- PNC.com

Strategy
Insights
Fourth-Quarter 2014
Global deflationary forces
remain potent, longer-term
yields have reset to a lower
base level, and the pace
at which U.S. longer-term
yields rise from this new
base may be determined as
much by what happens in
the rest of the world, in
particular Europe, as by
the path the Fed chooses.
Furthermore, despite
considerable angst that the
Fed is “behind the curve,”
the Fed is literally way
ahead of the curve.
In physics, escape velocity
is the minimum velocity
that a body must have
to escape f
rom the
gravitational field
of
another body.
Christopher D. Piros, Ph.D., CFA®
Managing Director of
Investment Strategy
215.585.7817
[email protected]
Ready to Come About? Hardly
When the skipper of a sailboat decides to change tacks, that is, make a course
change that puts the wind on the opposite side of the boat, the traditional
command to the crew is “ready to come about, hard a’lee.” As the helmsman
brings the bow (front) of the boat directly into the wind and through to the other
side, the sail swings (perhaps violently) from what used to be the downwind
(leeward) side of the boat to the new downwind side and the force of the wind
rolls the boat in that direction. To keep the boat stable, the crew must move in the
opposite direction, toward what had been the leeward (downwind) side.
For quite some time, market participants have been anxiously waiting for
central banks, in particular the Federal Reserve (Fed), to announce that they are
“ready to come about.” Leading up to the September 16-17 Federal Open Market
Committee (FOMC) meeting, it was widely anticipated that the Fed would signal
that a course change is fast approaching by removing the phrase “considerable
time” from its postmeeting statement. It did not, and Fed Chair Janet Yellen
emphasized in her press conference that there has been no change in the Fed’s
policy stance, in the view that there is too much slack in the labor market, or
in the risk of accelerating inflation. Ready to come about? Hardly.
Meanwhile, despite considerable angst that the Fed is “behind the curve,” we show
that the Fed is literally way ahead of the curve. Investor rhetoric notwithstanding,
the market is generally betting the Fed will raise rates much more slowly than the
FOMC members are projecting.
In this issue of Strategy Insights, we draw on themes we have discussed over the
last couple of years to assess what is going on in the bond market, why yields are
where they are, and where yields are likely to go. In addition, we slice ’n dice
equity valuations around the world.
How Do We Know Rates Are Too Low?
It may seem like a silly question, but how do we know that interest rates are too
low? There are at least three “obvious” responses, in our view.
n The key policy rates for three of the most closely monitored central
banks – the Fed, the European Central Bank (ECB), and the Bank of
Japan (BOJ) – are essentially at the so-called zero lower bound. These
three central banks oversee countries that account for nearly 50% of
world GDP and 65% of publicly traded equity value.1 If these rates
can only go up, then rates must be too low, right?
n Top-quality bond yields have not been this low since before most of
us were born. Ipso facto they must be abnormally low, right?
n The answer most pertinent to our clients is that rates are so low that
investors feel they cannot earn a “living yield” without accepting
significant credit risk.
1
Global equity value is based on a composite of the MSCI World, World Small Cap, Emerging Markets, and
Frontier Markets indexes.
hawthorn.pnc.com
While these answers provide useful perspectives on the current situation, they
do not really give us a handle on where yields should be, would be, or are likely
to be under more normal conditions. For this we turn to an empirical regularity
discussed in our third-quarter 2013 Strategy Insights, Playing the Dogleg. Over
time, the average real yield on a 10-year Treasury note tends to be close to the
average growth rate of real GDP. Correspondingly, the average nominal yield
(that is, the yield published in the newspaper) is generally close to the average
growth rate of nominal GDP. How close? From the first quarter of 1962 through
the second quarter of 2014, U.S. nominal GDP growth exceeded the yield on the
benchmark 10-year Treasury note by just 25 basis points (0.25%) on average.
As shown in Chart 1, there have been three distinct subperiods since 1962 in
terms of the relationship between nominal growth and the 10-year yield. In the
1960s and 1970s, nominal growth exceeded the 10-year yield by an average
of 2.62%. This was a period of rising inflation driven by the Great Society
programs, the Vietnam War, the OPEC oil shock, and accommodative monetary
policy. It is the period from which the Fed likely learned the importance of
keeping inflation expectations well anchored, a mantra FOMC members
chant frequently these days.
