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Island Light Investment Views (Apr 2015)

Investment Views

Our investment strategy team makes a series of active decisions within our Global Portfolios based upon our current outlook on the US and global economy, global equity and fixed income markets. Every quarter, we shift assets away from our strategic allocation, tilting our allocations in certain asset classes and segments from their long term weights, in order to potentially benefit from changing conditions in global capital markets.

Q1 2015 Review: Performance, Market and Economy
Global financial markets were volatile in the first quarter of 2015 with negative returns in domestic equities in January, strong results in February and mixed returns in March contrasted with opposite results in domestic fixed income. For the full quarter, broad equity indices generated positive returns in most regions and styles with U.S. large value being the only area to suffer a loss. Non-US equity markets were very strong as monetary easing in Europe and Japan, declining global oil prices and a strong dollar brought new hope for overseas economic growth.

Fixed income indices also rose with the lone exceptions being unhedged non-US bonds and local currency emerging markets debt. Declining global interest rates created a positive investing environment for fixed income. The US 10 Year Treasury Rate began the year at 2.2% and ended the quarter at 1.9%, still well below its 10 year average of 3.3%. Commodities suffered acutely as many contracts fell nearly 10% while REITs continued to post strong results.

Capital Market Estimates and Views
Capital Market forecasts and estimates are critical components in the development of our portfolio allocations. When creating capital market forecasts, we employ sophisticated statistical techniques to combine observations of history with current information and forward looking views. This advanced and unique forecasting process is rigorous, transparent and practical, allowing us to include technical, quantitative factors and investment intuition to manage our investment portfolios in a consistent dynamic framework. We share our current and forward looking views, and the strength of those views here.
Portfolio Construction Methodology
We use advanced portfolio optimization technology to turn our capital market assumptions into investable portfolios. This patented asset allocation methodology, known as Michaud optimization, is designed to improve risk-adjusted returns through enhanced diversification of asset classes, selected to satisfy a range of investment objectives.

Investment Outlook – Q2 2015

We expect the US economy to continue to grow at slightly less than 3% with moderate confidence and US inflation over the short/mid term to remain low, with higher confidence.

Overlay View – Equities

Asset Class Valuation (Global Equity Risk Premium): we expect the Equity Risk Premium to be above average (6.0%) with Higher Confidence
Developed Equity Timing (US vs. non-US developed market equities): we favor non-US developed equities with Moderate Confidence
Non-US Regions Timing (Europe vs. Pacific vs. Canada) we expect Canada to underperform the rest of the developed world with Moderate Confidence
Emerging Equity Timing (Non-US Emerging equities vs US equities): we are neutral with Moderate Confidence
US Equity Style Tilt (US value vs. US growth equities): we Favor US growth equities with Moderate Confidence
US Equity Size Tilt (US large-cap vs. US small cap equities): we favor US small-cap equities with Low Confidence
Non-US Equity Size Timing (Non-US large vs. non-US small equities): we favor non-US Small Cap with Low Confidence

Overlay View – Fixed Income

US Interest Rate direction (US interest rate expectation – short/mid): we expect short term interest rates to increase modestly with Lower Confidence
US Bond view (US short bond forecast vs. inflation): we expect that bonds returns will equal the inflation rate with Lower Confidence
US Yield Curve Timing (US long bond v. US short bond): we favor intermediate duration bonds with lower confidence
US Inflation-Protected Bond (US bonds vs. US inflation-protected bonds): we favor US bonds with Lower Confidence
US Credit Spread (Credit Spread vs Treasuries): we see the spread increasing with Lower Confidence
Non-US Bond View (Hedged non-US Bond vs US Bond): we favor non-US Hedged Bond with Moderate Confidence

Overlay View – Other Assets
Global REITs Timing (Global equities vs. Global equity REITs): we favor REITs with Lower Confidence
Commodities Timing (US commodities forecast): We are negative on commodities with Moderate Confidence
MLPs Timing (Equity MLPs vs US equities): we favor US equities vs MLPs with Low Confidence
Global Macro Timing (Global Macro expectation): We are Neutral with Moderate Confidence

“Confidence” is the strength of our forecast rating from Low to High.

Island Light is pleased to share our capital market forecasts with professional investors who ask for them. Please drop a line or give us a call for our capital market forecasts for the upcoming quarter and year. Our capital market assumptions are forecasts and reflect our forward looking views as of April 9, 2015. Such views do not express or imply a guarantee or warranty of any kind, but are estimates of future market returns. All views expressed above are the views of Island Light Capital.

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