compelling wealth management conversations -...

Compelling Wealth Management Conversations

Not FDIC InsuredMay Lose ValueNot Bank Guaranteed

Q3 2015

Over the long term, the stock market historically reflects the objective performance of the macroeconomy and the individual companies within that economy. Over the short term, however, the stock market often reflects human emotion, perceptions and misperceptions.

This book is designed to help provide philosophical and historical context and perspective, to help clients keep “buckled in” and stay the course during uncertain times, while also providing a framework to help identify the best current opportunities.

Table of Contents

The Principles of Sound Investing 3Historical Context 22Current Opportunities 48Positioning Your Practice 69

The Principles of Sound Investing Historical ContextCurrent OpportunitiesPositioning Your Practice

Table of Contents

The Principles of Sound Investing 3Historical Context 21Current Opportunities 46Positioning Your Practice 68

Speaker Notes

When you listen to financial news commentators, it can feel as though financial markets and investment decisions are capricious and arbitrary. Over the short term, that might actually be accurate. However, over the long term, there are universal investment principles which will ultimately govern your success and which guide all of our wealth management and investment decisions.

Adhering to principles like balance, consistency and courage, help keep us on course and provide a wonderful buffer from the constant drone of crisis and fear promoted by the majority of news and media outlets.

Consistency Courage Balance

The Principles of Sound Investing

The Princip

les of S

ound Investing

Consistency Courage Balance

The Principles of Sound Investing

The Princip

les of S

ound Investing

Speaker Notes

One of the most powerful principles is consistency; yet ironically, in today’s society it is the most “consistently” violated.

• Yo-yo dieting?

• A hit-or-miss exercise regimen?

• Inconsistent prospecting?

• A reactive investment strategy?

All of these examples have one thing in common: they each violate the principle of consistency. We work closely with our clients to establish an overarching and highly personalized wealth management and investment strategy. We then exercise the principles of discipline and consistency in their long-term application, knowing that this gives us the best opportunity to achieve long-term success for our clientele.

The Principle of Consistency

“Everyone has a plan until they get hit.” —Joe Louis

4

The Principle of Consistency

“Everyone has a plan until they get hit.” —Joe Louis

4

Speaker Notes

The #1 threat to your investment portfolio is unbridled emotion. More money is lost due to fear and greed (how we respond) than all of the financial, economic and geopolitical events combined. It’s not the events themselves but our response to the events that can cause the greatest harm.

• How harmful? The average investor doesn’t come close to beating the S&P 500 Index and barely outpaces the rate of inflation.

What Has the Greatest Impact on Investment Results?

2.5%2.9% 2.4%

5.7%5.7%5.8%

9.2%

10.2%

REITs GoldU.S. Stocks InternationalEquities

Government-Related Bonds

Homes Inflation Average Investor

Source: Bloomberg, 12/31/13. Average asset allocation investor return is based on an analysis by DALBAR, Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Indices shown are as follows: REITs are represented by the FTSE NAREIT Equity REIT Index, Gold is represented by the U.S. dollar spot price of one troy ounce, Homes are represented by U.S. existing home sales median price, inflation is represented by the Consumer Price Index. U.S. stocks are represented by the S&P 500 Index, international equities are represented by the MSCI EAFE Index, government-related bonds are represented by the Barclays U.S. Aggregate Bond Index. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

20-Year Annualized Returns % (1994–2013)

5

Investment Returns Investor Behavior

What Has the Greatest Impact on Investment Results?

2.5%2.9% 2.4%

5.7%5.7%5.8%

9.2%

10.2%

REITs GoldU.S. Stocks InternationalEquities


Homes Inflation Average Investor

Source: Bloomberg, 12/31/13. Average asset allocation investor return is based on an analysis by DALBAR, Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Indices shown are as follows: REITs are represented by the FTSE NAREIT Equity REIT Index, Gold is represented by the U.S. dollar spot price of one troy ounce, Homes are represented by U.S. existing home sales median price, inflation is represented by the Consumer Price Index. U.S. stocks are represented by the S&P 500 Index, international equities are represented by the MSCI EAFE Index, government-related bonds are represented by the Barclays U.S. Aggregate Bond Index. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

20-Year Annualized Returns % (1994–2013)

5

Investment Returns Investor Behavior

Speaker Notes

Be wary of the herd mentality. From the tech boom to the so-called fear trade, investors often position themselves poorly at the most inopportune times.

Here’s an analogy that illustrates the single greatest challenge people face when dealing with the stock market:

How do people respond when there’s a significant markdown in prices at their favorite department store? They run into the store searching for bargains.

How do they respond when there is a significant markdown in prices in the stock market? They often run out of the “store” and don’t return until prices get back to “full retail.”

6

–50

50

0$B$B

–50

50

0

Tech Boom

Fear Trade

201520142013201220112010200920082007200620052004200320022001200019991998199719961995

Global Equity Mutual Funds

Global Fixed Income Mutual Funds

The Herd Is Often Wrong: “If everyone is thinking alike, then somebody isn’t thinking.” —General George S. Patton

Source: Investment Company Institute, 5/31/15. For illustrative purposes only. The mention of specific company names is not intended as investment advice.

SALE!50% OFF

SALE!50% OFF

Department Store

Stock Market

SALE!50% OFF

SALE!50% OFF

Department Store

Stock Market

6

–50

50

0$B$B

–50

50

0

Tech Boom

Fear Trade

201520142013201220112010200920082007200620052004200320022001200019991998199719961995

Global Equity Mutual Funds

Global Fixed Income Mutual Funds

The Herd Is Often Wrong: “If everyone is thinking alike, then somebody isn’t thinking.” —General George S. Patton

Source: Investment Company Institute, 5/31/15. For illustrative purposes only. The mention of specific company names is not intended as investment advice.

SALE!50% OFF

SALE!50% OFF

Department Store

Stock Market

SALE!50% OFF

SALE!50% OFF

Department Store

Stock Market

Speaker Notes

Now before we get started let’s agree that no one has a crystal ball. I don’t have one, you don’t have one and none of the pundits have one either. And worse than not having a crystal ball is acting as though you do.

• The most dramatic example of the folly of market timing is the chart on the left. Missing the 10 best days over that 20-year span of time drops your investment return by almost half!

• One well-known strategy is “sell in May and go away.” Let’s see how that has worked out:

• A $1,000 investment held in the stock market from January 1926 to December 2014 would now be worth $5,305,992.

• Incorporating the “sell in May and go away” would have turned that $5,305,992 into $1,268,814. So much for that forecasting technique!

No One Has a Crystal Ball, Yet Often People Act as Though They Do

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

$6,000,000

1926 19591937 1948 19811970 20031992 2014

The Truth About “Sell in May and Go Away”Growth of $1,000: S&P 500 Index buy and hold vs. selling every May, going to T-bills, and buying again in November

$5,305,992

Buy and Hold

$1,268,814

Sell in May and Buy in November

May

AprilA rp

Source: Morningstar Direct, as of 12/31/14. For illustrative purposes only and is not intended as investment advice. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results. 7

Missed60

Best Days

Missed50

Best Days

Missed40

Best Days

Missed30

Best Days

Missed10

Best Days

FullyInvested

Missed20

Best Days

AnnualizedReturn4.41%

$236,864


$474,257


$149,674

AnnualizedReturn–0.12%$97,651 Annualized

Return–2.03%$66,416

AnnualizedReturn

–3.76%$46,486

AnnualizedReturn

–5.36%$33,244

Missing Even the 10 Best Days in the Market Reduced Returns by Almost 50% in the Last 20 YearsS&P 500 Index: Annualized returns and growth of $100,000 investment (1994–2014)

No One Has a Crystal Ball, Yet Often People Act as Though They Do

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

$6,000,000

1926 19591937 1948 19811970 20031992 2014

The Truth About “Sell in May and Go Away”Growth of $1,000: S&P 500 Index buy and hold vs. selling every May, going to T-bills, and buying again in November

$5,305,992

Buy and Hold

$1,268,814

Sell in May and Buy in November

May

AprilA rp

Source: Morningstar Direct, as of 12/31/14. For illustrative purposes only and is not intended as investment advice. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results. 7

Missed60

Best Days

Missed50

Best Days

Missed40

Best Days

Missed30

Best Days

Missed10

Best Days

FullyInvested

Missed20

Best Days


$236,864


$474,257


$149,674

AnnualizedReturn–0.12%$97,651 Annualized

Return–2.03%$66,416

AnnualizedReturn

–3.76%$46,486

AnnualizedReturn

–5.36%$33,244

Missing Even the 10 Best Days in the Market Reduced Returns by Almost 50% in the Last 20 YearsS&P 500 Index: Annualized returns and growth of $100,000 investment (1994–2014)

Speaker Notes

Is the stock market like a Vegas casino? Actually, no.

• Notice that the odds of winning any of the most popular games in Vegas never reach 50%; for comparison’s sake, over rolling monthly one-year holding periods the stock market has been up 75.1% of the time.

• Over rolling monthly 15-year periods (i.e., January 1926 to December 1940, February 1926 to January 1941, all the way up to January 1999 to December 2014), stocks are up 99.8% with the only two down periods coming during the Great Depression.

• Ironically, the longer you sit at a table in Vegas the worse your odds get, because as we know “the house always wins.”

Is the Market Really Like a Casino?

40.0%

48.8%

44.7%

46.5%

48.0%

46.6%

48.6%

23.0%

POKER

CRAPS

BLACKJACKRO

ULE

TTE

SLOTS

BACCARAT

LET IT RIDE

KE

NO

94.4%99.8%

87.1%82.9%

75.1%

1-Year 3-Year 5-Year

Rolling Monthly Returns

10-Year 15-Year

Percentage of Years U.S. Stocks Posted Positive Returns Over Rolling Periods (1926–2014)

Odds of Winning at Various Casino Games

Source: Morningstar Direct, 12/31/14. Chart is for illustrative purposes only and is not intended as investment advice. U.S. stocks are represented by the S&P 500 Index. Source of Casino odds: Wizard of Odds. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results. 8

Is the Market Really Like a Casino?

40.0%

48.8%

44.7%

46.5%

48.0%

46.6%

48.6%

23.0%

POKER

CRAPS

BLACKJACKRO

ULE

TTE

SLOTS

BACCARAT

LET IT RIDE

KE

NO

94.4%99.8%

87.1%82.9%

75.1%

1-Year 3-Year 5-Year


10-Year 15-Year

Percentage of Years U.S. Stocks Posted Positive Returns Over Rolling Periods (1926–2014)

Odds of Winning at Various Casino Games

Source: Morningstar Direct, 12/31/14. Chart is for illustrative purposes only and is not intended as investment advice. U.S. stocks are represented by the S&P 500 Index. Source of Casino odds: Wizard of Odds. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results. 8

Speaker Notes

We often hear that equity returns are being manufactured by policymakers.

Stocks reflect partial ownership in real companies, with real products and services, and real earnings. The performance of those stocks simply reflect the performance of those companies over the long term.

• Over the short term, those stocks can reflect all kinds of external circumstances, but from 1935 to 2014 there is 0.94 correlation between the S&P 500 Index and S&P 500 Index earnings.

Stocks Go Up Because Earnings Improve

0

400

800

1,200

1,600

2,000

0

20

40

60

80

100

$120

Correlation

0.94

2014

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

1945

1940

1935

Stocks are partial ownership, in real companies with real revenue

Left Axis

Right AxisS&P 500 Earnings

S&P 500 Index

Source: Bloomberg, as of 12/31/14. Company logos are for illustrative purposes only and are not intended as investment advice. The mention of specific companies does not constitute a recommendation on behalf of any fund or OppenheimerFunds, Inc. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on page 73. Past performance does not guarantee future results. 9

S&P 500 Index and S&P 500 Index Earnings

S&

P 5

00 In

dex S

&P

500 Index Earnings P

er Share

Stocks Go Up Because Earnings Improve

0

400

800

1,200

1,600

2,000

0

20

40

60

80

100

$120

Correlation

0.94

2014

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

1950

1945

1940

1935

Stocks are partial ownership, in real companies with real revenue

Left Axis

Right AxisS&P 500 Earnings

S&P 500 Index

Source: Bloomberg, as of 12/31/14. Company logos are for illustrative purposes only and are not intended as investment advice. The mention of specific companies does not constitute a recommendation on behalf of any fund or OppenheimerFunds, Inc. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on page 73. Past performance does not guarantee future results. 9

S&P 500 Index and S&P 500 Index Earnings

S&

P 5

00 In

dex S

&P

500 Index Earnings P

er Share

Speaker Notes

There are two ways to go through life, faith or fear. We choose faith: faith in the long-term viability of a free people, under the rule of law, with private property ownership, to always improve their society. We have only been right for 6,000 years of recorded history.

And while this historical perspective informs and guides all of our investment decisions, maintaining that disciplined perspective often requires that we exercise the principle of courage during times of uncertainty and fear.

The Principle of Courage

“ Courage is rightly esteemed the first of human qualities because it is the quality which guarantees all others.”

—Sir Winston Churchill

10

The Principle of Courage

“ Courage is rightly esteemed the first of human qualities because it is the quality which guarantees all others.”

—Sir Winston Churchill

10

Speaker Notes

Each generation faces challenges that often appear both unique and overwhelming but when viewed through the sobering lens of history we find they are neither.

Today we face any number of challenges which while significant, are no more daunting than:

• A global depression

• Two world wars

• The Cold War

• The assassination of one President and the resignation of another

• 9/11

And yet the market continues its inexorable climb. Why? Because in spite of our shortcomings, the human race is remarkably resilient, as well as masterful inventors and innovators, always striving to make a better place for themselves, their families and their societies.

The most concise description of this iconic mountain chart was captured by the venerable Nick Murray, “all the downs are temporary, all the ups are permanent.”