The situation changed abruptly on Saturday, October 6, 1979, when in what
became known as the Saturday night massacre, the new Fed chairman, Paul
Volker, announced a new regime of very tight control of the money supply. Rates
soared and the economy tanked. For the next two decades, the 10-year Treasury
rate exceeded nominal GDP growth by an average of 2.61% in the 1980s and
1.13% in the 1990s, as the Fed squeezed inflation back down to low single
digits. Finally, since 2000 the nominal growth rate has averaged 0.23% above
the 10-year yield, just 2 basis points (0.02%) off the 50+ year average.
The 1960s and 1970s experience of rising inflation and rising yields with the
Fed unable or unwilling to rein in inflation is the scenario that many people fear
will arise from the massive expansion of the Fed’s balance sheet since the global
financial crisis. We do not think this is likely to be the scenario we face going
forward. The 1960s and 1970s were an inherently inflationary environment with
fiscal expansion and contractionary supply shocks, whereas we believe the current
global environment remains inherently disinflationary. In addition, the Fed is now
fully cognizant of the need to keep inflation and inflationary expectations under
control, and we believe they will do so.2
Chart 1
U.S. Nominal Growth minus 10-Year Treasury Yield
8
6
4
Percent
2
0
-2
-4
-6
Nominal Growth – 10y Yield
Average Subperiod Difference
-8
-10
Full Period Average Difference
-12
3/62 1/65 11/67 9/70 7/73 5/76 3/79 1/82 11/84 9/87 7/90 5/93 3/96 1/99 11/01 9/04 7/07 5/10 3/13
Source: FactSet Research Systems, Inc., PNC
2
2
See our discussion of this issue in the First-Quarter 2013 Strategy Insights, Get Real: Protecting Purchasing Power.
In contrast, the 1980s and 1990s were for the most part a period of falling
inflation and declining yields. It was a secular bull market in bonds, but with
the Fed riding the brake yields did not fall as fast as inflation. Hence, as shown
in Chart 1 (page 2), nominal growth was systematically below the 10-year yield.
This is not the scenario we are likely to face going forward since it reflects
persistently restrictive monetary policy designed to keep real interest rates high
while squeezing inflationary expectations out of nominal yields. Such a policy
is only sustainable if the underlying economy is strong enough to withstand
the drag induced by high real rates. As discussed below, that is not where we
are today nor are we likely to get there any time soon.
Where does that leave us? It leaves us with the view that the best guide as to
where the 10-year yield should be, would be, and is likely to be under normal
conditions is where it has been on average over both the last 15 years and
over the last 50+ years – modestly below the rate of nominal GDP growth. For
the last couple of years, nominal GDP has been growing at roughly 3.75%.
Subtracting the 50+ year average differential of 0.25% would put the 10-year
yield at about 3.5%. After the FOMC met in mid-September, however, the
yield stood at about 2.60%.
One could therefore argue that the yield is 50-100 basis points below where it
could or should be. Similarly, if real growth averages, say, 2.5% and inflation
averages, say, 2.25% in the longer run, then the 10-year yield is likely to end
up around 4.0–4.5%.
Based on these calculations, the 10-year yield could rise 50-100 basis points
even without a meaningful acceleration of U.S. real growth or inflation, and it
is likely to rise 150-200 basis points by the time the Fed has normalized
monetary policy.
What Is Keeping U.S. Yields so Low?
Based on conditions in the United States, it appears that bond yields could/should
be higher. Indeed, they were higher at the beginning of this year but have declined
even as the Fed reduced its asset purchases and openly discussed the timing of
eventual rate hikes. We believe the reason is that the global economy remains
subject to secular deflationary pressures reinforced by the global financial crisis,
deleveraging during the protracted recovery, and the boom in U.S. energy
production capacity.3
Ongoing deflationary pressures are perhaps most apparent in the Eurozone at
this point. Table 1 (page 4) shows what has happened to inflation in eight euro
area countries and the Eurozone as a whole over the last three years. Since August
2011, the inflation rate has fallen 3.24% in Spain and more than 2.0% in the
Netherlands, Portugal, Italy, and the Eurozone. It has declined by more than
1.6% in France, Germany, and Greece. The price level is actually falling in Spain,
Greece, Italy, and Portugal. Even in Germany, arguably the strongest member of
the monetary union, inflation is far below the ECB’s stated target of 2.0%. This
strong deflationary trend is why the ECB has recently cut its policy rates again,
initiated a new round of large-scale direct lending to banks, and is planning to
undertake asset purchases similar in concept to the program the Fed is phasing
out in the United States.
