, investors will increasingly need a long-term strategy nimble and diverse enough to thrive in both kinds of markets.

1991 Recession
1.0 0.9 0.8
Correlation coefficient

Asian Banking Crisis

2008 Financial Crisis

Sovereign Debt Crises

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0

1990 1993 1996 1999 2002 2005 2008 2011

MsCi emerging Markets MsCi aC asia (ex Japan)

MsCi europe (ex u.K.) MsCi usa

MsCi Japan Source: BofA Merrill Lynch Global Research

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managing risks in this environment requires what once might have seemed better suited to market speculators: an approach more dynamic than old-style investing, more tactical, more flexible and quicker to respond. its not enough, for instance, to diversify along traditional lines: risky growth stocks on one hand and stable dividend-paying blue chips on the other. it means knowing how to diversify between countries and regions: between southeast Asian chip manufacturers and south American miners. it means seeking out mutual funds that have broader mandates, with an ability to hedge positions or to range across borders and asset classes. it means taking a look at alternative assets in general, including commodities and, for qualified investors, hedge funds and private equity to determine whether theyre appropriate for your portfolio. traditional asset classes, too, must be seen through a more global, dynamic prism. diversification matters more than ever, but it can no longer be achieved by dutifully filling neatly defined slots with 60% stocks, 30% bonds and 10% cash and then holding on for dear life. Are those stocks positioned to capture global growth, to help protect against currency fluctuations, to provide yield potential? Are you prepared to change directions as new opportunities arise?

A neW APPRoACH to stoCks

he truisms weve embraced for generations about these familiar securities no longer apply. stocks, in one way of viewing it, could at times fill more of the role traditionally played by bonds. Particularly with many large, blue-chip multinational companies, profits have recovered, rendering balance sheets as robust as theyve been in years.15 that means dividends are currently growing16and likely to expand, since companies realize that deploying cash dividends to shareholders may be their most effective way of compensating investors during these turbulent times. Corporate dividends, then, in an era of historically low U.s. interest rates, have made equity ownership a potentially reliable source of yield. At the same time, blue-chip multinationals with track records of stable dividends can act as a hedge to volatility, just as bonds may. even if stock prices plummet during marketwide sell-offs, dividend recipients can still get paid. multinational equities possess another valuable trait: Because their operations cut across regions and countries, they can offer investors exposure to global growth. Consider that last year 40% of the profits for the companies in the s&P 500 came from overseas.17 stillnice as it would beyou cant own the world just by owning multinationals. these stocks are part of the answer, but the move toward national insularity means that, over time, foreign countries are likely to tilt their regulatory environments toward domestic companies. so at some point, protecting yourself from a world of risks and gaining the full advantages of its opportunities should have you consider actually investing in those companies directly.
International Monetary Fund, Global Financial Stability Report, April 2011. According to Standard & Poors data, cash dividends per share on the S&P 500 were $22.73 as of Sept. 26, 2011, compared with $16.27 as of Sept. 26, 2000. 17 BofA Merrill Lynch Global Equity Research.
15 16

it meAns knoWinG HoW to diveRsifY BetWeen CoUntRies And ReGions: BetWeen soUtHeAst AsiAn CHiP mAnUfACtUReRs And soUtH AmeRiCAn mineRs.

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the GlObal POrtFOliO MaKeOver

historic change requires a new way of thinking about asset allocations that is more global, more flexible and more dynamic in its approach to managing risk and seeking returns. here, we show how a typical u.s.-centric investment portfolio can be updated to embrace the great global shift.18

BEForE KEy
at a glance, fixed income doesnt seem to change much. but in the before model, its almost entirely allocated to u.s. bonds, with 14% of all assets dedicated to treasuries and municipalsand just 1.75% to bonds from overseas. 8% 2%

U.S. Equities International Equities Emerging-Market Equities Fixed Income Cash Global Hedge Funds Global Private Equity Global Real Assets

50% 35%

5%

time horizon (30 years)

AFTEr
in the after models, no distinction is made between u.s. and foreign bonds theyre all classified as global. though theres no specific allocation to commodities for average affluent clients, exposure still comes through etFs listed on u.s. stock exchanges. through global managers, even the most mainstream clients can access companies based in south america, asia and eastern europe. For qualified clients, real assets could include the standard commodity vehicles plus direct investments in farm and timberland. Private equity lets qualified clients invest in companies (and countries) at an earlier stage in their development. hedge funds offer especially dynamic strategies for managing risk and seeking higher-than-market returns. in the after models, exposure also grows to include foreign companies based in developed nations like Canada and Japan.