Every Generation Faces Its Share of Challenges

Sources: Morningstar Direct and Ibbotson, 12/31/14. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

“In the 20th century, the United States endured two world wars...the Depression, a dozen or so recessions and financial panics, oil shocks, a flu epidemic, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” —Warren Buffett, 10/17/08

$1,000,000

$100,000

$10,000

$2,520,387 (Log Scale)

1900 1920 1940 1960 1980 2000 20140

1

2

3

4

5%

Dow Jones Industrial Average: Growth of $10,000, Right AxisDow Jones Industrial Average: Volatility (3-month moving average), Left Axis

11

Dow Jones Industrial Average: Growth of $10,000 and Volatility (1900–2014)

BLACKTUESDAY

TUESDAY, OCTOBER 29, 1929

Crowds gathered on Wall Street as the market took a historical decline.

BY BARABARA SILBERDICK FEINBERG

THE STOCK MARKET CRASH

OF 1929

NEW YORK, OCTOBER 29—Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt ut laoreet dolore mag-na aliquam erat volutpat. Ut wisi enim ad minim veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea commodo consequat. Duis autem vel eum iriure do-lor in hendrerit in vulputate velit esse molestie consequat, vel illum dolore eu feugiat nulla facilisis at vero eros et accumsan et iusto odio dignissim qui blandit prae-

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Every Generation Faces Its Share of Challenges

Sources: Morningstar Direct and Ibbotson, 12/31/14. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

“In the 20th century, the United States endured two world wars...the Depression, a dozen or so recessions and financial panics, oil shocks, a flu epidemic, and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” —Warren Buffett, 10/17/08

$1,000,000

$100,000

$10,000

$2,520,387 (Log Scale)

1900 1920 1940 1960 1980 2000 20140

1

2

3

4

5%

Dow Jones Industrial Average: Growth of $10,000, Right AxisDow Jones Industrial Average: Volatility (3-month moving average), Left Axis

11

Dow Jones Industrial Average: Growth of $10,000 and Volatility (1900–2014)

BLACKTUESDAY

TUESDAY, OCTOBER 29, 1929

Crowds gathered on Wall Street as the market took a historical decline.

BY BARABARA SILBERDICK FEINBERG

THE STOCK MARKET CRASH

OF 1929

NEW YORK, OCTOBER 29—Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh euismod tincidunt ut laoreet dolore mag-na aliquam erat volutpat. Ut wisi enim ad minim veniam, quis nostrud exerci tation ullamcorper suscipit lobortis nisl ut aliquip ex ea commodo consequat. Duis autem vel eum iriure do-lor in hendrerit in vulputate velit esse molestie consequat, vel illum dolore eu feugiat nulla facilisis at vero eros et accumsan et iusto odio dignissim qui blandit prae-

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Speaker Notes

Market corrections happen fairly often and even in the good years, including fairly significant intra-year declines in recent strong-return years like 2010 and 2012.

• From 1981 to 2014, the S&P 500 Index has experienced at least a 5% intra-year decline (i.e., loss) in every year but one. The average intra-year decline over the past 34 years has actually been 14.4%.

• But notice, equities have still posted positive returns in 26 of those last 34 years with annualized total returns over that period of over 11%.

So let’s take a page from Warren Buffet, when asked by a CNBC personality in 2009 how it felt to have “lost” 40% of his lifetime accumulation of capital, he said it felt about the same as it had the previous three times it had happened.

The bottom line is, market corrections do not equal a financial loss… unless you sell.

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Volatility Does Not Equal a Financial Loss Unless You Sell

S&P 500 Index Calendar Year Price Return (%) S&P 500 Index Largest Intra-Year Price Decline (%)

“ I’ve lived through some terrible things in my life, some of which have actually happened.”

—Mark Twain

–9

–17

–7 –7–8

–26

–19

–10

–6–9

–13

–8

–20

–8–6

–19

–32

–10

–18

–7

–33

–8 –8

–3–6

–11

–26

–8

–5

–12

–47

–2

–10

3

9

23

13 13

30

15 15

–7

20

4

27

–23

4

–10

17

2

26 27

34

26

31

–13

14

7

20

26

–38

01

12

Annualized Total Return

+11.1%

Average Intra-Year

Decline

–14.4%

Source: Bloomberg, 12/31/14. Calendar-year returns are price returns, meaning that they do not include the reinvestment of dividends. The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

–14 –14 –16

12

11

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Volatility Does Not Equal a Financial Loss Unless You Sell

S&P 500 Index Calendar Year Price Return (%) S&P 500 Index Largest Intra-Year Price Decline (%)

“ I’ve lived through some terrible things in my life, some of which have actually happened.”

—Mark Twain

–9

–17

–7 –7–8

–26

–19

–10

–6–9

–13

–8

–20

–8–6

–19

–32

–10

–18

–7

–33

–8 –8

–3–6

–11

–26

–8

–5

–12

–47

–2

–10

3

9

23

13 13

30

15 15

–7

20

4

27

–23

4

–10

17

2

26 27

34

26

31

–13

14

7

20

26

–38

01

12

Annualized Total Return

+11.1%

Average Intra-Year

Decline

–14.4%

Source: Bloomberg, 12/31/14. Calendar-year returns are price returns, meaning that they do not include the reinvestment of dividends. The index is unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

–14 –14 –16

12

11

Speaker Notes

1-Year 3-Year 5-Year 10-Year 15-Year

$28.0M

Small-CapStocks

$4.8MLarge-CapStocks

$126,000GovernmentBonds

$62,000Gold

$21,000Real Estate

$20,000Government Bills

$13,000Inflation

85%83%

71%68%64%

Stocks Outperform Most Asset Classes Over Time

13

Percentage of Time U.S. Stocks Outperformed Long-Term Government Bonds Over Rolling Periods (1926–2014)

Source: Morningstar Direct, 12/31/14. Small-Cap Stocks are represented by the total return for the SBBI U.S. Small Company Stock Index. Large-Cap Stocks are represented by the SBBI U.S. Large Company Stock Index. Government bonds are represented by the SBBI U.S. Long-Term Government Bond Index. Gold is represented by the U.S. dollar spot price of one troy ounce. Real estate is represented by the Shiller Real Home Price Index. Government bills are represented by the SBBI U.S. (30-day) Treasury Bills. Inflation is represented by the Consumer Price Index. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

Growth of $1,000 (1926–2014)


• Stocks have outperformed most asset classes, outperforming bonds over rolling monthly 15-year periods from 1926–2014 (i.e., January 1926 to December 1940, February 1926 to January 1941, all the way up to January 1999 to December 2014) 85% of the time.

• For investors with a growth objective, there are few (if any) better alternatives to stocks.

1-Year 3-Year 5-Year 10-Year 15-Year

$28.0M

Small-CapStocks

$4.8MLarge-CapStocks

$126,000GovernmentBonds

$62,000Gold

$21,000Real Estate

$20,000Government Bills

$13,000Inflation

85%83%

71%68%64%

Stocks Outperform Most Asset Classes Over Time

13

Percentage of Time U.S. Stocks Outperformed Long-Term Government Bonds Over Rolling Periods (1926–2014)

Source: Morningstar Direct, 12/31/14. Small-Cap Stocks are represented by the total return for the SBBI U.S. Small Company Stock Index. Large-Cap Stocks are represented by the SBBI U.S. Large Company Stock Index. Government bonds are represented by the SBBI U.S. Long-Term Government Bond Index. Gold is represented by the U.S. dollar spot price of one troy ounce. Real estate is represented by the Shiller Real Home Price Index. Government bills are represented by the SBBI U.S. (30-day) Treasury Bills. Inflation is represented by the Consumer Price Index. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

Growth of $1,000 (1926–2014)


Speaker Notes

“When there is blood on the street, I am buying”—Baron Rothschild

1 2 3 4 5 6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

0

100%

200%

0

100%

200%

0

500%

1,000%

1,500%

300%

400%443% 175%

500%

1,165%3,891%

0

1,000%

2,000%

3,000%

4,000%

5,000%

Years after crisis

Years after crisis

Years after crisis

Years after crisis

December 1994 November 1997

August 1998 December 2001

MSCI Mexico Index MSCI Korea Index

MSCI Russia Index MSCI Argentina Index

Source: Bloomberg, 12/31/14. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results. 14

Cumulative Monthly Returns

An old adage says to buy when there is blood in the streets. This is often easier said than done and of course does not have a perfect track record. Still, a key tenet in the principle of courage is to be greedy when others are fearful.

As the charts show, investing in markets when there is blood in the streets (figuratively in these high profile financial crises but more literally in other cases) has often proved to be sage investment practice.

“When there is blood on the street, I am buying”—Baron Rothschild

1 2 3 4 5 6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

1 2 3 4 5 6 7 8 9 10

0

100%

200%

0

100%

200%

0

500%

1,000%

1,500%

300%

400%443% 175%

500%

1,165%3,891%

0

1,000%

2,000%

3,000%

4,000%

5,000%

Years after crisis

Years after crisis

Years after crisis

Years after crisis

December 1994 November 1997

August 1998 December 2001

MSCI Mexico Index MSCI Korea Index

MSCI Russia Index MSCI Argentina Index

Source: Bloomberg, 12/31/14. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results. 14

Cumulative Monthly Returns

Speaker Notes

Forget About the Price, Focus on Income

15

“The most powerful force in the universe is compound interest.” —Albert Einstein

$100,000 Investment in Barclays High Yield Bond Index (1989–2014) $100,000 Investment in Barclays Municipal Bond Index (1981–2014)

0100,000

300,000

500,000

700,000

900,000

1,100,000

$1,300,000

0

100,000

300,000

500,000

700,000

$900,000

More than 101% of the return has come from the income!

98% of the return has come from the income!

$816,740

Price Return Total Return Price Return Total Return

$1,191,386

201420092004199919941989 201420112008200520021999199619931990198719841981

Source: Bloomberg, 12/31/14. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

Albert Einstein said, “The most powerful force in the universe is compound interest.” Notice the commonality between these two charts:

• Bond prices remain relatively steady over time, in spite of the inevitable crises that periodically hit the financial system. (As the old saying goes, “the difference between bonds and men…is that bonds ultimately mature.”)

• The return from both categories of bonds comes from the income, not from price appreciation.

Forget About the Price, Focus on Income

15

“The most powerful force in the universe is compound interest.” —Albert Einstein

$100,000 Investment in Barclays High Yield Bond Index (1989–2014) $100,000 Investment in Barclays Municipal Bond Index (1981–2014)

0100,000

300,000

500,000

700,000

900,000

1,100,000

$1,300,000

0

100,000

300,000

500,000

700,000

$900,000

More than 101% of the return has come from the income!

98% of the return has come from the income!

$816,740

Price Return Total Return Price Return Total Return

$1,191,386

201420092004199919941989 201420112008200520021999199619931990198719841981

Source: Bloomberg, 12/31/14. The charts are hypothetical examples which are shown for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

Speaker Notes

16

The Principle of Balance

“ Life is about balance. The good and the bad. The highs and the lows. The piña and the colada.”

—Ellen DeGeneres

Balance is a universal principle that works wherever it is applied. For example, a balanced nutritional program is better than an unbalanced one; a balanced exercise program is better than an unbalanced one; and a balanced life is better than an unbalanced life.

This same principle of balance has historically worked in portfolio management. Adding diversity of style, geography and asset class has historically muted volatility, and made it easier for our clients to remain “buckled in.”

16

The Principle of Balance

“ Life is about balance. The good and the bad. The highs and the lows. The piña and the colada.”

—Ellen DeGeneres

Speaker Notes

Source: FactSet, 5/31/15. High Yield is represented by the JPMorgan Domestic High Yield Index. U.S. Aggregate is represented by the Barclays Aggregate Bond Index. REITs are represented by the FTSE NAREIT Equity REITs Index. MLPs are represented by the Alerian MLP Index. International Stocks are represented by the MSCI EAFE Index. EM is represented by the MSCI EM Index. Commodities are represented by the Bloomberg Commodity Index. Small-Cap Stocks are represented by the total return for the Russell 2000 Index. Large-Cap Stocks are represented by the Russell 1000 Index. Index definitions can be found on page 73. Diversification does not guarantee profit or protect against loss. Past performance does not guarantee future results.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTDEmerging Markets

55.82

REITs 31.58

Emerging Markets

34.00

REITs 35.06

Emerging Markets

39.42

U.S. Aggregate

5.24

Emerging Markets

78.51

MLPs 35.85

MLPs 13.88

Emerging Markets

18.22

U.S. Small Cap

38.82

REITs 30.14

International Stocks

8.93

U.S. Small Cap

47.25

Emerging Markets

25.55

Commodities 21.36

Emerging Markets

32.14

Commodities 16.23

High Yield –26.55

MLPs 76.41

REITs 27.96

REITs 8.29

REITs 18.06

U.S. Large Cap

33.11

U.S. Large Cap

13.24

Emerging Markets

5.78

MLPs 44.54

International Stocks 20.25



MLPs 12.72

U.S. Small Cap

–33.79

High Yield 58.17

U.S. Small Cap

26.85

U.S. Aggregate

7.84


MLPs 27.58

U.S. Aggregate

5.97

High Yield 4.18


U.S. Small Cap

18.33

REITs 12.16

MLPs 26.07


Commodities –35.65


Emerging Markets

18.88

High Yield 6.97

U.S. Large Cap

16.42


U.S. Small Cap

4.89

U.S. Small Cap

3.98

REITs 37.13

MLPs 16.67

MLPs 6.32

U.S. Small Cap

18.37

U.S. Aggregate

6.97

MLPs –36.91

U.S. Large Cap

28.43

Commodities 16.83

U.S. Large Cap

1.50

U.S. Small Cap

16.35

High Yield 8.23

MLPs 4.80

U.S. Large Cap

3.65

U.S. Large Cap

29.89

U.S. Large Cap

11.40

U.S. Large Cap

6.27

U.S. Large Cap

15.46

U.S. Large Cap

5.77

U.S. Large Cap

–37.60

REITs 27.99

U.S. Large Cap

16.10

U.S. Small Cap

–4.18

High Yield 15.39

REITs 2.47

High Yield 2.21

U.S. Aggregate

1.00

High Yield 26.80

High Yield 11.10

U.S. Small Cap

4.55

High Yield 11.56

High Yield 2.58

REITs –37.73

U.S. Small Cap

27.17

High Yield 14.74

International Stocks –12.14

MLPs 4.80

U.S. Aggregate

–2.02

Emerging Markets

–2.19

REITs –1.38

Commodities 23.93

Commodities 9.15

U.S. Aggregate

2.43

U.S. Aggregate

4.33

U.S. Small Cap

–1.57


Commodities 18.91


7.75


U.S. Aggregate

4.21

Emerging Markets

–2.60


MLPs –2.97

U.S. Aggregate

4.10

U.S. Aggregate

4.34

High Yield 2.42

Commodities 2.07

REITs –15.69

Emerging Markets –53.33

U.S. Aggregate

5.93

U.S. Aggregate

6.54


Commodities –1.06

Commodities –9.52


Commodities –3.23

Asset Classes Move In and Out of Favor

Annual Returns % (2003–YTD 2015)

17

Diversification across asset classes prevents investors from chasing last year’s performance.