3
Our Third-Quarter 2012 Strategy Insights, Painful Adjustments and Big Decisions, explained in some detail why,
starting in roughly 2001, the rising role of China in the global economy has put downward pressure on inflation and real
interest rates.
3
Table 1
Consumer Price Index Inflation in the Euro Area (year-over-year)
(year-over-year)
Chart 2 shows what
has happened to the
German yield curve
Spain
over this same threeNetherlands
Portugal
year period. Not
Italy
surprisingly to us, as
Eurozone
inflation dropped
France
Germany
sharply so did yields.
Greece
As of the end of
Ireland
August, German
Source: FactSet Research Systems, Inc.
nominal yields were
slightly negative out
to three years and, using the inflation rate in Table 1, real yields were negative
for maturities less than 10 years.
One Year through August of:
2011
2012
2013
2014
2.73%
2.72%
1.63%
-0.51%
3.22
2.55
2.79
0.36
2.75
3.15
0.16
-0.07
2.27
3.28
1.20
-0.17
2.55
2.61
1.34
0.37
2.41
2.38
0.98
0.53
2.48
2.24
1.58
0.78
1.41
1.15
-0.97
-0.24
1.04
2.62
0.00
0.64
Change in
Inflation Rate
2011–14
-3.24%
-2.86
-2.82
-2.44
-2.18
-1.89
-1.71
-1.64
-0.40
As shown in Chart 3 (page 5), 10-year yields in the United States and Germany
have tracked each other closely over the last 25 years. The spread was a mere
0.04% (4 basis points) at the end of August 2011, 0.23% at the end of August
2012, and 0.46% going into May 2013 when the Fed announced it was likely to
begin phasing out its asset purchase program. By the end of 2013 the U.S. 10-year
yield shot up by 1.35%, pulling the German yield up by 0.72% and widening the
spread by 0.63% to 1.09%. Bear in mind that this occurred while inflation in
Germany was declining sharply; thus the real, inflation-adjusted yield in Germany
was rising even more rapidly.
Chart 2
German Yield Curve
2.5
Change
2.0
8/29/2014
1.5
8/31/2011
Percent
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
3M
6M
1Y
2Y
3Y
4Y
5Y
Maturity
6Y
7Y
8Y
9Y
10Y
Source: Bloomberg L.P.
The U.S. 10-year yield was just over 3.0% at the beginning of this year and most
investors, including ourselves, thought it would continue upward as long as U.S.
growth remained strong enough to keep the Fed on track to phase out asset
purchases and then begin to raise policy rates. Although the Fed is still on that
track, the U.S. yield fell 0.70% by the end of August, dragged down we believe
in the wake of the 1.05% plunge in the German yield. Had the U.S. yield just
remained unchanged, the spread would have soared to 2.15%, far above any
(month-end) spread since the high-inflation, high-rate 1980s. As it was, the
1.45% spread at the end of August was the highest of the last 25 years.
4
Chart 3
U.S. and German 10-Year Yields
10
U.S.10-Year
8
German 10-Year
U.S.-German
Percent
6
4
2
0
-2
1/90
7/91
1/93
7/94
1/96
7/97
1/99
7/00
1/02
7/03
1/05
7/06
1/08
7/09
1/11
7/12
1/14
Source: FactSet Research Systems, Inc.
The upshot, we believe, is that:
n
global deflationary forces remain potent;
n
longer-term yields have reset to a lower “base” level; and
n
the pace at which U.S. longer-term yields rise from this new base may
be determined as much by what happens in the rest of the world, in
particular Europe, as by the path the Fed chooses.
Meanwhile, the ECB’s promise of aggressive new measures to combat deflation
seems to have arrested the down draft in bond yields, at least in the short run.
Both U.S. and German yields rebounded in September off the lows set around
the end of August.
Is the Fed Ahead of the Curve?
It has become somewhat of a time-honored tradition to assert that the Fed is
“behind the curve,” too slow to take action in the face of supposedly compelling
evidence. These days, however, we think the Fed is literally ahead of the curve.
One of the new policy tools that the Fed adopted in the wake of the financial
crisis is so-called “forward guidance.” Back in the olden days (let’s just say few
people had heard of the Internet yet), the Fed would not even say what they
had already done at their meetings much less what they thought they would do
later or when. Now, in addition to many speeches, each member of the FOMC
projects where he or she thinks the federal funds rate will be at various points in
the future. Due to the way these projections are formatted for release, they are
often referred to as the “dot charts.” As you would expect, the FOMC members
have differing opinions, but we can take the median forecast among the members
as a fairly good estimate of where the majority of the committee thinks policy
is headed.