2% 7% 38% 28% 2% 9%

4% 21%

Affluent Client
24% 8%

More Affluent Client

18% 33% 6%

time horizon (30 years)

time horizon (30 years)

But how? Just because nigeria may be booming, individual investors arent likely to leap into the nigerian stock exchange or to parse the intricacies of investing in indonesia or in a toll road project in China. What they can do, however, is with the help of their financial advisor locate the money managers that invest in emerging-market tech companies. or select one that takes long and short positions on the vicissitudes of the Asian business cycle. of course, the success of active management19 depends on making wise decisions, so due diligence is key.
All of the sample allocations are based on Merrill Lynchs model portfolios. The before scenario is based on the U.S. RIC Tier 0 Moderate Strategic Allocation; and in the after scenarios, the affluent client is based on the Global RIC Tier 0 Moderate Strategic Allocation, while the more affluent client is based on the Global RIC Tier 2 Moderate Strategic Allocation. The more affluent client portfolio includes alternative investments, which are defined as hedge funds, private equity and real assets. Additionally, up to 20% of the Global RIC Tier 2 Moderate Strategic portfolio might be illiquid for three to five years. We define liquidity as the percentage of assets, by invested value, within a portfolio that can be reasonably expected to be liquidated within a given time duration under typical market conditions. Most alternative investment products are sold on a private placement basis, and eligible clients must typically be Qualified Purchasers ($5 million net investments). 19 The active manager will deviate from various benchmark weights to produce a return that exceeds the passive return with minimal risk.
18

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(see know Your managers, below.) there are other ways to tap into specific, otherwise hard-toreach global investments. market-Linked investments, for example, are bonds with returns that can be linked to the performance of any of a wide range of assets, including the stock-exchange indexes of developing countriesBrazil, say, or China or Russia.

investoRs ARent LikeLY to LeAP into tHe niGeRiAn stoCk exCHAnGe. BUt tHeY caN LoCAte tHe fUnd mAnAGeRs tHAt invest in emeRGinGmARket teCH.

LookinG At Bonds in tHe Context of CURRenCies

o paraphrase Hunter s. thompson, when the going gets weird, the opportunistic investor turns pro. Consider this peculiar sequence of events: the U.s.s wobbly debt sparks a near panic in global markets, causing investors to seek protection in the debt of the U.S., a surge in demand that in turn pulls Americas interest obligations to historic lows. How should investors respond to this bizarre turn? they can either chase yield down the credit ladder, seeking out riskier bonds here at home, or they can adopt a bond strategy as diversified as their approach to other asset classes, with appropriate allocations to higher-yielding municipals, corporates and bonds in other parts of the world. its worth noting, for example, that even as the yield on 10-year treasuries dipped to an unprecedented 1.72% in september, 20 the yield on comparable

KnOW yOur ManaGers

When it comes to managing a global investment fund, few things matter more than proven experience. s the geo-shifts accelerate and overseas investments seem to promise better returns, many fund managers, accustomed to working within narrow asset classes and styles (u.s. largecap, corporate fixed income, etc.), are recasting themselves as global fund managers. While they may be extremely competent managers, not all have the access and true expertise necessary to tap opportunities in unfamiliar markets. Following are some of the criteria that Merrill lynchs due diligence team considers when trying to separate the best global managers from the pack:

have made it easier to discern the lucky from the good, and to see which managers have performed during the toughest times. as every investor knows, past returns are not indicative of future results, but they can be indicative of the disciplines and controls that a fund has in place. Merrill lynch expends considerable energy each year seeking to reduce due diligence risk by confirming that the approaches advertised by the funds on its platform are backed by consistent patterns of rational decision-making. Are they truly global? When a fund manager who has made a name in u.s. small-cap stocks starts a multi-asset fund with exposure to emerging markets, theres no guarantee the transition will go smoothly. Just as the global economy favors large, multinational stocks, it also favors fund managers with proven global reach. For example,

typically only the largest, most experienced global funds hold a Qualified Foreign institutional investors (QFii) status, crucial for gaining access to Chinese investment markets.21 What do they spend on research? in the same way an innovative manufacturer keeps improving its products through research and development, leading global funds maintain staffs dedicated to tracking events as they unfold and finding opportunities others may miss. the resources a fund commits to indepth, local and original research into the areas in which it invests can tell you a lot about whether it is truly generating original, exciting ideas or simply following popular trends. talk with your financial advisor about how the funds under consideration for your portfolio rate on this, and other, key benchmarks as you seek to refine your global investment strategy.