As the chart illustrates, what worked last year doesn’t necessarily work in the subsequent years. Oftentimes, last year’s outperformer falls to the bottom of the pack and vice versa.

Source: FactSet, 5/31/15. High Yield is represented by the JPMorgan Domestic High Yield Index. U.S. Aggregate is represented by the Barclays Aggregate Bond Index. REITs are represented by the FTSE NAREIT Equity REITs Index. MLPs are represented by the Alerian MLP Index. International Stocks are represented by the MSCI EAFE Index. EM is represented by the MSCI EM Index. Commodities are represented by the Bloomberg Commodity Index. Small-Cap Stocks are represented by the total return for the Russell 2000 Index. Large-Cap Stocks are represented by the Russell 1000 Index. Index definitions can be found on page 73. Diversification does not guarantee profit or protect against loss. Past performance does not guarantee future results.

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTDEmerging Markets

55.82

REITs 31.58

Emerging Markets

34.00

REITs 35.06

Emerging Markets

39.42

U.S. Aggregate

5.24

Emerging Markets

78.51

MLPs 35.85

MLPs 13.88

Emerging Markets

18.22

U.S. Small Cap

38.82

REITs 30.14


8.93

U.S. Small Cap

47.25

Emerging Markets

25.55

Commodities 21.36

Emerging Markets

32.14

Commodities 16.23

High Yield –26.55

MLPs 76.41

REITs 27.96

REITs 8.29

REITs 18.06

U.S. Large Cap

33.11

U.S. Large Cap

13.24

Emerging Markets

5.78

MLPs 44.54




MLPs 12.72

U.S. Small Cap

–33.79

High Yield 58.17

U.S. Small Cap

26.85

U.S. Aggregate

7.84


MLPs 27.58

U.S. Aggregate

5.97

High Yield 4.18


U.S. Small Cap

18.33

REITs 12.16

MLPs 26.07




Emerging Markets

18.88

High Yield 6.97

U.S. Large Cap

16.42


U.S. Small Cap

4.89

U.S. Small Cap

3.98

REITs 37.13

MLPs 16.67

MLPs 6.32

U.S. Small Cap

18.37

U.S. Aggregate

6.97

MLPs –36.91

U.S. Large Cap

28.43

Commodities 16.83

U.S. Large Cap

1.50

U.S. Small Cap

16.35

High Yield 8.23

MLPs 4.80

U.S. Large Cap

3.65

U.S. Large Cap

29.89

U.S. Large Cap

11.40

U.S. Large Cap

6.27

U.S. Large Cap

15.46

U.S. Large Cap

5.77

U.S. Large Cap

–37.60

REITs 27.99

U.S. Large Cap

16.10

U.S. Small Cap

–4.18

High Yield 15.39

REITs 2.47

High Yield 2.21

U.S. Aggregate

1.00

High Yield 26.80

High Yield 11.10

U.S. Small Cap

4.55

High Yield 11.56

High Yield 2.58

REITs –37.73

U.S. Small Cap

27.17

High Yield 14.74


MLPs 4.80

U.S. Aggregate

–2.02

Emerging Markets

–2.19

REITs –1.38

Commodities 23.93

Commodities 9.15

U.S. Aggregate

2.43

U.S. Aggregate

4.33

U.S. Small Cap

–1.57


Commodities 18.91


7.75


U.S. Aggregate

4.21

Emerging Markets

–2.60


MLPs –2.97

U.S. Aggregate

4.10

U.S. Aggregate

4.34

High Yield 2.42

Commodities 2.07

REITs –15.69


U.S. Aggregate

5.93

U.S. Aggregate

6.54


Commodities –1.06

Commodities –9.52


Commodities –3.23

Asset Classes Move In and Out of Favor

Annual Returns % (2003–YTD 2015)

17

Speaker Notes

Global

Countries Move In and Out of FavorReal Annualized Returns % (by decade, 1910–2010)

Sources: Morningstar, Dimon-Marsh-Staunton Global Indices. Study goes through 2010. The DMS Global and Country-Specific Indices measure the long-run performance of stocks in 20 countries and three global regions around the world. Index definitions can be found on page 73. Past performance does not guarantee future results.

1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

Japan8.69

Australia21.27

South Africa13.64

U.S.3.96

Germany35.97

South Africa13.10

Japan9.24

Japan21.09

U.S.14.24

South Africa11.28

Spain–0.21

Canada 15.64

Japan8.51

Canada3.12

Japan33.65

Japan12.96

South Africa 7.15

Spain17.72

UK11.76

Australia9.59

Australia–0.57

U.S.14.38

Australia6.36 0.26 Italy

21.61Spain11.92

France3.09

Italy15.55

Europe10.47

Spain7.54

Canada–2.05

Germany13.52

Italy4.89

South Africa –1.26

France18.31

Australia10.53

UK3.03

UK13.75

France9.74

Canada6.41

UK–2.34 11.38 UK

3.15Germany

–1.75Europe18.10

UK6.01

Germany2.95 13.74 Spain

8.72France

0.83

U.S.–2.46

South Africa 10.41

Canada2.24

Australia–2.18

UK17.80

Canada5.99

Europe1.90

Europe12.79 7.79 Europe

0.63


UK9.94 2.22 Europe

–3.55 16.10 5.91 Canada1.67

France12.60

Germany7.38

Germany0.20

–4.91 Spain9.12

U.S.2.00

UK–4.62

U.S.15.69

U.S.5.62 0.61 Germany

11.75Australia

6.26Italy

–0.51

France–7.41

France8.96

Europe0.56

Italy–7.54

Australia15.27

Germany5.42

U.S.–0.71

U.S.10.99

South Africa 5.08

UK–0.74

Europe–7.91

Europe8.33

Spain–2.50

France–7.95

Canada14.65

Europe5.02

Australia–2.22

Australia8.28

Canada5.01 –1.50

Italy–8.34

Italy4.94

France–4.20

Spain–12.54

Spain7.69

Italy1.07

Spain–7.80

Canada6.80

Italy3.19

U.S.–2.72

Germany–22.04

Japan–0.08

Germany–11.42

Japan–33.62

South Africa 6.18

France–0.83

Italy–9.78

South Africa 2.76

Japan–3.73

Japan–6.52

18

Geographical diversity provides both relatively consistent returns while also potentially muting volatility.

Over the past 100 years, the annualized return by decade of a global equity benchmark has provided a smoother ride when compared to the market returns of selected individual countries.

• Japanese market returns, for example, have either landed near the top or the bottom of the grouping (but never in the middle) and significantly underperformed the global benchmark in the decades of the 1990s and 2000s.

• U.S. markets have underperformed the global benchmark in five of the last six decades.

Maintaining a home bias (as investors so often do), whether you’re Japanese, European, American or other, limits your opportunity set and will often offer more volatile return profiles.

Global

Countries Move In and Out of FavorReal Annualized Returns % (by decade, 1910–2010)

Sources: Morningstar, Dimon-Marsh-Staunton Global Indices. Study goes through 2010. The DMS Global and Country-Specific Indices measure the long-run performance of stocks in 20 countries and three global regions around the world. Index definitions can be found on page 73. Past performance does not guarantee future results.

1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s

Japan8.69

Australia21.27

South Africa13.64

U.S.3.96

Germany35.97

South Africa13.10

Japan9.24

Japan21.09

U.S.14.24

South Africa11.28

Spain–0.21

Canada 15.64

Japan8.51

Canada3.12

Japan33.65

Japan12.96

South Africa 7.15

Spain17.72

UK11.76

Australia9.59

Australia–0.57

U.S.14.38

Australia6.36 0.26 Italy

21.61Spain11.92

France3.09

Italy15.55

Europe10.47

Spain7.54

Canada–2.05

Germany13.52

Italy4.89


France18.31

Australia10.53

UK3.03

UK13.75

France9.74

Canada6.41

UK–2.34 11.38 UK

3.15Germany

–1.75Europe18.10

UK6.01

Germany2.95 13.74 Spain

8.72France

0.83

U.S.–2.46

South Africa 10.41

Canada2.24

Australia–2.18

UK17.80

Canada5.99

Europe1.90

Europe12.79 7.79 Europe

0.63


UK9.94 2.22 Europe

–3.55 16.10 5.91 Canada1.67

France12.60

Germany7.38

Germany0.20

–4.91 Spain9.12

U.S.2.00

UK–4.62

U.S.15.69

U.S.5.62 0.61 Germany

11.75Australia

6.26Italy

–0.51

France–7.41

France8.96

Europe0.56

Italy–7.54

Australia15.27

Germany5.42

U.S.–0.71

U.S.10.99

South Africa 5.08

UK–0.74

Europe–7.91

Europe8.33

Spain–2.50

France–7.95

Canada14.65

Europe5.02

Australia–2.22

Australia8.28

Canada5.01 –1.50

Italy–8.34

Italy4.94

France–4.20

Spain–12.54

Spain7.69

Italy1.07

Spain–7.80

Canada6.80

Italy3.19

U.S.–2.72

Germany–22.04

Japan–0.08

Germany–11.42

Japan–33.62

South Africa 6.18

France–0.83

Italy–9.78

South Africa 2.76

Japan–3.73

Japan–6.52

18

Speaker Notes

Although our lives have become increasingly globalized, our approach to investing has not. Investors still have nearly 70% of their equity portfolios in U.S.-domiciled companies, despite the fact that the U.S. now represents less than half of the world’s market capitalization.*

U.S.-centric investors are missing out on a much larger opportunity set. Of the 7,436 actively traded companies with a market capitalization of over $1 billion, over 75% (37% in the developed world, 33% in the emerging world) are headquartered outside of the U.S., a far cry from the early 1990s when almost half were headquartered in the U.S.

* Sources: Morningstar and MSCI, 12/31/14.

0

10

20

30

40

50

60

70%

0

1,000

2,000

3,000

4,000

5,000

U.S. International Emerging U.S. International Emerging Markets

1992 1998 2001 2007 2010 2014

Imbalance: The Home Bias

19Sources: Morningstar, Bloomberg, 12/31/14. Does not include target date funds or funds of funds. Global funds are classified as international. Chart is for illustrative purposes only.

Typical U.S. Investor PortfolioMorningstar Equity Mutual Fund Assets by Category

Stocks with a Market Cap Over $1 Billion

Num

ber o

f Com

pani

es

0

10

20

30

40

50

60

70%

0

1,000

2,000

3,000

4,000

5,000

U.S. International Emerging U.S. International Emerging Markets

1992 1998 2001 2007 2010 2014

Imbalance: The Home Bias

19Sources: Morningstar, Bloomberg, 12/31/14. Does not include target date funds or funds of funds. Global funds are classified as international. Chart is for illustrative purposes only.

Typical U.S. Investor PortfolioMorningstar Equity Mutual Fund Assets by Category

Stocks with a Market Cap Over $1 Billion

Num

ber o

f Com

pani

es

Speaker Notes

Another imbalance in investors’ portfolios is the amount of money sitting in cash and cash equivalents ($11 trillion) and government-related bond funds ($2.7 trillion).

Having money in cash today is akin to growing poor slowly given the negative real after-tax returns.

Fixed income mutual fund investors may be doing somewhat better from an income perspective but not significantly better. Government-related bonds are highly interest-rate sensitive.

• The chart on the right shows that if interest rates do nothing over the next 12 months, investors in Barclays Aggregate Bond Index-like investments will simply earn the coupon. But if rates move higher by even 1%, returns will have turned negative.