We can see where market participants think the federal funds rate will be on
future dates by looking at the federal funds futures contract. Putting these two
sources together we can see whether the Fed is more or less aggressive than the
market. To put it another way, we can see if the market is pricing in what the
Fed is telling it about the likely course of policy.
5
Chart 4
Likely Course of the Federal Funds Rate – the Fed is Ahead
4.0
3.5
3.0
Federal Funds Futures
FOMC - Median
FOMC - 5th Lowest
FOMC - 5th Highest
Percent
2.5
2.0
1.5
1.0
0.5
0.0
10/14 12/14 2/15 4/15 6/15 8/15 10/15 12/15 2/16 4/16 6/16 8/16 10/16 12/16 2/17 4/17 6/17 8/17 10/17 12/17
Source: FactSet Research Systems, Inc., Federal Reserve
The blue bars in Chart 4 show the path of the federal funds rate over the next
three years given by federal funds futures contracts.4 The orange dots indicate
the median FOMC projection, the red dots are the fifth highest of the 17 FOMC
member forecasts, and the green dots are the fifth lowest among the FOMC
projections for that date. The difference between the fifth highest and lowest
forecasts shows the range of opinion among the nine members that might be
considered the core of the committee. It must be noted, however, that we can
only guess at who contributed each dot and that only 10 of the 17 have a
vote at any one time.5
It is clear from Chart 4 that the FOMC expects to be much more aggressive in
raising the federal funds rate than is priced into the market. Using the median
forecast, the Fed expects to hike the rate to about 1.38% by the end of 2015
whereas the market is pricing in a move to only 0.78%. The gap is even bigger by
the end of 2016, 2.88% versus 1.87%. By the end of 2017 the Fed expects to have
reached 3.75%, which it considers to be the appropriate rate in the longer run. In
contrast, the market expects the rate to be roughly 1.0% lower at that point.6
What does this mean for our bond market outlook? The fact that the market is
pricing in a much less aggressive path for monetary policy than the Fed is signaling
means that bond prices will fall if and when market expectations come more into
alignment with the Fed’s guidance. Since it is rarely a good idea to bet against
those who have the power to make the decision, the bond market is clearly
vulnerable.
Cornerstone Macro has estimated that if market expectations realigned with the
Fed’s projections, the 10-year Treasury note yield would rise about 0.50% to
3.10%; the 5-year yield, about 0.60% to 2.45%; and the 2-year yield, about
0.30% to 0.85%.7 Since the 10-year Treasury yield started the year only slightly
4
5
6
7
6
The longest contract as of this writing matures in August 2017. The gray bars in the chart reflect extrapolating the curve
out to the end of 2017 for comparison with the FOMC forecasts for that date.
There are supposed to be 7 governors, who always vote, and 12 regional presidents, 5 of whom are voting members in
any given year. However, there are 2 vacancies among the governors now.
It is interesting to note that the market’s view is roughly one rate hike below that of the fifth lowest FOMC forecast at
each horizon.
Roberto Perli, “What’s Next for Rates After the FOMC?,” Cornerstone Macro, September 19, 2014.
below 3.1%, we can infer that this would probably cause bonds to give back their
year-to-date gains, implying perhaps a 3.5% loss for the Barclays Aggregate index.
Chart 5
Market Implied Path of Treasury Yields
4.00
3.50
Yields (Percent)
3.00
2.50
2.00
1.50
1-Month
1.00
5-Year
0.50
10-Year
0.00
0
3
6
9
12
15
18
21
24
Horizon: Months
27
30
33
36
39
42
Source: FactSet Research Systems, Inc., Federal Reserve
If the Fed’s projected path would take the 10-year yield to 3.1% immediately,
what do the market’s expectations imply for the path of Treasury yields? Chart 5
shows what is priced in for the 1-month T-bill rate, the 5-year note yield, and
the 10-year note yield. These curves are derived such that notes of every maturity
will earn the same return as rolling T-bills if rates follow the path implied by the
current yield curve. If rates rise faster (slower), the return will be less than
(greater than) on T-bills.
According to Chart 5, market pricing implies that the 10-year yield will not move
above 3.0% until about March 2016 and will not approach 3.5% until early
2018. Notwithstanding the impact of the global forces discussed above, we think
these levels are likely to be reached sooner, perhaps substantially sooner. Hence,
we remain underweight duration.