Are they tested in good times and bad? Going back to the technology crash that began in 2000, a decade of extraordinary volatility has yielded a large population of managers seasoned in all phases of the business cycle. long track records
20 21

U.S. Department of the Treasury, Sept. 22, 2011. Defined by the China Securities Regulatory Commission, a Qualified Foreign Institutional Investor (QFII) is an approved overseas fund management institution, insurance company, securities company or other assets management institution that invests in Chinas securities market.

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even MOre tarGeted sOlutiOns FOr QualiFied investOrs

volatile times demand creativity. For affluent investors, that may mean looking for alternatives. here are plenty of ways for todays globally minded investors to gain access to international markets. the u.s. stock market trades shares of multinationals as well as foreign companies, and overseas government and corporate bonds are making their way into growing numbers of portfolios. but for investors defined as qualified because of higher levels of investable assets and other factors, there are additional, even more sophisticated vehicles for targeting growth, dialing up diversification and seeking protections against volatility. these investments are not suitable for everyone, and clients need to have the appropriate investment objectives, time horizons, liquidity needs and risk tolerance, but the potential benefits may be worth it.

days of highly leveraged, exorbitantly priced buyouts. in addition to going more global, the deals getting done now tend to be smaller, with a greater emphasis on cash and less on borrowing. While the formula may make for fewer splashy headlines, its a climate that actually favors affluent individual investors. Many private equity companies also have been enticing investors by distributing regular interest or dividend payments. because private equity requires investors to commit capital for extended periods, getting some income while you wait can ease those illiquidity concerns. Global Hedge Funds in a volatile global economy, policy makers and government agencies in Washington, brussels or beijing can jolt international markets with a single speech or regulation. to keep pace, affluent investors may need to rely more on global hedge funds, which can have the flexibility to offset risks and exploit opportunities as they arise. Global macro funds, for example, base their investment models on forecasts and analyses of international politics and policies, relations among countries, interest rates and other factors. event-driven funds, meanwhile, seek to take advantage of temporary market inefficiencies caused by political

developments, natural disasters or other events that may affect companies operations. Ultra-Structured Solutions at a time of rapidly shifting global risks and opportunities, growth with safety is a priority for many investors. ultra-structured solutions, an exclusive subset of Marketlinked investments (see Commodities by any Other name, page 9), give qualified investors the ability to customize exposure to a wide variety of global themes across the risk asset classes, all the while building in protective features more characteristic of bonds. an ultrastructured note might be designed, for example, to track the performance of the turkish lira, protecting against the first 10% of any losses if the currency ends up weakening over the next several years. Or a note might allow an investor to benefit from the widening spreads between u.s. and asian bonds while buffering against the first 30% of losses if those spreads start to narrow. ultra-structured notes do carry credit riskthe company issuing them could default. still, they provide another way of diversifying a complex portfolio and reducing the impact of a volatile investment world while taking advantage of its distinct growth potential.

Private Equity in many emerging markets, particularly the frontier markets in africa and southeast asia that may represent some of todays biggest growth opportunities, public securities exchanges are rudimentary at best. so to gain access to these growth stories, affluent investors may need to look at funds that trade not in stocks or bonds, but which actually buy and sell whole companies. the private-equity market has changed considerably since the pre-credit-crisis

tax-free municipal bonds was tracking at 2.11%, 22 with prices holding steady as state governments got a jump on their federal counterparts in bringing their fiscal problems under control. the spread between U.s. and Chinese bonds is similarly striking. over the past 10 years, Chinese government and corporate bonds as a group have posted total annualized returns (the combined returns from price appreciation and interest coupons) of 8.9%, compared with 5.7% for U.s. bonds. 23 in light of this disparity, the leap into foreign bonds should feel less strange. But any decision to do so requires an investor to make yet another cognitive jogand start thinking about currencies. thats because foreign bonds bring exchange rates directly into play.
22 23

Bloomberg, BVAL Muni Benchmark 10-Year. Data as of Sept. 22, 2011. Chinese bond market returns are based on the S&P/CITIC Composite Bond Index, and U.S. returns are based on Barclays U.S. Aggregate Bond Index. All indexes in U.S. dollars. Data as of Sept. 30, 2011.