$

2008 201220102009 2013 20142011

$2,650

$1,658$1,440

–$1,755

$960

–$729

$770

–$3,010

$690

–$1,094

$670 $540

–$1,158

–$586

7.71%

2.19%

–3.33%

–8.85%

–14.37%

–19.89%

–1.0% 0.0% 1.0% 2.0% 3.0% 4.0%

Nominal Pre-Tax IncomeReal After-Tax Income

Hypothetical Percent Change in Interest Rates

DramaticLoss of

PurchasingPower

InterestRate

Sensitivity

The Challenges of Low RatesThe Challenge of Cash ($11.0T)* Annual Income Generated by $100,000 Investment in 1-Year CD

Sources: Federal Reserve, Bankrate.com and Barclays Live. *Includes retail money market funds, savings deposits, small time deposits, institutional money market funds, and cash in IRA and Keogh. The hypothetical tax rate used in the chart on the left is the highest marginal tax rate of 35.0% before 2013 and 39.6% after 2013. The 4.3% Affordable Care Act surcharge was not considered. **Based on Morningstar assets under management in government-related bond categories. Hypothetical Interest Rate Moves: Barclays Live, as of 5/31/15. Hypothetical returns for the Barclays Aggregate Bond Index are based on the current yield to maturity of 2.19%, the current duration of 5.52 years. The charts are for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

The Challenge with Long Duration Bonds ($2.7T)**Barclays Aggregate Bond Index Hypothetical returns based on hypothetical moves in rates over the next 12 months

20

$

2008 201220102009 2013 20142011

$2,650

$1,658$1,440

–$1,755

$960

–$729

$770

–$3,010

$690

–$1,094

$670 $540

–$1,158

–$586

7.71%

2.19%

–3.33%

–8.85%

–14.37%

–19.89%

–1.0% 0.0% 1.0% 2.0% 3.0% 4.0%

Nominal Pre-Tax IncomeReal After-Tax Income

Hypothetical Percent Change in Interest Rates

DramaticLoss of

PurchasingPower

InterestRate

Sensitivity

The Challenges of Low RatesThe Challenge of Cash ($11.0T)* Annual Income Generated by $100,000 Investment in 1-Year CD

Sources: Federal Reserve, Bankrate.com and Barclays Live. *Includes retail money market funds, savings deposits, small time deposits, institutional money market funds, and cash in IRA and Keogh. The hypothetical tax rate used in the chart on the left is the highest marginal tax rate of 35.0% before 2013 and 39.6% after 2013. The 4.3% Affordable Care Act surcharge was not considered. **Based on Morningstar assets under management in government-related bond categories. Hypothetical Interest Rate Moves: Barclays Live, as of 5/31/15. Hypothetical returns for the Barclays Aggregate Bond Index are based on the current yield to maturity of 2.19%, the current duration of 5.52 years. The charts are for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

The Challenge with Long Duration Bonds ($2.7T)**Barclays Aggregate Bond Index Hypothetical returns based on hypothetical moves in rates over the next 12 months

20

Speaker Notes

Historical Context:

All investments and portfolios float in the ocean of history and are affected by the winds of economics, politics and human nature. In a culture that doesn’t study history or really understand economics, these insights can provide a much-needed long-term perspective in a world of “breaking news,” dire predictions and market volatility.

• What history shows us over and over again is the extraordinary resilience, creativity, invention and innovation of mankind down through the ages.

• Optimism is ultimately the only realism. Pessimism is quite literally counterintuitive because it rests on the concept of insoluble crises, which simply doesn’t square with the facts. If humanity has shown one aptitude, it is the capacity to adapt and to learn (compare our response to the financial crisis of 2008 to our response in 1929).

• Pessimism is often framed around an exponential problem addressed by a linear solution. Human ingenuity, technological innovation and the inherent limits of long-term forecasting are never factored into the debate.

Historical

Context

Debunking Myths and Misperceptions

Historical Context

Historical

Context

Debunking Myths and Misperceptions

Historical Context

Speaker Notes

In 1798, the famed Thomas Malthus made his legendary prediction: “The power of population is infinitely greater than the power in the earth to produce subsistence for man.”

As recently as 1968, best-selling author Paul Ehrlich predicted: “The battle to feed all of humanity is over. In the 1970s, hundreds of millions of people will starve to death.”

In 1977, Jimmy Carter stated, “We could use up all of the proven reserves of oil in the world by the end of the next decade.”

All of these doom-and-gloom forecasters always fail to factor in mankind’s remarkable intellect and ingenuity.

“ Our intuition about the future is linear. But the reality of technology is exponential and that makes a profound difference. If I take 30 steps linearly, I get to 30. If I take 30 steps exponentially, I get to a billion.”

—Ray Kurzweil22

Overpopulation, Demographics, and Energy

“ Our intuition about the future is linear. But the reality of technology is exponential and that makes a profound difference. If I take 30 steps linearly, I get to 30. If I take 30 steps exponentially, I get to a billion.”

—Ray Kurzweil22

Overpopulation, Demographics, and Energy

Speaker Notes

Thomas Malthus, the godfather of all demographic and economic pessimists, stated in 1798, “all the children born, beyond what would be required to keep the population level, must necessarily perish.” That’s pretty harsh.

• Here’s a reality check: You could place the entire population of the globe, all 7.2 billion people, in the state of Texas and it would have the population density of New York City! Maybe a little cramped, but not exactly uninhabitable!

Paul Ehrlich predicted that “by the year 2000 the United Kingdom will simply be a small group of impoverished islands, inhabited by some 70 million hungry people.”

• Whether or not we’re big fans of kippers and Yorkshire pudding, we can all agree that the people of London are doing just fine.

• As a result of innovation, world grain production since 1950 has outpaced world population growth by over 70%.

All of these pessimists see geometric problems and linear solutions; when history demonstrates the majority of problems are in fact linear.

150

100

200

250

300

350

50

0 1950 2010

…it would only have the population density of New York City

The entire world population could fit in the state of Texas and…

Overpopulation and Food Shortages?...Nope

World Grain Production+249%

World Population Growth+174%

World Grain Production vs. World Population Growth

Sources: United Nations and World Bank, as of 12/31/10. 23

1950

= 1

00

150

100

200

250

300

350

50

0 1950 2010

…it would only have the population density of New York City

The entire world population could fit in the state of Texas and…

Overpopulation and Food Shortages?...Nope

World Grain Production+249%

World Population Growth+174%

World Grain Production vs. World Population Growth

Sources: United Nations and World Bank, as of 12/31/10. 23

1950

= 1

00

Speaker Notes

There is a common misperception, illustrated by the images on the left, that the size of the population at or near retirement age (59 and over) dwarf their younger brethren and when they all hit retirement, could wreak financial havoc on the economy.

• The reality is far more encouraging. The two younger generations are larger individually and significantly larger collectively than the vaunted Baby Boomers.

• In fact, 42.9 million* of the 73 million Baby Boomers are actually between the ages of 50 (people like Michelle Obama and Michael Jordan) and 59 (people like Bill Gates and Eddie Van Halen). These are hardly the faces of a graying population.

• Oh and by the way, a June 2014 study from Merrill Lynch finds that 72% of pre-retirees over the age of 50 say their ideal retirement will include working—often in new, more flexible and fulfilling ways.

* Source: U.S. Census Bureau, 2013.

Reality

20–39

Age in years

40–5959+

82.2 Million

How Are We Going to Handle All of Those Baby Boomers?

59.0 Million

Perception

20–39

Age in years

40–5959+

U.S. Population by Age

Top 10Most Common Ages in the U.S.

85.2 Million

24

23242021222526272829

#1

#10

Sources: Bureau of Labor Statistics, Census Bureau, 2014.

Reality

20–39

Age in years

40–5959+

82.2 Million

How Are We Going to Handle All of Those Baby Boomers?

59.0 Million

Perception

20–39

Age in years

40–5959+

U.S. Population by Age

Top 10Most Common Ages in the U.S.

85.2 Million

24

23242021222526272829

#1

#10

Sources: Bureau of Labor Statistics, Census Bureau, 2014.

Speaker Notes

How does the U.S. stack up globally?

What do you think the median age is in the U.S. today?

• 37 years old. That means the average American is closer to Peyton Manning than those that actually watched the first season of Peyton Place (1964–1969).

Yeah, but the U.S. population is aging right? What about in the future?

• It is estimated that by 2050, there will be over 400 million* Americans and the median age will be 39 years old!

• Not only will the U.S. have the fourth youngest population of the G20, but the third largest population of the world behind just India and China.

For the U.S., demographics remain a tailwind, as it is for many of the countries of the emerging world. The same can’t necessarily be said for Japan, China, Germany and Russia.

*Sources: Ned Davis Research and U.S. Census Bureau, 2013.

Isn’t the U.S. Demographically Set to Become the Next Japan?

The Major Players—Four Youngest Forecasted Populations of G20Median age (in years) of population by 2050

On the Sidelines—Six Oldest Forecasted Populations of G20Median age (in years) of population by 2050

Source: U.S. Census Bureau. Note: There are 19 permanent members of the G20. 25

Isn’t the U.S. Demographically Set to Become the Next Japan?

The Major Players—Four Youngest Forecasted Populations of G20Median age (in years) of population by 2050

On the Sidelines—Six Oldest Forecasted Populations of G20Median age (in years) of population by 2050

Source: U.S. Census Bureau. Note: There are 19 permanent members of the G20. 25

Speaker Notes

You often hear in the popular press that student loans are skyrocketing and that the average student is suffocating under a mountain of debt. While this makes good headlines, it’s a grossly incomplete picture of what’s actually going on.

• According to a recent Brookings Institution study, since 1998 the average debt for a bachelor’s degree graduate has been basically flat; going from only approximately $12,000 to $16,000 over almost 20 years. Not exactly the hundreds of thousands of dollars that you would believe if you read the popular press.

• The real increase has occurred at the graduate school level, rising from roughly $30,000 to $40,000 from 2007 to 2010.

• Are the degrees worth it? Absolutely! With each additional degree, the average unemployment rate goes down and average annual earnings go up.

The majority of young Americans are not going to end up being unemployed and living in their parents’ basements crippled by mountainous student loan payments.

1998 2001 2004 2007 2010

Bachelor’s Degree Graduate Degree

ProfessionalDegree

Bachelor’sDegree

High School

Diploma

No HighSchool Diploma11.0% $24.5K

$33.9K

$57.6K

$89.1K

7.5%

4.0%

2.3%

NEEDWORK

$

Unemployment Rate

Annual Earnings

$12K

$25K

$12K

$27K

$14K

$28K

$17K

$29K

$16K

$41K

Income and Unemployment Levels Reflect Educational Attainment

Source: Brookings Institution and Federal Reserve Survey of Consumer Finances, June 2014. 26

Average Debt by Educational Attainment Earnings and Unemployment Rates by Educational Attainment

1998 2001 2004 2007 2010

Bachelor’s Degree Graduate Degree

ProfessionalDegree

Bachelor’sDegree

High School

Diploma

No HighSchool Diploma11.0% $24.5K

$33.9K

$57.6K

$89.1K

7.5%

4.0%

2.3%

NEEDWORK

$

Unemployment Rate

Annual Earnings

$12K

$25K

$12K

$27K

$14K

$28K

$17K

$29K

$16K

$41K

Income and Unemployment Levels Reflect Educational Attainment

Source: Brookings Institution and Federal Reserve Survey of Consumer Finances, June 2014. 26

Average Debt by Educational Attainment Earnings and Unemployment Rates by Educational Attainment

Speaker Notes

It’s time for a quick pop quiz! The answer is

A. United States

Aren’t We in the Twilight of the American Century?

Source: Ned Davis Research, 2013. 27

#1 in natural gas production

Which country is:

A. United States

B. Brazil

C. India

D. China

#1 in nuclear production

#1 in refinedoil output

#2 in coal production

#3 in oil production

#3 exporting goods and services

Aren’t We in the Twilight of the American Century?

Source: Ned Davis Research, 2013. 27

#1 in natural gas production

Which country is:

A. United States

B. Brazil

C. India

D. China

#1 in nuclear production

#1 in refinedoil output

#2 in coal production

#3 in oil production

#3 exporting goods and services

Speaker Notes

The concept of “peak oil” was first popularized by Marion Hubbert in 1956. Like so many pessimists, Hubbert failed to account for human ingenuity and extraordinary technological innovations, that in this case allow oil exploration companies to drill deeper and to uncover oil in less conventional places.

• As a result, technological innovations have allowed land-drilling depth to go from 3,600 feet in 1952 to 8,000 feet today. Ocean drilling is even more dramatic, going from less than 1,000 feet pre-1975 to 10,000 feet today, a 10-fold increase.

Combine this with the revolutionary technique of fracking and we’ve gone from lines at the gas station in the 1970s to a virtual oil glut today.

The long and short of it is that the world has more than enough energy resources to fuel the global economy for quite some time.

What About Peak Oil?

Oil Well Land Depth (in feet)

Maximum Water Depth Drilled in Gulf of Mexico (in feet)

Total Proved World Oil Reserves (in trillions of barrels)

19805,733

19503,635

Pre-1975Less than 1,000

19958,000

19854,000

CURRENT10,000

19906,076

20007,056

20107,778

0.74T1.04T 1.33T

1.68T

1983 1993 2003 2013

28Source: BP Statistical Review of World Energy, 2014.

What About Peak Oil?

Oil Well Land Depth (in feet)

Maximum Water Depth Drilled in Gulf of Mexico (in feet)

Total Proved World Oil Reserves (in trillions of barrels)

19805,733

19503,635

Pre-1975Less than 1,000

19958,000

19854,000

CURRENT10,000

19906,076

20007,056

20107,778

0.74T1.04T 1.33T

1.68T

1983 1993 2003 2013

28Source: BP Statistical Review of World Energy, 2014.

Speaker Notes

A decade ago it seemed almost impossible to imagine that America might break its dependence on Middle East oil imports.

The U.S. now has states or regions that produce as much oil as some well-known oil producing countries. And total U.S. annual production in the 50 states now stands only behind Russia and Saudi Arabia.*

• U.S. net imports of crude oil and petroleum products have plunged by 45% since 2003.

• The revolution in the U.S. has caused natural gas prices to fall sharply there, even as they have risen in Europe, China and Japan because gas, unlike oil, cannot be easily transported around the world.

*Source: BP, 2014.

1973 1983 1993 2003 2013

11.2M

6.2M

4.3M

6M

7.6M

0

6

12

18

2014201020062002199819941990

Nat

ural

Gas

$/B

TU

Liquified Natural Gas Import Price

Europe $8.37

Japan $13.62

U.K.