A Look at Global Equity Valuations
With various equity indexes setting new record highs, the question naturally
arises as to whether stocks are expensive. The simple answer, we think, is yes,
equities as a whole are on the expensive side. They are certainly not cheap. But as
we argued above, neither are bonds. Credit spreads are very tight, so reaching for
yield is no panacea. And, of course, cash earns virtually nothing these days. So
among publicly traded, liquid asset classes, we think stocks still look good. As
one of the research services we follow puts it, there is no alternative. So let’s
take a brief look at what seems to be most expensive and what looks to be
relatively cheap.
Starting with the United States, Table 2 (page 8) shows the price adjustment that
would be required to bring each of the nine standard “size/style boxes” back to
a neutral valuation based on historical valuation of that size/style category.8
Market prices in all nine of the categories would have to decline to bring them
into alignment with their respective historical valuations. In terms of size, small
cap appears relatively expensive. This is especially apparent within the Value style.
Within large cap, Growth looks quite expensive relative to both Value and Core.
8
The valuation metric is a simple, equally weighted average of the price/sales, price/trailing earnings, and price/forward
earnings ratios relative to their respective 10-year average values. The table reflects the S&P500®, S&P MidCap 400®,
and S&P SmallCap 600®.
7
Table 2
U.S. Equity Size/Style Boxes — Change to Reach Neutral Valuation
Looking below the surface, the
main driver of these valuation
differentials appears to be sales.
Profit margins in the United States
Source: FactSet Research Systems, Inc., PNC
are generally high, but with the
exception of the large cap and mid cap Value categories, stock prices are quite
high relative to sales.
Large Cap
Mid Cap
Small Cap
Value
-7.6%
-7.5
-15.3
Core
-13.8%
-16.2
-19.6
Growth
-20.4%
-13.0
-17.7
Table 3 applies this same metric across developed and emerging markets and
regional subcomponents. The obvious message from this table is that emerging
markets appear inexpensive in both absolute terms and relative to developed
markets. Within emerging markets, all of the regions appear inexpensive with the
exception of Latin America. The worst valuations appear to be within the
European Monetary Union.
Table 3
Equity Valuations by Region — Price Change to Reach Neutral Valuation
Since developed and
emerging markets
have different
EM Europe
25.3%
EM Far East
17.8
sector/industry
EM Asia
18.0
compositions, it is
EM
17.7
useful
to examine
Far East
-12.6
EM Latin America 15.0
whether the emerging
EAFE
-11.8
markets still appear
United States
-20.2
inexpensive on an
Europe
-21.5
EMU
-10.6
apples-to-apples
basis. To do this we
Source: FactSet Research Systems, Inc., MSCI, PNC
look at the median
price/earnings (PE) ratio by sector. We use the median rather than an average in
order to reduce the impact of a few outliers and/or dominant (large) companies.
Sales
Price to:
Trailing
Earnings
28.5%
9.4
8.8
6.2
21.9
-10.9
-7.8
-8.1
-8.5
-18.5
Forward
Earnings
24.2%
4.9
4.2
0.7
12.2
-17.2
-10.6
-10.4
-10.6
-18.9
Composite
Metric
26.0%
10.7
10.3
8.2
7.2
-4.4
-10.1
-13.5
-16.0
-18.5
Table 4
Median Price-to-Earnings Ratios by Sector and Subindex
Global
Composite
Developed
Large Cap
Median PE
Emerging
Markets
Frontier
Markets
Median PE – Global Composite Median PE
Sector
Health Care
Consumer Staples
Information Technology
Industrials
Consumer Discretionary
Telecommunication Services
Materials
Utilities
Energy
Financials
23.8
22.3
19.9
18.4
17.8
17.7
17.1
16.3
15.1
13.8
1.6
0.0
2.4
2.0
1.5
0.0
2.8
0.3
5.3
1.5
1.4
-2.6
3.5
1.0
1.3
5.6
1.6
1.8
3.3
1.8
5.7
3.3
-2.3
-0.6
1.7
0.1
-0.5
-2.4
-2.1
-1.1
1.9
11.9
*
-6.7
-6.2
-4.7
-3.3
2.7
-6.0
-0.9
All
17.7
2.0
-0.5
-2.4
-3.6
Source: FactSet Research Systems, Inc., MSCI, PNC
8
Developed
Small Cap
The first numeric column of Table 4 (page 8) shows the median PE ratio for each
sector in a global composite index including developed market large cap, developed
market small cap, emerging markets, and frontier markets. The remaining columns
show the median PE within a sector for each subindex minus the median across
all markets. A positive value in these columns indicates that this sector is more
expensive within this subindex than it is globally. Although emerging market
equities and frontier market equities in general sell at a discount to developed
markets, there are sectors in which they sell at premium multiples. Health Care,
Consumer Staples, and Consumer Discretionary stocks appear to command a
premium in the emerging markets. Consumer Staples are especially expensive in
the frontier markets whereas Industrials, Consumer Discretionary, and Energy
appear to offer discounts.