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this is not as true in the case of Chinese bonds (although they could have other issues) because Chinas currency is unlikely to lose ground to the dollar. But suppose you purchase a french bond with an attractive yield. if the euro drops while you own the bond certainly a possibility, given the eurozones debt problemsthe extra income from that higher yield could be wiped out when you convert back to dollars. some foreign countries and companies offer bonds transacted only in dollars, which can help mitigate currency risk. However, that approach limits the range of choices, as well as the possibility of gains if currency moves in your favor. so what do you do? Here again, investors should set aside conventional thinking and embrace the shiftfor instance, buying the bonds of emerging-market governments and companies in places like malaysia or indonesia or Peru. the logic is fairly simple. As capital continues flooding into those countries, their currencies will likely gradually keep appreciating as their central banks take advantage of the inflows to lift the purchasing power of their citizens. As with the new world order in equities, a smart, global approach to fixed-income investment comes down to working with your financial advisor to find the right bond funds led by managers experienced in foreign markets, whether theyre watching emerging markets anywhere in the world or dedicated to a specific regionlike those new models of fiscal health, the Pacific Rim and south America.

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to meet demAnd, fARms WiLL HAve to PRodUCe moRe food dURinG tHe next HALf CentURY tHAn dURinG tHe PRevioUs 10,000 YeARs.

Commodities foR A sHRinkinG PLAnet

or all of its complexities, the new age of global risk at some level boils down to the tensions among four children forced to share three dolls. As world population rises by a staggering 200,000 per day,24 emerging middle classes demand a steadily higher standard of living and a greater share of finite resources. to meet demand, according to one estimate, farms worldwide will have to produce more food during the next half century than during the previous 10,000 years.25 Add energy, industrial metals and building materials to the mix, along with the intense pressure being placed on gold prices by central banks that have started buying up gold as an alternative to dollars and euros, and it becomes clear why every macroeconomic and sociological trend points to a similar conclusion: many investors could likely benefit from increasing their focus on commodities. Commodities do pose risks, and they dont produce interest income or dividends. But they do provide an important source of diversification. Like stocks, commodities are cyclical and influenced by global growth; and because they are subject to such vagaries as weather, disease, embargoes and tariffs, theyre potentially even more volatile. But whereas equity prices reflect a forward-looking view of company earnings, commodities prices depend more on immediate demand and scarcities. in August, for example, when fears about U.s. and european government debt drove world stocks into wild swings, the price of oil moved much less, because global demand for energy held firm.26
The World Bank. International Forum on Soils, Society and Global Change, 2007. 26 According to BofA Merrill Lynch Global Commodities Research, the price of Brent crude declined 2% in Aug. 2011.
24 25

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the neW rules OF GlObal investinG

the global shifts have overturned some of our most basic orthodoxies of investment thinking. here are the new rules that investors can use to position themselves for protection and growth: oing global. as nations turn more inward to deal with their domestic challenges, investors may need to become that much more international in their search for growth, yield, quality and effective ways to manage risk. Taking a more dynamic approach. although buy-and-hold isnt exactly obsolete, investors may need to consider more dynamic, tactical and flexible approaches to reducing risk and maximizing returns. these may include actively managed funds, as well as alternatives like Market-linked investments that explicitly manage downside market exposure. Getting yield from multinational stocks. look for corporate dividends to become

a more important source of yield as u.s. multinationals deploy the cash on their fast-improving balance sheets to lure investors in volatile markets. Seeking the safety of emerging-market bonds. With u.s. treasury yields at historic lows, global fixed income becomes more attractive, especially in markets that pair higher interest rates with currencies likely to be buoyed by influxes of foreign capital. (a stronger local currency makes for stronger real returns when bonds are converted back to dollars.) experienced global fixed-income managers can help source the right combinations of currency strength and yield. Buying direct exposure to overseas equities. While u.s.-based multinationals