UAEVenezuela

Libya

Ukraine

Ecuador

2,980

2,411

45

237545

1,145

Oman 1,003

U.S. Energy Renaissance

1. Sources: U.S. Energy Information Administration, 2014, Bloomberg, New York Mercantile Exchange, 12/4/14. 2. Source: U.S. Department of Energy, 2013.3. Sources: Bloomberg, New York Mercantile Exchange, 12/31/14. 29

Production RegionsDaily Output of Oil by U.S. Region (thousands of barrels per day)1

U.S. Net Imports of Crude Oil and Petroleum Products2

U.S. Natural Gas Prices3

1973 1983 1993 2003 2013

11.2M

6.2M

4.3M

6M

7.6M

0

6

12

18

2014201020062002199819941990

Nat

ural

Gas

$/B

TU

Liquified Natural Gas Import Price

Europe $8.37

Japan $13.62

U.K.

UAEVenezuela

Libya

Ukraine

Ecuador

2,980

2,411

45

237545

1,145

Oman 1,003

U.S. Energy Renaissance

1. Sources: U.S. Energy Information Administration, 2014, Bloomberg, New York Mercantile Exchange, 12/4/14. 2. Source: U.S. Department of Energy, 2013.3. Sources: Bloomberg, New York Mercantile Exchange, 12/31/14. 29

Production RegionsDaily Output of Oil by U.S. Region (thousands of barrels per day)1

U.S. Net Imports of Crude Oil and Petroleum Products2

U.S. Natural Gas Prices3

Speaker Notes

At some point our inefficient ways will catch up to us, right? After all, the gluttonous United States uses 18.0% of the world’s energy with only 4.4% of the world’s population! Not so fast. People don’t consume energy, economic activity consumes energy. The more a country produces, the more energy it consumes.

• The U.S. accounts for 23.1% of the world’s economic activity but only consumes 18.0% of the world’s energy. Seen from this lens, the U.S. is actually very efficient.

• And getting better every year: between 1992 and today, U.S. energy use per dollar of GDP has declined an average of 2% per year.

of World Population

of World Nominal GDP

4.4%of World Energy Consumption

18.0% 23.1%

U.S. Energy Consumption

1980 1985 1990 1995 2000 2005 2010

14,000

13,000

12,000

11,000

10,000

9,000

8,000

7,000

BTU

Per

Yea

r (20

05 U

.S. D

olla

rs)

Total Primary Energy Consumption per Dollar of GDP


30Sources: U.S. Department of Energy, as of 12/31/11, and Census Bureau and U.S. Bureau of Economic Analysis, as of 12/31/13.

of World Population

of World Nominal GDP

4.4%of World Energy Consumption

18.0% 23.1%


1980 1985 1990 1995 2000 2005 2010

14,000

13,000

12,000

11,000

10,000

9,000

8,000

7,000

BTU

Per

Yea

r (20

05 U

.S. D

olla

rs)

Total Primary Energy Consumption per Dollar of GDP


30Sources: U.S. Department of Energy, as of 12/31/11, and Census Bureau and U.S. Bureau of Economic Analysis, as of 12/31/13.

Speaker Notes

The great underreported story of the last half-century is the dramatic improvement of the human condition around the globe. Even a cursory glance at the evening news would give you the opposite impression, that the world is “coming apart at the seams” as they say.

This is based on two factors:

1. Fear sells! Neuropsychology has demonstrated that human beings respond quickly and virtually unconsciously to fear; and the news media, along with advertisers and politicians, have been exploiting this response throughout recorded history.

2. The explosion of news outlets with the advent of cable and the Internet has exacerbated this problem geometrically as they ratcheted up the fear to capture an increasingly fragmented market.

This section is designed to balance the scales and demonstrate the extraordinary achievements we’ve made as a society both here and abroad that you will likely never hear about on the nightly news.

31

“ Where have you gone, Joe DiMaggio? A nation turns its lonely eyes to you.” —Simon & Garfunkel

The Improving Human Condition

31

“ Where have you gone, Joe DiMaggio? A nation turns its lonely eyes to you.” —Simon & Garfunkel

The Improving Human Condition

Speaker Notes

All good, healthy economies evolve. The natural progression is to move from more agricultural-based economies to more industrial-based economies and ultimately to more service-based economies and beyond. The evolution is ongoing and the most advanced economies combine elements of each.

• The U.S. economy in the 1700s was almost 95% agricultural. Today less than 1% of the U.S. workforce is in the agricultural sector and over 90% is in the service economy.*

In an integrated global economy, the jobs will move to the workers who can complete the task in the most cost-effective ways or be automated by the machines that can complete the task with greater productivity. This improves standards of living both in the countries losing the comparative advantage (lower costs) and in the countries gaining the comparative advantage (more jobs). It also frees up the more advanced economies to focus on higher value output.

*Source: Bureau of Economic Analysis, 2014.

All Good Economies Evolve

EarlyAgriculture

1492–1800USA

IndustrialRevolution

USA1800–1950

Future

Future: the SymphonyConductor

InformationAge

1950–TodayUSA

USA

Japan

Currently

China

Currently

Nigeria

Currently

32

The Evolution of Societies and Nations

Source: World Bank, 2013. For illustrative purposes only and not intended as investment advice. The placement of specific countries on the scale is based on the percentage of economic activity coming from the agricultural, manufacturing and service sectors.

All Good Economies Evolve

EarlyAgriculture

1492–1800USA

IndustrialRevolution

USA1800–1950

Future

Future: the SymphonyConductor

InformationAge

1950–TodayUSA

USA

Japan

Currently

China

Currently

Nigeria

Currently

32

The Evolution of Societies and Nations

Source: World Bank, 2013. For illustrative purposes only and not intended as investment advice. The placement of specific countries on the scale is based on the percentage of economic activity coming from the agricultural, manufacturing and service sectors.

Speaker Notes

Global GDP has exploded from $1.3 trillion in the 1960s to over $70 trillion today with the U.S. making up a smaller share of the world’s economic activity. The 48x more economic activity is being produced by only 2.4x the number of people.* As a result, the world has gotten significantly wealthier in a very short period of time.

There has been a dramatic reduction in mass poverty (people living on less than $2/day) over the past 20 years alone.

• To put this in perspective, consider the number of years taken for select economies to raise real per capita GDP from $1,000 to $2,000— a wealth level that is often viewed as being above general poverty levels. While this process took over 100 years in the United States and 455 years in Italy, the citizens of countries like Vietnam, India, China, and Indonesia have accomplished it in less than 20 years!**

*Sources: Bureau of Economic Analysis and U.S. Census Bureau, 2013. **Sources: OECD (Maddison, 2006), Goldman Sachs Research, 2013.

$75.6T

$22.2T

1960 1990 2013

$1.3T

World GDP in Current USD

People Living on Less than 2005 Purchasing Power Parity $2/Day(Percent of World Population)

26%22%

1980 20001990 2010

69.6% 64.6% 57.4%43.0%

U.S. Percentage of World GDP 40%

Source: World Bank, as of 12/31/13.

Global GDP Growth

33

$75.6T

$22.2T

1960 1990 2013

$1.3T

World GDP in Current USD

People Living on Less than 2005 Purchasing Power Parity $2/Day(Percent of World Population)

26%22%

1980 20001990 2010

69.6% 64.6% 57.4%43.0%

U.S. Percentage of World GDP 40%

Source: World Bank, as of 12/31/13.

Global GDP Growth

33

Speaker Notes

The extraordinary achievements of the past 50 years were marked by a dramatic expansion in global literacy and a significant rise in the number of people around the world enjoying a middle-class lifestyle. It is estimated that by 2025, half of the world’s population will be in the ranks of the middle class.

2025E20051965

84%82%75%70%

63%61%56%

2010200019901980197019601950

3953

%

%

29%

The Big Story: Global Educated Middle Class

2025E20051965

84%82%75%70%

63%61%56%

2010200019901980197019601950

34

Size of Middle Class Population of the World(% of world population)

Size of Literate Population of the World(% of world population)

Sources: Middle Class Data: Brookings Institute, 2012, Population Data: World Bank: Health Nutrition and Population Statistics. Forecasts may not be achieved.

2025E20051965

84%82%75%70%

63%61%56%

2010200019901980197019601950

3953

%

%

29%

The Big Story: Global Educated Middle Class

2025E20051965

84%82%75%70%

63%61%56%

2010200019901980197019601950

34

Size of Middle Class Population of the World(% of world population)

Size of Literate Population of the World(% of world population)

Sources: Middle Class Data: Brookings Institute, 2012, Population Data: World Bank: Health Nutrition and Population Statistics. Forecasts may not be achieved.

Speaker Notes

The nightly news tells us that the world is coming apart at the seams. Some even suggest that we have never lived in such uncertain times. The facts suggest otherwise.

• Economic historian Stanley Engerman has noted that as recently as the late 18th century, “The bulk of mankind, over 95 percent, were miserable slaves of despotic tyrants.”

• Today, a larger percentage of the world’s inhabitants are freer than ever before in history.* This is illustrated in the maps showing that the number of countries scoring low in economic freedom metrics has declined drastically over the past 40 years.

* Source: “It’s Getting Better All the Time: 100 Greatest Trends of the Last 100 Years.” Stephen Moore & Julian L. Simon, 2000.

The Big Story: Dramatic Rise in Global Economic Freedom

1970

2010Economically unfree nations

35Source: Cato Institute, 2010. The economic freedom index scores nations on 10 broad factors of economic freedom: business freedom, trade freedom, monetary freedom, government size/spending, fiscal freedom, property rights, investment freedom, financial freedom, freedom from corruption and labor freedom.

Cato Institute Economic Freedom Index

The Big Story: Dramatic Rise in Global Economic Freedom

1970

2010Economically unfree nations

35Source: Cato Institute, 2010. The economic freedom index scores nations on 10 broad factors of economic freedom: business freedom, trade freedom, monetary freedom, government size/spending, fiscal freedom, property rights, investment freedom, financial freedom, freedom from corruption and labor freedom.

Cato Institute Economic Freedom Index

Speaker Notes

Isn’t the world more violent than it has ever been before? Let’s look at this through the broad lens of history.

A smarter, more educated world is becoming more peaceful in several statistically significant ways:

• The number of people killed in battle has dropped by 1,000-fold over the centuries as civilizations evolved. Battles once killed on average more than 500 out of every 100,000 people. Now battlefield deaths are down to three-tenths of a person per 100,000.*

It is easy to forget how dangerous life used to be.

• During the times of Genghis Khan, over 11% of the Earth’s population was killed in battle. Imagine 792 million people (11% of the world’s population) dying in battle today. By comparison, less than 0.01% of the world’s population has perished in the conflicts of the 21st century. One life is one too many but the numbers simply pale in comparison to the violent world of the past.

* Source: Steven Pinker, “The Better Angels of Our Nature: Why Violence Has Declined.”

The Big Story: Dramatic Decrease in Global Violence

11.1%

5.9%5.9% 4.7% 3.7% 1.9%

0.1%

0.01%

Genghis Khan

(1206 - 1227)

An Lushan

Rebellion

(755 - 763)

Xin Dynasty

(9 - 24)

Timur

(1370 - 1405)

World War II(1939 - 1945)

World War I(1914 - 1918) Vietnam War(1955 - 1975)21st Century Conflicts

(2001 - 2014)

“ The decline of violence may be the most significant and least appreciated development in the history of our species.” —Steven Pinker, Psychologist, Harvard University

36

Percentage of World Population that Was Killed in Specific World Events

Source: Statistics on Violent Conflict, 2013.

The Big Story: Dramatic Decrease in Global Violence

11.1%

5.9%5.9% 4.7% 3.7% 1.9%

0.1%

0.01%

Genghis Khan

(1206 - 1227)

An Lushan

Rebellion

(755 - 763)

Xin Dynasty

(9 - 24)

Timur

(1370 - 1405)

World War II(1939 - 1945)

World War I(1914 - 1918) Vietnam War(1955 - 1975)21st Century Conflicts

(2001 - 2014)

“ The decline of violence may be the most significant and least appreciated development in the history of our species.” —Steven Pinker, Psychologist, Harvard University

36

Percentage of World Population that Was Killed in Specific World Events

Source: Statistics on Violent Conflict, 2013.

Speaker Notes

The world has never been a better place to live in than it is today, and if history is any guide, it will keep getting better.

Compared with the “golden” days of the 1950s, the average American not only lives longer, but better! People are more highly educated, earn more money and work less for it, operate in safer conditions, are far healthier and enjoy a much more luxurious lifestyle than their brethren in the 1950s could possibly have imagined.

The Big Story: These Are the Good Old Days

37

983 sq. ft. with 3.5 residents55% homeownership

10% own televisions $2,100 inflation adjusted cost of television60% own landline telephones0% have air conditioning0% have computers

$11,000 average earnings (inflation-adjusted 2008)41% high school graduation rate8% college graduation rate

68 years life expectancy50% of seniors in poverty75% of African-Americans in poverty0 years average retirement

Average American Home

1950s

2,349 sq. ft. with 2.5 residents80% homeownership

95% own televisions $500 average cost of television90% own cell phones 90% have air-conditioning75% have computers



Today

Technology

Income and Education

Quality of Life


Technology


Quality of Life

Sources: Federal Reserve Bank of Boston, Statistical Abstract of the United States, International Labor Organization, United Nations, Bureau of Labor Statistics, as of 12/31/13. “Its Getting Better All The Time: 100 Greatest Trends of the Last 100 Years,” Stephen Moore & Julian L. Simon.

The Big Story: These Are the Good Old Days

37

983 sq. ft. with 3.5 residents55% homeownership

10% own televisions $2,100 inflation adjusted cost of television60% own landline telephones0% have air conditioning0% have computers




1950s

2,349 sq. ft. with 2.5 residents80% homeownership

95% own televisions $500 average cost of television90% own cell phones 90% have air-conditioning75% have computers



Today

Technology


Quality of Life


Technology


Quality of Life

Sources: Federal Reserve Bank of Boston, Statistical Abstract of the United States, International Labor Organization, United Nations, Bureau of Labor Statistics, as of 12/31/13. “Its Getting Better All The Time: 100 Greatest Trends of the Last 100 Years,” Stephen Moore & Julian L. Simon.