The valuations within emerging and frontier markets reflect several countries
whose valuations appear to be depressed by significant geopolitical and economic
issues. Among these are Argentina (median PE = 5.8), Russia (7.2), Ukraine (8.7),
China (12.5), and Turkey (12.7). In addition, we believe emerging markets remain
vulnerable to the kind of hot money outflows that occurred during the so-called
taper tantrum in 2013 and again in January of this year, although we think the
threat is substantially diminished. Notwithstanding their general attractiveness
from a valuation perspective, we have chosen to remain modestly underweight
emerging markets with a clear preference for actively managed exposure to
these markets.
Additional Comments on our Views and Strategy
As discussed above, we believe both equities and bonds are somewhat expensive
in absolute terms. Based on the belief that fundamentals (for example, earnings)
will continue to improve and the expectation that central banks will not overtighten
policy, we remain fully allocated to equities. On the other hand, we retain a
moderate underweight allocation to bonds offset by overweight allocations to
cash and alternative asset classes.
Within our equity allocations we are modestly underweight emerging markets.
Our offsetting overweight is to U.S. equities, tilted slightly toward small cap and
mid cap stocks. The tilt toward the U.S. and smaller capitalizations within the
United States reflects our belief that U.S. economic fundamentals are stronger
than in other major countries and that smaller capitalization firms should benefit
disproportionately from the domestic economy.
For some time now we have preferred credit risk to duration risk in our fixed
income portfolios. Accordingly, we have had tactical allocations to leveraged
loans and, in more conservative portfolios with larger overall bond allocations,
high-yield bonds and have maintained shorter overall durations. Recently,
however, we reduced our allocations to leveraged loans and made a corresponding
allocation to nondirectional credit strategies in the form of credit-oriented hedge
funds or unconstrained mutual funds. This move does not reflect a belief that a
rash of credit events are on the horizon. However, issuance has been very heavy,
covenants have been getting weaker, and despite some widening this summer,
spreads remain tight. Hence, we believe it is prudent to reduce directional credit
exposure. In addition, we believe that tight spreads should provide good
opportunities for long/short credit managers to exploit situations in which
specific credits are not appropriately differentiated in the market.
9
After a surprisingly strong first half of the year, which we ascribe to weather,
geopolitics, and market-specific conditions, commodity prices came under
pressure in the third quarter. As is often the case, weakness in commodity prices
coincided with strength in the dollar. We expect the dollar to remain firm, if not
appreciate further, as the Fed moves toward tighter policy and the ECB and BOJ
maintain or intensify stimulus. This should weigh on commodity prices and also
help keep inflation in check. Because we are not concerned about inflation, we
remain underweighted in inflation-protected bonds and retain only a small
strategic commodity position.
10
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Pepper Pike, Ohio 44124
Detroit
755 West Big Beaver Road
Troy, Michigan 48084
Pittsburgh
249 Fifth Avenue
Pittsburgh, Pennsylvania 15222
Washington, DC
800 17th Street NW
Washington, D.C. 20006
Wilmington
300 Delaware Avenue
Wilmington, Delaware 19801
11
Balanced Portfolio
Asset Allocation
Baseline
Tactical
Stocks 50%
Stocks 50%
Bonds 17.5%
Bonds 25%
Alternative 25.5%
Alternative 20%
Cash 7%
Cash 5%
Equity Allocation
Baseline
Tactical
U.S. 74%
75%
U.S. 70%
Developed
International
20%
Developed
International
20%
16%
5%
Emerging Market 10%
Emerging Market 10%
Alternative Assets
Tactical
Baseline
Private Equity 35%
Private Equity 35%
Real Estate 20%
Real Estate 20%
Commodities/
Real Assets
20%
Commodities/
Real Assets 8%
Hedge Funds 25%
Fixed Income
Baseline
Core Municipals 100%
Hedge Funds 37%
Tactical
Short-term municipals 60%
Core municipals 40%
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