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Asset Allocation Committee Outlook

Third Quarter 2014

  • Preference for equities over fixed income continues
  • Expectations reduced for U.S. government securities and municipals

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 Below-Normal Return Outlook Long-Term (10 Yr. +) Annual Return Outlook Above-Normal Return OutlookChange From Previous Outlook
  o + 
Global Fixed Income          
Bunds 10 Year          
Gilts 10 Year          
JGBs 10 Year          
U.S. Treasury 10 Year          
U.S. Investment Grade Fixed Income          
Investment Grade Corporates          
Agency MBS          
CMBS / ABS          
U.S. TIPS          
High Yield Corporates          
Emerging Markets Fixed Income          
EMD Local Sovereign          
EMD Hard Sovereign          
EMD Hard Corporates          
Return outlook higher than previous quarter
Return outlook lower than previous quarter
Return outlook essentially unchanged
 Below-Normal Return Outlook Long-Term (10 Yr. +) Annual Return Outlook Above-Normal Return OutlookChange From Previous Outlook
  o + 
Global Equities          
U.S. Large Cap          
U.S. Small Cap          
Master Limited Partnerships          
Developed Market—Non-U.S. Equities          
Emerging Markets Equities          
Public Real Estate          
Return outlook higher than previous quarter
Return outlook lower than previous quarter
Return outlook essentially unchanged
 Below-Normal Return Outlook Long-Term (10 Yr. +) Annual Return Outlook Above-Normal Return OutlookChange From Previous Outlook
  o + 
Lower Volatility Hedge Funds          
Directional Hedge Funds          
Private Equity          
Return outlook higher than previous quarter
Return outlook lower than previous quarter
Return outlook essentially unchanged
 Below-Normal Return OutlookLong-Term (10 Yr. +) Annual Return OutlookAbove-Normal Return OutlookChange From Previous Outlook
Swiss Franc      
EM FX (broad basket)      
Return outlook higher than previous quarter
Return outlook lower than previous quarter
Return outlook essentially unchanged

*The currency forecasts are not against the U.S. dollar but stated against the other major currencies. As such, the forecasts should be seen as relative value forecasts and not directional U.S. dollar pair forecasts. Currency forecasts are shorter-term in nature, with a duration of 1–3 months. Regional equity and fixed income views reflect a 1-year outlook.

The Committee members are polled on the asset classes listed above and these discretionary views are representative of an Asset Allocation Committee consensus.

Looking Forward

The Committee remains constructive on equities as a whole and anticipates a better global growth backdrop, after some near-term volatility. The risk environment for financial markets remains a highly debated topic, particularly in relation to growth, interest rates, valuations, geopolitical concerns and central bank policy. As a result, we believe it will continue to be a grinding environment for markets, with the potential for near-term volatility along the way. Global monetary policy remains accommodative across the U.S. Federal Reserve (Fed), European Central Bank (ECB), Bank of Japan (BoJ) and Bank of England (BoE), although the Fed and BoE appear to be moving closer to tighter postures. Geopolitical tensions between Ukraine and Russia appear to have declined following successful elections on May 25. While the Committee expects noise from the region periodically, the worst may be behind us.

In the United States, economic activity has picked up, as represented by Institute for Supply Management and regional Fed surveys, and improved labor market data. The Committee anticipates accelerating domestic economic growth throughout the year, with strong second quarter numbers following the downward revision of first quarter GDP to -2.9%.

Portfolio Positioning

Overall, the Committee’s longstanding preference for equities over fixed income remains intact, with slight changes on the margin including downgraded views to very underweight for U.S. government securities and underweight for municipal fixed income.

Second Quarter 2014 Review

The second quarter of 2014 followed a similar path as the first quarter, with wide sections of both equities and fixed income in positive territory quarter to date. Every asset class under review by the Asset Allocation Committee has delivered positive returns year to date, with real estate investment trusts and master limited partnerships leading the way.

Fixed income yields continued to decline during the quarter and are down considerably year to date, but have bounced back somewhat from their lows. U.S. investment grade and high yield bond indices are both posting solid returns quarter to date. Meanwhile, emerging markets debt, both local and hedged currency, was the strongest-performing fixed income sector both quarter and year to date.

Within U.S. equities, we witnessed a role reversal between large and small caps. On both a quarter- and year-to-date basis, large caps bested their small cap counterparts. Developed market non-U.S. equities, as represented by the MSCI EAFE Index, lagged slightly, but are still up approximately 5% year to date. Meanwhile, emerging markets equities rebounded and are now solidly in positive territory, delivering nearly 6% returns year to date.

Within the real and alternative asset classes, commodity prices have leveled out thus far in the second quarter after a strong first quarter.1

Performance: All Asset Classes in Positive Territory Year to Date

QTD and YTD a/o 6/24/2014QTDYTD
Barclays US Aggregate 1.68 3.55
Barclays Municipal Bond 2.26 5.65
Barclays US Aggregate Government 0.97 2.29
Barclays US Corporate Investment Grade 2.30 5.30
Barclays US Aggregate Securitized - MBS 2.07 3.69
Barclays ABS + CMBS 0.92 2.06
Barclays Global Inflation-Linked - US TIPS 3.38 5.40
Barclays US Corporate High Yield 2.49 5.55
Barclays Global Aggregate x USD 1.70 4.54
JP Morgan GBI-EM Composite 4.87 6.88
Russell 3000 4.09 6.14
Russell 1000 4.42 6.56
Russell 2000 0.30 1.42
Alerian MLP 12.26 14.36
MSCI EAFE 4.49 5.29
MSCI Emerging Markets 6.37 5.98
DJ UBS Commodity Index 1.36 8.44
FTSE NAREIT All Equity REITs 6.71 15.79
S&P 500 4.65 6.54

1 Note: All performance as of June 24, 2014.

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types.

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The views expressed herein are generally those of Neuberger Berman’s Asset Allocation Committee which comprises professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews asset allocations for large diversified mandates and makes client-specific asset allocation recommendations. The views and recommendations of the Asset Allocation Committee may not reflect the views of the firm as a whole and Neuberger Berman advisors and portfolio managers may recommend or take contrary positions to the views and recommendation of the Asset Allocation Committee. The Asset Allocation Committee views do not constitute a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented.

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