Speaker Notes

But didn’t the world just live through its version of the Great Depression? Comparing the 2008 financial crisis to the Great Depression is the height of hyperbolic rhetoric. The Great

Depression

The Great Recession

Length of Economic

Contraction

Drop in Industrial

Production

Peak Unemployment

Rate

Change in Consumer Price

IndexNumber of

Bank Failures

Drop in Dow Jones Industrial Average

43 months 51.7% 24.8% –27.2% 9,096

(50% of banks)89.2%

18 months 14.9% 9.9% +1.5% 57

(0.6% of banks)53.8%

Our “Great Recession”....Like the Great Depression?

Sources: Bureau of Labor Statistics, FDIC, Bureau of Economic Analysis, Bloomberg, and U.S. Federal Reserve, as of 12/31/14. For illustrative purposes only. Index definitions can be found on page 73. Past performance does not guarantee future results. 38

The Great Depression

The Great Recession

Length of Economic

Contraction

Drop in Industrial

Production

Peak Unemployment

Rate

Change in Consumer Price

IndexNumber of

Bank Failures

Drop in Dow Jones Industrial Average

43 months 51.7% 24.8% –27.2% 9,096

(50% of banks)89.2%

18 months 14.9% 9.9% +1.5% 57

(0.6% of banks)53.8%

Our “Great Recession”....Like the Great Depression?

Sources: Bureau of Labor Statistics, FDIC, Bureau of Economic Analysis, Bloomberg, and U.S. Federal Reserve, as of 12/31/14. For illustrative purposes only. Index definitions can be found on page 73. Past performance does not guarantee future results. 38

Speaker Notes

Contrary to the popular press, the American dream is alive and well!

• Of the nation’s millionaires, more than 80% did not inherit 10% or more of their wealth.

• We all know people who were born on third base but act like they hit a triple. But how common is that? Of the Forbes 400 list, “only” 28% inherited wealth in excess of $50M, i.e., woke up on third base or home plate!

• The remaining nearly 70% were either born “on deck” from a lower- to middle-class background, on first base inheriting less than $1M, or on second base inheriting more than $1M or substantial start-up capital from a family member. And turning any of those numbers into over $1 billion is still one heck of an achievement!

Being born with a silver spoon in your mouth may help, but it is not the only path to financial success.

7%

3rd BaseInherited wealth in excess of $50 million or a large and prosperous company

22%

Individuals who had opportunities that gave them an advantage, inherited less than $1m, or received some start-up capital from a family member

1st Base

2nd Base

Inherited a medium-sized business or wealth of more than $1m or received substantial start-up capital for a business from a family member

12%

Inherited sufficientwealth to make theForbes 400 list

Home Plate21% Individuals who

came from a lower- or middle-class background

On Deck 38%

80%

20%

did not inherit 10% or more of their wealth

inherited some wealth from a trust fund orestate

The Big Story: The American Dream Is Alive and Well

39

Millionaires BillionairesOn which base was each member of the Forbes 400 born?

Sources: United for a Fair Economy, 2011 and thomasjstanley.com.* 3% of the on deck individuals are undetermined.

*

7%

3rd BaseInherited wealth in excess of $50 million or a large and prosperous company

22%

Individuals who had opportunities that gave them an advantage, inherited less than $1m, or received some start-up capital from a family member

1st Base

2nd Base

Inherited a medium-sized business or wealth of more than $1m or received substantial start-up capital for a business from a family member

12%

Inherited sufficientwealth to make theForbes 400 list

Home Plate21% Individuals who

came from a lower- or middle-class background

On Deck 38%

80%

20%

did not inherit 10% or more of their wealth

inherited some wealth from a trust fund orestate

The Big Story: The American Dream Is Alive and Well

39

Millionaires BillionairesOn which base was each member of the Forbes 400 born?

Sources: United for a Fair Economy, 2011 and thomasjstanley.com.* 3% of the on deck individuals are undetermined.

*

Speaker Notes

The U.S. doesn’t make anything anymore, right?

The U.S. no longer makes cheap, low quality manufactured goods (and shouldn’t), but the U.S. is still the top value-added manufacturer in the world.

There are many different ways for businesses to add value in the manufacturing process. Designing a new product, upgrading a current product, and improving marketing and sales for that product.

Consider the iPhone.

• iPhones are designed and developed in the U.S.

• 85% of all iPhones are assembled in China although China adds very little to the process, or less than 5% of the production cost.*

• Since the final assemblage takes place in China, trade statistics calculate a sale of an iPhone in the U.S. as an “export” from China and an “import” to the U.S.

• Bottom line: Because of these kinds of issues, the official manufacturing and trade data drastically understates the U.S. role in global manufacturing and overstates the U.S. trade deficit.

* Source: American Enterprise Institute, 2013.

5%

10%

15%

20%

Mexico India Italy Republic of Korea

Germany Japan China United States

France United Kingdom

The Big Story: U.S. Still a Manufacturing PowerhouseTop 10 Value-Added Manufacturing Countries(% of world)

40Source: United Nations Industrial Development Organization, 2013.

5%

10%

15%

20%

Mexico India Italy Republic of Korea

Germany Japan China United States

France United Kingdom

The Big Story: U.S. Still a Manufacturing PowerhouseTop 10 Value-Added Manufacturing Countries(% of world)

40Source: United Nations Industrial Development Organization, 2013.

Speaker Notes

While hating the American government has become a cottage industry, it is a really poor investment strategy.Hating the

Government Is Not an Investment Strategy

Hating the government does not inform an investment strategy.

41

“ Americans always do the right thing but only after exhausting all other options.” —Winston Churchill

Hating the Government Is Not an Investment Strategy

Hating the government does not inform an investment strategy.

41

“ Americans always do the right thing but only after exhausting all other options.” —Winston Churchill

Speaker Notes

Today many potential investors use “politics” as a rationale for staying on the sidelines. They claim they will invest when their favorite politician or party gets elected or when the latest policy-induced crisis is averted (like the fiscal cliff or the government shutdown). So what do the facts show?

• Since the Kennedy administration, the sitting president has been viewed unfavorably by more than half of the country 45% of the time.

• Congress’s approval rating has been even worse, historically often approaching the favorability ratings of head lice and meth labs. That’s actually true, you can look it up.

• The reality is that over the past 55 years, the markets have performed best when the president’s approval rating polled somewhere between 35%–50%.

In short, hating the government should not inform an investment strategy.

40

20

0

60

80%

30

10

50

70 $1,000,000

$100,000

Log Scale

20142009200119931989198119771974196919631961

(left axis)

Presidential Approval Rating

Gallup Poll

(right axis)

Dow Jones Industrial Average

Presidential Approval

Rating

Gain/Annum

% ofTime

>65 2.4% 15.9%

50–65 6.8% 39.1%

35–50 11.8% 37.3%<35 –13.8% 7.7%

Approval Ratings and Markets Don’t Always Move in the Same Direction

Source: Gallup, 2/28/15. The Presidential Approval Ratings were introduced to gauge public support for the President of the United States during the term. For illustrative purposes only and not intended as investment advice. See page 73 for index definitions. Past performance does not guarantee future results. 42

Gallup Poll Presidential Approval Ratings and Dow Jones Industrial Average Growth of $100,000

40

20

0

60

80%

30

10

50

70 $1,000,000

$100,000

Log Scale

20142009200119931989198119771974196919631961

(left axis)

Presidential Approval Rating

Gallup Poll

(right axis)

Dow Jones Industrial Average

Presidential Approval

Rating

Gain/Annum

% ofTime

>65 2.4% 15.9%

50–65 6.8% 39.1%

35–50 11.8% 37.3%<35 –13.8% 7.7%

Approval Ratings and Markets Don’t Always Move in the Same Direction

Source: Gallup, 2/28/15. The Presidential Approval Ratings were introduced to gauge public support for the President of the United States during the term. For illustrative purposes only and not intended as investment advice. See page 73 for index definitions. Past performance does not guarantee future results. 42

Gallup Poll Presidential Approval Ratings and Dow Jones Industrial Average Growth of $100,000

Speaker Notes

We are often told that our politics have never been so dysfunctional and the political discourse has never been filled with such vitriol. Is this true?

• On July 11, 1804, a sitting (sitting!) vice president, Aaron Burr shot and killed a former Secretary of the Treasury, Alexander Hamilton. Today, political attack ads can get pretty intense but none ended with any duels on the White House lawn.

• Four years earlier, President John Adams and Vice President Thomas Jefferson—the two highest elected officials in the land and founding fathers of the country—squared off in a race for the White House. Old-style civility did not prevail.

Our Campaigns Have Never Been Filled with Such Vitriol, Right?

43For illustrative purposes only and not intended as investment advice.

JohnAdams

Thomas Jefferson

Our Campaigns Have Never Been Filled with Such Vitriol, Right?

43For illustrative purposes only and not intended as investment advice.

JohnAdams

Thomas Jefferson

Speaker Notes

For many investors, one of their biggest concerns has been the size of the annual deficits and the run-up in the national debt.

Here are the facts:

• Across a wide array of administrations, the U.S. federal government has spent more money each year than revenue it collects.

• The government pays for:

• Entitlements (over $1.7 trillion)

• Defense (almost $600 billion)

• Everything else (over $1.2 trillion)

The U.S. makes up the difference by borrowing the money primarily from itself but also foreign countries like China and Japan as well as individual investors, mutual fund companies and pension funds.

Source: Congressional Budget Office, 2013.

• And collects:

• Income tax (over $1.3 trillion)

• Social insurance tax (over $1 trillion)

• Corporate tax (over $350 billion)

• Other (over $250 billion)

1945 1953 1961 1963 1969 1974 1977 1981 1989 1993 2001 2009

10%

20%

30%

40%

US Treasury, Federal Budget total receipts as a percent of GDP

US Treasury, Federal Budget total outlays as a percent of GDP

U.S. Treasury, federal budget total receipts as a percent of GDP

U.S. Treasury, federal budget total outlays as a percent of GDP

1. U.S. Government: Fed, Social Security Trust Fund & Other ($6.4 Trillion)2. China

($1.3 Trillion)3. Japan ($1.2 Trillion)

5. Pension Funds ($0.7 Trillion)

4. Savings Bondsand Other Investors ($1.1 Trillion)

Top 5 Holders of U.S. Debt

But What About Debt and Deficits?

44Source: Congressional Budget Office, 2014.

1945 1953 1961 1963 1969 1974 1977 1981 1989 1993 2001 2009

10%

20%

30%

40%

US Treasury, Federal Budget total receipts as a percent of GDP

US Treasury, Federal Budget total outlays as a percent of GDP

U.S. Treasury, federal budget total receipts as a percent of GDP

U.S. Treasury, federal budget total outlays as a percent of GDP

1. U.S. Government: Fed, Social Security Trust Fund & Other ($6.4 Trillion)2. China

($1.3 Trillion)3. Japan ($1.2 Trillion)

5. Pension Funds ($0.7 Trillion)

4. Savings Bondsand Other Investors ($1.1 Trillion)

Top 5 Holders of U.S. Debt

But What About Debt and Deficits?

44Source: Congressional Budget Office, 2014.

Speaker Notes

Over the next 75 years, the federal government has promised benefits to Social Security recipients in excess of anticipated payroll tax revenues equal to $8 trillion. The Congressional Budget Office estimates that the Social Security shortfall will be equal to 0.6% of GDP.

Social Security is something to be paid in the future which allows us to make adjustments in the present.

Potential options include:

A. Changing the taxation of earnings

B. Changing the benefit formula

C. Raising the retirement age

D. Reducing cost-of-living adjustments

Or, for example, the government could eradicate the shortfall today by simply eliminating the taxable maximum.

What About Those Trillions of Unfunded Liabilities? The Reality of Social Security

Source: Congressional Budget Office Social Security Policy Options, July 2010.

50%

Potential options fall into at least four categories.

Change the Taxation of Earnings

Increase the Payroll Tax by 1% Today

of shortfall eliminated

33%

Change the Benefit Formula

Index Initial Benefits to Changes in Longevity

33%

Raise the FullRetirement Age

Index Retirement Age to Changes in Longevity

33%

Reduce Cost-of-LivingAdjustmentsBase COLA onthe Chained API

Congressional Budget Office estimates that the Social Security shortfall over the next 75 years is equal to

0.6% of GDP

A


100%Eliminate theTaxable Maximum

or

B C D




45

What About Those Trillions of Unfunded Liabilities? The Reality of Social Security

Source: Congressional Budget Office Social Security Policy Options, July 2010.

50%

Potential options fall into at least four categories.

Change the Taxation of Earnings

Increase the Payroll Tax by 1% Today


33%

Change the Benefit Formula

Index Initial Benefits to Changes in Longevity

33%

Raise the FullRetirement Age

Index Retirement Age to Changes in Longevity

33%

Reduce Cost-of-LivingAdjustmentsBase COLA onthe Chained API

Congressional Budget Office estimates that the Social Security shortfall over the next 75 years is equal to

0.6% of GDP

A


100%Eliminate theTaxable Maximum

or

B C D




45

Speaker Notes

Within these pages you’ll find our macroeconomic and investment strategy views and a breakdown of our outlook, not by traditional asset class categories, but by investment objectives—growth, income, real returns and diversification—an acknowledgment that people invest not simply to beat benchmarks but to achieve specific investment goals.

Current

Op

portunities

Current Opportunities

Current

Op

portunities

Current Opportunities

Speaker Notes

This section is designed to identify the current state of the global economy and to assess how global policy decisions and macro trends will shape the outlook for world economic growth.

47

Macroeconomic Views

47

Macroeconomic Views

Speaker Notes

The global economy has three potential paths forward in 2015—each with real implications for financial markets. We believe that the most likely outcome is the middle path.