give some access to emerging-market growth, its prudent to have assets that provide more direct exposure to some of the worlds fastest-growing economies (think: China, turkey, Malaysia, even nigeria). experienced global fund managers, again, are especially critical here, along with Market-linked investments that can be tied to stock indexes or baskets of stocks in less established markets. reducing risk with commodities. One of the worlds most volatile asset classes can also be one of its best diversifiers. although owning commodities poses its own risks,27 it can reduce overall portfolio risk by providing a hedge against scarcities in vital natural resources that can drive up production costs and hurt corporate earnings and consumer spending.

Because most commodities actually are raw materials, they also provide possibly the best natural counterbalance when inflation erodes the value of a bond portfolio or eats into corporate earnings by driving up the cost of manufacturing. investors sometimes overlook commodities during periods in which, as today, weak growth and high unemployment help contain overall U.s. inflation. if anything, though, the hedging power of commodities has historically reached its peak during such times, because inflation is tied more directly to the rising cost of materials on world markets than it is to higher wages or other consequences of a faster-growing U.s. economy. in a real sense, owning commodities can offer a hedge not just for your investment portfolio but also against higher consumer prices, be they of groceries or the gas for your car.

seekinG fLexiBiLitY And GRoWtH

F
27

or at least 40 years, growth has been the investors watchword. success meant crafting a portfolio of what appeared to be stable, mostly U.s.-based stocks and bonds that would grow predictablynot in a straight line but with relatively brief interruptions that would be more than counterbalanced by long stretches of economic expansion. the fundamental strength and resilience of the U.s. economy was the unquestioned foundation on which investors could always build.
See commodities disclosure on back page.

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now we need to balance that view of the worldand that style of investing. more shocks are doubtlessly coming: climate change, inflation in world food prices and continued movement out of the dollar into gold and other currencies. And there will be other, unexpected crisesnatural disasters such as the Japanese earthquake and tsunami as well as man-made upheavals like the Arab springthat further roil the global landscape. As humans, we will, as always, adapt and re-engineer. As investors, we must be prepared for risk, even in the unlikeliest places. As we saw during the financial crisis, even money market funds are not entirely safe when an outlier event like a freeze in the financial markets occurs (and, given their exposure to the very short-term debt of european banks, there is at least a possibility they could be impacted again). so, we must focus on sustainability, resilience, the ability to deal with the unforeseen and also the wherewithal to capitalize on often fleeting opportunities. flexibility gives nations the capacity for extraordinary strength and resilience. Japan has presented challenges to investors over the past two decades, but time and again it has been able to rely on its citizens to help pull itself out of crises. most recently, the government announced plans to spend $248 billion on disaster relief funded in part through higher taxes and disaster bonds.28 the country is banking on its citizens personal savings to find a way out of a crisis that could have crippled another nation. As for the U.s., for all the challenges it faces and the noise it sometimes creates, it remains one of the most flexible, stable and sought-after economies on the planet. With just 4.6% of the global population, the U.s. accounts for just as much output in a year as the next three largest economiesJapan, China and Germanycombined.29 Judging by reports in the popular media, you would think that the U.s. makes nothing and consumes everything. in truth, the country is still a global manufacturing powerhouse, the worlds second largest, having ceded the top spot to China only in 2008.30 the list goes on and on: When combining goods and services, the U.s. remains the worlds top exporter,31 a fact masked by headline trade-deficit figures. According to just about any consumer survey, the planets most recognizable brands are largely American.32 the U.s. has the worlds favorite economy for foreign investors, the largest market for it spending and the largest and highest-quality university system in the world.33 All of which is to emphasize the obvious resilience of the U.s. that has brought the nation back resoundingly from crisis after crisis in the past. As much as the U.s. and other traditional players in the global economy admire the growth of newcomers, the winners among the emerging nations will be those that learn from the developed countries and find ways to move beyond pure growth and adopt the flexibility to survive inevitable shocks of their own. much the same can be said of investors facing a world they never foresaw. the winners are likely to be those who maintain the flexibility, both in mind and in portfolio, to see and respond to the world as it has become.
The International Institute for Strategic Studies, Japan: Life After Kan, Sept. 2011. International Monetary Fund. 30 U.N. 31 World Trade Organization. 32 Brandz Top 100 Most Valuable Global Brands 2011. 33 U.N. Conference on Trade and Development; Economist Intelligence Unit estimates; Quacquarelli Symonds World University Rankings.
28 29

As HUmAns, We WiLL ALWAYs AdAPt And Re-enGineeR. As investoRs, We mUst do tHe sAme.