Macro Insights

Stagnation ExpansionGreat Moderation 2.0

JapaneseRecession

EuroSlowdown

Reform TechnologyRevolution

ChineseConsumerism

EnergyRenaissance

Growth below trend, disinflationary forces

Outcome:Broadly positive for bondsExtended period of low equity returnsInterest rates trend lower

Probability: Low

Growth strong enough to support earnings but not strong enough to raise inflation concerns

Outcome:Stocks outperform bondsInterest rates low for longGrowth and income scarce, investors pay up for it

Probability: High

Secular growth forces prevail

Outcome:Stocks outperform bondsCyclical sectors outperformInterest rates trend higher

Probability: Low

48

Macro Insights

Stagnation ExpansionGreat Moderation 2.0

JapaneseRecession

EuroSlowdown

Reform TechnologyRevolution

ChineseConsumerism

EnergyRenaissance

Growth below trend, disinflationary forces

Outcome:Broadly positive for bondsExtended period of low equity returnsInterest rates trend lower

Probability: Low

Growth strong enough to support earnings but not strong enough to raise inflation concerns

Outcome:Stocks outperform bondsInterest rates low for longGrowth and income scarce, investors pay up for it

Probability: High

Secular growth forces prevail

Outcome:Stocks outperform bondsCyclical sectors outperformInterest rates trend higher

Probability: Low

48

Speaker Notes

Continuing into 2015, the U.S. economy has mended and is growing, and larger emerging market countries like India and China are recovering, although conditions in Europe and Japan remain weak but are improving.

Paradoxically, the unsynchronized and relatively weak nature of the global expansion—with disinflation still front and center—forestalls the tightening cycle and in turn extends the cycle rather than curtails it.

Investors, mistaking this environment for a normal cycle, have focused on rate hikes, when instead the real story has always been continued global economic weakness and an ongoing global deleveraging cycle. The old adage of not fighting the Fed (and the European Central Bank and the Bank of Japan) applies.

Expansion

Slowdown

Recovery

Contraction

Russia

USA

China

India

Brazil

Indonesia

Turkey

Chile

Germany

Japan

United Kingdom

Italy

South Korea

Poland

South Africa

European Union

Global

France

Australia

Weak Global Expansion Extends the Cycle, Rather than Curtailing It

Sources: OFI Global Multi Asset Group Proprietary Leading Indicator and Organisation for Economic Co-operation and Development (OECD), 5/31/15. Business cycles are based on OECD leading indicators. Size of flag represents each country’s percentage of world GDP. GDP (gross domestic product) is the total value of all final goods and services produced in a country in a given year. The chart is for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results. 49

Expansion

Slowdown

Recovery

Contraction

Russia

USA

China

India

Brazil

Indonesia

Turkey

Chile

Germany

Japan

United Kingdom

Italy

South Korea

Poland

South Africa

European Union

Global

France

Australia

Weak Global Expansion Extends the Cycle, Rather than Curtailing It

Sources: OFI Global Multi Asset Group Proprietary Leading Indicator and Organisation for Economic Co-operation and Development (OECD), 5/31/15. Business cycles are based on OECD leading indicators. Size of flag represents each country’s percentage of world GDP. GDP (gross domestic product) is the total value of all final goods and services produced in a country in a given year. The chart is for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results. 49

Speaker Notes

It’s said that business cycles always end the same way: The Fed murders them with rate hikes.

Inflation remains very low across the globe. Aside from a few places around the world, inflationary pressures have failed to materialize, despite unfounded fears that aggressive monetary policy accommodation would foster uncontainable general price level increases.

In fact, very few central banks are even meeting their stated 2.0% inflationary target which leaves room for further policy accommodation overseas, and a very benign and orchestrated normalization cycle in the U.S. with significant pauses thrown in for effect and with no surprises in store for the markets. In the post-taper world, there are other central banks (European Central Bank and Bank of Japan) that will carry the Fed’s mantle and continue to provide liquidity to the global economy.

NeutralDove Hawk

Yellen Williams

Fischer Dudley

Tarullo Brainard

Evans

Lockhart

Powell

Lacker

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

2.5

NorwayAustraliaCanadaJapanNew ZealandEurozoneU.K.U.S.SwedenSwitzerland

Flag depicts Central Bank target.

–1.1 –0.2 –0.2 –0.1 0.0 0.1 0.6 0.8 1.3 2.0

Y/Y

Per

cent

Cha

nge

1. Source: U.S. Bank Asset Management Group analysis based on FOMC member speeches/papers.2. Source: Bloomberg, 5/31/15. Index definitions can be found on page 73.

“ None of the...expansions...died of old age; every one was murdered by the Federal Reserve” —Rudi Dornbusch

Fed in No Rush1

Composition of Fed (Based on member speeches/papers)Global Central Banks in No Rush2

Consumer Price Index by country and Central Bank targets

50

NeutralDove Hawk

Yellen Williams

Fischer Dudley

Tarullo Brainard

Evans

Lockhart

Powell

Lacker

–1.5

–1.0

–0.5

0.0

0.5

1.0

1.5

2.0

2.5

NorwayAustraliaCanadaJapanNew ZealandEurozoneU.K.U.S.SwedenSwitzerland

Flag depicts Central Bank target.

–1.1 –0.2 –0.2 –0.1 0.0 0.1 0.6 0.8 1.3 2.0

Y/Y

Per

cent

Cha

nge

1. Source: U.S. Bank Asset Management Group analysis based on FOMC member speeches/papers.2. Source: Bloomberg, 5/31/15. Index definitions can be found on page 73.

“ None of the...expansions...died of old age; every one was murdered by the Federal Reserve” —Rudi Dornbusch

Fed in No Rush1

Composition of Fed (Based on member speeches/papers)Global Central Banks in No Rush2

Consumer Price Index by country and Central Bank targets

50

Speaker Notes

Being bearish in this environment is unlikely to be a fruitful exercise.

Nearly half of all government bonds yield less than

1%

Nearly

of the global equity market capitalizationis supported by zero-interest policies

80%around the world are experiencingnegative real yields on short-term bonds

1.5 billion

Investors Are Making It Too Complicated

Source: Bank of America/Merrill Lynch, 10/31/14. For illustrative purposes only. 51

Nearly half of all government bonds yield less than

1%

Nearly

of the global equity market capitalizationis supported by zero-interest policies

80%around the world are experiencingnegative real yields on short-term bonds

1.5 billion

Investors Are Making It Too Complicated

Source: Bank of America/Merrill Lynch, 10/31/14. For illustrative purposes only. 51

Speaker Notes

The recent sharp decline in energy prices is an unequivocal net positive for the global economy. Falling energy prices redistributes wealth from those that are less likely to spend it (energy companies) to those with a higher propensity to consume (households).

Using the U.S. as an example, and based on back-of-the-envelope calculations considering that the owners of the nation’s 253 million vehicles drive an average of 13,500 miles per year in vehicles that average 20 miles to the gallon, then the move in gasoline prices from over $3.50 in 2013 and 2014 to near $2.60 today, if sustained, saves the U.S. consumer over $165 billion!

The decline in energy prices will have some impact on U.S. employment and capital spending but the numbers pale in comparison to the likely savings for American households. While the energy sector has produced 7% of all job growth in the U.S. since 2007, the sector still only employs 759,000 of the nation’s 140 million workers, or 0.5% of the workforce. In addition, energy capital expenditures equal roughly 1% of the nation’s total output.

What Is the Impact of Declining Oil Prices?

Positives

Source: AAA as of 5/31/15. For regular unleaded gasoline. *Assumes that the average price throughout 2015 is $2.60. Source: Bureau of Economic Analysis, 12/31/14. 52

253 million 200 0 12.4% $183B1 3 759,000

2013 2014 May 2015

$3.57 $3.52 $2.60*

5

Expenditure $609B $600B $444B

Savings — $9B $165B

Per Gallon Per Gallon Per Gallon

vehicles in the U.S. average miles driven per year

average miles per gallon

Negatives

energy jobs in U.S. (vs. 140 million total)

of job gains since January

2008

Energy cap-ex (1% of GDP)

Energy-related employment has

accounted for

What Is the Impact of Declining Oil Prices?

Positives

Source: AAA as of 5/31/15. For regular unleaded gasoline. *Assumes that the average price throughout 2015 is $2.60. Source: Bureau of Economic Analysis, 12/31/14. 52

253 million 200 0 12.4% $183B1 3 759,000

2013 2014 May 2015

$3.57 $3.52 $2.60*

5

Expenditure $609B $600B $444B

Savings — $9B $165B

Per Gallon Per Gallon Per Gallon

vehicles in the U.S. average miles driven per year

average miles per gallon

Negatives

energy jobs in U.S. (vs. 140 million total)

of job gains since January

2008

Energy cap-ex (1% of GDP)

Energy-related employment has

accounted for

Speaker Notes

For Investors with an Income Objective

The scarcity of income in a “low-for-long” world will have investors paying up for income wherever they can find it.

For Investors with a Growth Objective

Clever strategists have referred to the current environment as T.I.N.A., meaning, “There Is No Alternative,” to equities. We agree, although we would revise that statement to say that for growth-oriented investors there is no alternative to equities and global high yield credit.

Asset Allocation Views

These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the open of business on May 31, 2015, and are subject to change. Diversification does not guarantee profit or protect against loss. 53

Income Asset Allocation Views for Investors with an Income Objective


Developed Government

EM Local Government

TIPS

Less Favorable FavorableNeutral

Global Investment Grade EM USD Credit

Global REITs

Cat Bonds

High Dividend Equity

Global High Yield

Senior Loans

Municipal Bonds

Credit

Other Sources of Income

MLPs

GrowthAsset Allocation Views for Investors with a Growth Objective

Regional Developed Markets Equity


U.S. Large Cap

Value

MLPs

Global REITs

EM Credit

Emerging Market Equities

Global High Yield CreditHigh Dividend Equity

U.S. Small Cap

U.S. Equities

Growth

Market Capitalization

Style

Other Sources of Growth

Commodities

Asset Allocation Views

These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the open of business on May 31, 2015, and are subject to change. Diversification does not guarantee profit or protect against loss. 53

Income Asset Allocation Views for Investors with an Income Objective


Developed Government

EM Local Government

TIPS


Global Investment Grade EM USD Credit

Global REITs

Cat Bonds

High Dividend Equity

Global High Yield

Senior Loans

Municipal Bonds

Credit

Other Sources of Income

MLPs

GrowthAsset Allocation Views for Investors with a Growth Objective

Regional Developed Markets Equity


U.S. Large Cap

Value

MLPs

Global REITs

EM Credit

Emerging Market Equities

Global High Yield CreditHigh Dividend Equity

U.S. Small Cap

U.S. Equities

Growth

Market Capitalization

Style

Other Sources of Growth

Commodities

Speaker Notes

Interest rates will remain low for the long term. Interest rates tend to track nominal growth rates. The relationship exhibits a 0.89 correlation in the U.S. over the past 50 years, and serves as a guidepost as to why rates are likely set to remain low for the foreseeable future.

Truth be told, 10-Year U.S. Treasuries appear overbought when compared to a smoothed nominal growth rate of 3.5% to 4.0%. But for U.S. rates to move substantially higher, one must forecast either a meaningful pickup in real economic activity (unlikely, given slowing population growth and weakening productivity trends in the U.S. and much of the developed world) or a wage-price spiral (also unlikely, given the output gaps of many of the world’s developed economies). Rates across much of the developed world have already adjusted for a new, slower growth world, and low yields in Europe and Japan will help to keep a lid on U.S. rates.

10-Year U.S. Treasury Rate Nominal GDP (Real GDP + Consumer Price Index)

Correlation

0.90

TreasuriesOversold

TreasuriesOverbought

3.60%

2.12%

20052000199519901985198019751970196519601955 20152010

Interest Rates Likely to Stay Low for a Long Time

Sources: U.S. Bureau of Economic Analysis and Bloomberg, as of 5/31/15. Nominal GDP is smoothed over 10 years, and as of 3/31/15. Forecasts may not be achieved. GDP (gross domestic product) is the total value of all final goods and services produced in a country in a given year. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on page 73. Past performance does not guarantee future results. 54

10-Year Treasury Rate and Nominal Gross Domestic Product (GDP) Y/Y Percent Change (10-Year Moving Average)

Income Objective

10-Year U.S. Treasury Rate Nominal GDP (Real GDP + Consumer Price Index)

Correlation

0.90

TreasuriesOversold

TreasuriesOverbought

3.60%

2.12%

20052000199519901985198019751970196519601955 20152010

Interest Rates Likely to Stay Low for a Long Time

Sources: U.S. Bureau of Economic Analysis and Bloomberg, as of 5/31/15. Nominal GDP is smoothed over 10 years, and as of 3/31/15. Forecasts may not be achieved. GDP (gross domestic product) is the total value of all final goods and services produced in a country in a given year. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on page 73. Past performance does not guarantee future results. 54

10-Year Treasury Rate and Nominal Gross Domestic Product (GDP) Y/Y Percent Change (10-Year Moving Average)

Income Objective

Speaker Notes

U.S. rates remain low by historical standards with yields on traditional fixed income categories not far above the rate of core inflation. We used core inflation this quarter because of a drastic decline in oil prices, which core excludes from its calculation. Other income vehicles that currently offer more competitive real yields may help investors to maintain or improve their standards of living.