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To see the Webcast go to: www.ml.com/webcast

The article co-authored by Ian Bremmer was prepared under an agreement with Eurasia Group and is provided for informational and educational purposes only. His opinions, assumptions, estimates and views expressed are as of the date of this publication, subject to change and do not necessarily reflect the opinions and views of Bank of America Corporation or any of its affiliates. The information does not constitute advice for making any investment decision or its tax consequences and is not intended as a recommendation, offer or solicitation for the purchase or sale of any investment product or service. Before acting on the information provided, you should consider suitability for your circumstances and, if necessary, seek professional advice. This material is not intended to be relied upon as a forecast or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 20, 2011, and may change as subsequent conditions vary. Opinions are subject to change due to market conditions and fluctuations, and any of their discussions concerning investments should not be considered as a solicitation or recommendation by Merrill Lynch and may not be profitable. Any investments or strategies presented do not take into account the investment objectives or financial needs of particular investors. It is important that you consider this information in the context of your personal risk tolerance, time horizon and investment goals. Always consult with personal professionals before making any investment decisions. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Diversification, asset allocation and rebalancing do not assure a profit or protect against loss in declining markets. Rebalancing can pose a tax event. Any tax statements contained herein were not intended or written to be used and cannot be used for the purpose of avoiding U.S. federal, state or local tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors. Past performance is no guarantee of future results. Market-Linked Investments may not be suitable for all investors. Since Market-Linked Investments have varying payout characteristics, risks and rewards, you need to understand the characteristics of each specific investment, as well as those of the linked asset. Its important that you carefully read the related disclosure document, which contains detailed explanation of the terms, risks, tax treatment and other relevant information. Its also recommended that you consult your accounting, legal or tax advisors. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Mutual Funds, new issue and ETFs are offered pursuant to a prospectus, which contains the investment objectives, risks, charges and expenses and other important information about the UIT or fund. Investors should read the prospectus and, if available, the summary prospectus for mutual funds and money market funds, and carefully consider this information before investing. Please contact your Merrill Lynch Financial Advisor for a prospectus, and, if available, a summary prospectus. Investment in commodities and gold are investments in natural resource industries that can be significantly affected by events relating to those industries such as variations in commodities markets, weather, embargoes, disease, international, political and economic developments, the success of exploration projects, tax and other government regulations, as well as other factors. Concentrating investments in gold companies means that performance will be more susceptible to factors affecting that particular sector. Alternative investments are intended for qualified and suitable investors only. Alternative investments involve limited access to the investment and may include, among other factors, the risks of investing in derivatives, using leverage, and engaging in shorts sales, practice which can magnify potential losses or gains. Alternative investments are speculative and involve a high degree of risk. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity, and your tolerance for risk. International investing presents certain risks not associated with investing solely in the U.S. These include, for instance, risks related to fluctuations in value of the U.S. dollar relative to the value of other currencies, custody arrangements made for a funds foreign holdings, political and economic risk, differences in accounting procedures, and the lesser degree of public information required to be provided by non-U.S. companies. Foreign securities may also be less liquid, more volatile and harder to value, and may be subject to additional risks relating to U.S. and foreign laws relating to foreign investment. These risks are heightened when the issuer of the securities is in a country with an emerging capital market. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. The principal on mortgage- or asset-backed securities may normally be prepaid at any time, which will reduce the yield and market value of these securities. Obligations of U.S. Government agencies and authorities are supported by varying degrees of credit but generally are not backed by the full faith and credit of the U.S. Government. There may be less information available on the financial condition of issuers of municipal securities than for public corporations. The market for municipal bonds may be less liquid than for taxable bonds. A portion of the income may be taxable. Some municipal security investors may be subject to Alternative Minimum Tax (AMT). Capital gains distributions, if any, are taxable. 2011 Bank of America Corporation. All rights reserved.

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