Investors Will Have to Find Income Beyond Traditional Sources

1.36

U.S. Treasuries

1.70

Agencies CMBSBarclaysAggregateBond Index

Corporates REITs BBBMunicipal

SeniorLoans

MLPs High Yield

EmergingMarket Bonds

3.09

3.94

4.48

5.23

7.92TEY*

6.056.576.41

2.19 2.24U.S. Core CPI

*Taxable equivalent yield (TEY) is based on the standardized yield and the combined effective federal and state tax rate of 43.4% for 2014 and assumes that alternative minimum tax (AMT) does not apply. Source: Bloomberg, 5/31/15. Asset classes are represented by the following indices (in the order they appear on the chart): Treasuries Index, Barclays U.S. Aggregate: Agencies Index, Aggregate Bond Index, Commercial Mortgage-Backed Securities Index, Corporate Investment Grade Bond Index, FTSE NAREIT All Equity REIT Index, Merrill Lynch BBB Municipal Bond Index, Credit Suisse Leveraged Loan Index, Alerian MLP Index, Barclays High Yield Bond Index and JPMorgan GBI-EM Global Diversified Composite Index. Index definitions can be found on page 73. Past performance does not guarantee future results.

Current Yields (%) as of 5/31/15

55

Income Objective

Investors Will Have to Find Income Beyond Traditional Sources

1.36

U.S. Treasuries

1.70

Agencies CMBSBarclaysAggregateBond Index

Corporates REITs BBBMunicipal

SeniorLoans

MLPs High Yield

EmergingMarket Bonds

3.09

3.94

4.48

5.23

7.92TEY*

6.056.576.41

2.19 2.24U.S. Core CPI

*Taxable equivalent yield (TEY) is based on the standardized yield and the combined effective federal and state tax rate of 43.4% for 2014 and assumes that alternative minimum tax (AMT) does not apply. Source: Bloomberg, 5/31/15. Asset classes are represented by the following indices (in the order they appear on the chart): Treasuries Index, Barclays U.S. Aggregate: Agencies Index, Aggregate Bond Index, Commercial Mortgage-Backed Securities Index, Corporate Investment Grade Bond Index, FTSE NAREIT All Equity REIT Index, Merrill Lynch BBB Municipal Bond Index, Credit Suisse Leveraged Loan Index, Alerian MLP Index, Barclays High Yield Bond Index and JPMorgan GBI-EM Global Diversified Composite Index. Index definitions can be found on page 73. Past performance does not guarantee future results.

Current Yields (%) as of 5/31/15

55

Income Objective

Speaker Notes

Highly favorable liquidity conditions and generally sound corporate fundamentals remain supportive of high yield credit. As of this writing, bond valuations are once again attractive following the fall selloff, while senior loan yields are roughly 500 basis points above LIBOR.*

• Deal leverage (not pictured) is rising modestly, but low borrowing costs give issuers more cushion to service debt.**

• Much of the new issuance of senior loans has been used to refinance existing debt. Such issuance does not add new supply to the market and may improve an issuer’s credit quality.

• Senior loan and high yield bond issuers have been able to extend their maturities to well into the late 2010s and early 2020s. Only 1.8% of all leveraged finance matures by the end of 2016.

**LIBOR—London InterBank Offered Rate—is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. **Source: JPMorgan, 5/31/15.

A Conversation on Senior Loans

56

15

25

35

11

45

55

42

16

71

35

50

27

5259

19 19

47

0

50

100

150

200

250

20222021202020192018201720162015

Senior Loans High Yield

Num

ber o

f Mat

urin

g B

onds

and

Loa

ns

300 bps

600 bps

900 bps

1,200 bps

1,500 bps

20122010200820062004200220001998 2014

350 bps

201520122009200620032000

Senior Loans Spread Over LIBOR

Leveraged Loan and High Yield Bond Maturity Schedule

Percent of New Loans Used for Refinancing and Repricing

Source: Top Chart – Credit Suisse, 5/31/15. Left Chart – JPMorgan, 5/31/15. Right Chart – JPMorgan, 5/31/15. Senior loans are represented by the Credit Suisse Leveraged Loan Index. High yield bonds are represented by the Barclays High Yield Bond Index. Index definitions can be found on page 73. Past performance does not guarantee future results.

Next 2 Years:

Only 5.7% of the bond market matures

Only 1.8% of the loan market matures

Income Objective

A Conversation on Senior Loans

56

15

25

35

11

45

55

42

16

71

35

50

27

5259

19 19

47

0

50

100

150

200

250

20222021202020192018201720162015

Senior Loans High YieldN

umbe

r of M

atur

ing

Bon

ds a

nd L

oans

300 bps

600 bps

900 bps

1,200 bps

1,500 bps

20122010200820062004200220001998 2014

350 bps

201520122009200620032000

Senior Loans Spread Over LIBOR

Leveraged Loan and High Yield Bond Maturity Schedule

Percent of New Loans Used for Refinancing and Repricing

Source: Top Chart – Credit Suisse, 5/31/15. Left Chart – JPMorgan, 5/31/15. Right Chart – JPMorgan, 5/31/15. Senior loans are represented by the Credit Suisse Leveraged Loan Index. High yield bonds are represented by the Barclays High Yield Bond Index. Index definitions can be found on page 73. Past performance does not guarantee future results.

Next 2 Years:

Only 5.7% of the bond market matures

Only 1.8% of the loan market matures

Income Objective

Speaker Notes

Energy infrastructure Master Limited Partnerships (MLPs) own and operate physical assets like pipelines that engage in the transportation and storage of natural resources such as refined petroleum products and natural gas. MLPs benefit directly from growing oil and gas transmission capacity. In addition, the tariffs that midstream energy infrastructure MLPs charge is often indexed to wholesale inflation. As a result, MLPs have distributions to shareholders that consistently outpace rising general price levels.

The precipitous decline in oil has led investors to question the long-term durability of earnings in the master limited partnership market. Reduced drilling activity may impact throughput volumes through select midstream infrastructure, which in turn is likely to alter growth trajectories. Longer lead time projects contracted and initiated in the past, however, will continue to come online and bridge growth gaps for many midstream entities. The first quarter of 2015 has brought generally positive earnings news for midstream MLPs, indicating that many of these companies will continue to prosper even during a more difficult commodity price environment.

Periods of high short-term trading correlation between crude oil and MLPs tend to reverse course quickly. Over the past three years there is only a 0.35 correlation between crude oil prices and the returns of MLPs.

Many basic valuation metrics for MLPs retreated in the recent selloff. Price to Distributable Cash Flow is back near the long-term average (excluding 2008–2009).

A Conversation on Master Limited Partnerships

3

4

5

6

7

8

9

10

Crude Oil

Nat

ural

Gas

(Bcf

/d) C

rude Oil (M

MB

pd)

40

50

60

70

80

90

100

110

120

130

Natural Gas

2020e2015e201020052000199519901985198019751970

0

2

4

6

8

10

12

14%

Consumer Price Index (Year-over-Year % Change)

Alerian MLP Index Annual Yield (%)

2014201220102008200620042002200019981996

7

9

11

13

15x

AverageAverage (excluding 08-09)Price/DCF

20152014201320122011201020092008200720062005200420032002

Large-Cap MLPs

0.85

0.56

0.44

0.40

0.35

1M

3M

6M

1Y

3Y

1. Sources: U.S. Energy Information Administration, BENTEK, 5/31/15. Data after 2014 are estimates. Forecasts may not be achieved. 2. Source: Bloomberg, 5/31/15. MLPs are represented by the Alerian MLP Index. Index definitions can be found on page 73. 3. Sources: FactSet, OFI SteelPath estimates, 5/31/15. Price/Distributable Cash Flow is the price paid today for the next 12 months Distributable Cash Flow. This is the cash flow available to pay distributions. Past performance does not guarantee future results.4. Source: Bloomberg, 5/31/15. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on page 73. Past performance does not guarantee future results.

Poised to Benefit from U.S. Energy Renaissance1 Income Continues to Outpace Inflation2

Prices in Line with Long-Term Average3 Low Correlation to Crude Oil, Long Term4

57

Income Objective

A Conversation on Master Limited Partnerships

3

4

5

6

7

8

9

10

Crude Oil

Nat

ural

Gas

(Bcf

/d) C

rude Oil (M

MB

pd)

40

50

60

70

80

90

100

110

120

130

Natural Gas

2020e2015e201020052000199519901985198019751970

0

2

4

6

8

10

12

14%

Consumer Price Index (Year-over-Year % Change)

Alerian MLP Index Annual Yield (%)

2014201220102008200620042002200019981996

7

9

11

13

15x

AverageAverage (excluding 08-09)Price/DCF

20152014201320122011201020092008200720062005200420032002

Large-Cap MLPs

0.85

0.56

0.44

0.40

0.35

1M

3M

6M

1Y

3Y

1. Sources: U.S. Energy Information Administration, BENTEK, 5/31/15. Data after 2014 are estimates. Forecasts may not be achieved. 2. Source: Bloomberg, 5/31/15. MLPs are represented by the Alerian MLP Index. Index definitions can be found on page 73. 3. Sources: FactSet, OFI SteelPath estimates, 5/31/15. Price/Distributable Cash Flow is the price paid today for the next 12 months Distributable Cash Flow. This is the cash flow available to pay distributions. Past performance does not guarantee future results.4. Source: Bloomberg, 5/31/15. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on page 73. Past performance does not guarantee future results.

Poised to Benefit from U.S. Energy Renaissance1 Income Continues to Outpace Inflation2

Prices in Line with Long-Term Average3 Low Correlation to Crude Oil, Long Term4

57

Income Objective

Speaker Notes

Investment-grade municipal bond yields are still attractive to treasuries, particularly on a tax-equivalent basis, while BBB municipal bonds are still trading at historically wide spreads to AAA municipal bonds.

Fundamentals have strengthened significantly, with state budget gaps decreasing significantly since 2010. Despite all the negative headlines around recent high profile bond restructurings, historically municipal bonds have had a far lower default rate than corporate bonds.

Issuance is poised to climb in 2015 but from very low levels.

A Conversation on Municipal Bonds

0

100B

200B

300B

400B

$500B

Combined Refunding New Money

YTDas of

5/31/15

20142013201220112010200920082007200620052004

42

56 5180

7362

55

51

75360

408389

430390

410433

288

376

229

146

156

9986

1097679131

8861

333

111

161145

90280261

208

274258221

65

144

334

126

30

42

144

72

0

1.0

2.0

3.0

4.0

5.0%

Baa Corporates

Baa Municipals

Year 10Year 9Year 8Year 7Year 6Year 5Year 4Year 3Year 2Year 1

50

100

150

200

250%

201520132011200920072005

100

150

200

250%

201520132011200920072005

Municipal/Treasury Yield Ratio

BBB/AAA Yield Ratio

BBB-Rated Spreads AttractiveMunicipal Bond Spread Ratios

Low IssuanceU.S. Municipal Bond Issuance

Low Historical Default RatesDefault Rates, Average Cumulative Issuer-Weighted, Moody’s Rated Baa Only, 1970–2013

Sources of spread charts: FactSet, Bloomberg, Merrill Lynch, 5/31/15. AAA and BBB are represented by Merrill Lynch Municipal Indices which are derived from data points on the Merrill Lynch Municipal AAA Yield to Worst and Merrill Lynch BBB Yield to Worst, respectively. The yield ratio indicates the relationship between the Merrill Lynch Municipal Master Index and the U.S. 10-Year Treasury. Source of issuance chart: The Bond Buyer, 5/31/15. Source of municipal default rate chart: Moody’s Investors Service. Data regarding default rates is from a study titled “U.S. Municipal Bond Defaults and Recoveries, 1970-2013,” dated May 7, 2014. The study is conducted annually and this is the latest data available. The above figures provide cumulative default rates for Moody’s-rated Corporate and Municipal debt rated Baa. For example, obligations in the Baa Municipal category had a default rate of 0.01% within one year of the initial rating, 0.03% within two years, etc. Performance is shown for illustrative purposes only and does not predict or depict the performance of any Oppenheimer fund. Index definitions can be found on page 73. 58

Income Objective

A Conversation on Municipal Bonds

0

100B

200B

300B

400B

$500B

Combined Refunding New Money

YTDas of

5/31/15

20142013201220112010200920082007200620052004

42

56 5180

7362

55

51

75360

408389

430390

410433

288

376

229

146

156

9986

1097679131

8861

333

111

161145

90280261

208

274258221

65

144

334

126

30

42

144

72

0

1.0

2.0

3.0

4.0

5.0%

Baa Corporates

Baa Municipals

Year 10Year 9Year 8Year 7Year 6Year 5Year 4Year 3Year 2Year 1

50

100

150

200

250%

201520132011200920072005

100

150

200

250%

201520132011200920072005

Municipal/Treasury Yield Ratio

BBB/AAA Yield Ratio

BBB-Rated Spreads AttractiveMunicipal Bond Spread Ratios

Low IssuanceU.S. Municipal Bond Issuance

Low Historical Default RatesDefault Rates, Average Cumulative Issuer-Weighted, Moody’s Rated Baa Only, 1970–2013

Sources of spread charts: FactSet, Bloomberg, Merrill Lynch, 5/31/15. AAA and BBB are represented by Merrill Lynch Municipal Indices which are derived from data points on the Merrill Lynch Municipal AAA Yield to Worst and Merrill Lynch BBB Yield to Worst, respectively. The yield ratio indicates the relationship between the Merrill Lynch Municipal Master Index and the U.S. 10-Year Treasury. Source of issuance chart: The Bond Buyer, 5/31/15. Source of municipal default rate chart: Moody’s Investors Service. Data regarding default rates is from a study titled “U.S. Municipal Bond Defaults and Recoveries, 1970-2013,” dated May 7, 2014. The study is conducted annually and this is the latest data available. The above figures provide cumulative default rates for Moody’s-rated Corporate and Municipal debt rated Baa. For example, obligations in the Baa Municipal category had a default rate of 0.01% within one year of the initial rating, 0.03% within two years, etc. Performance is shown for illustrative purposes only and does not predict or depict the performance of any Oppenheimer fund. Index definitions can be found on page 73. 58

Income Objective

Speaker Notes

If you’d been listening to the news about Puerto Rico, you’d think it was falling apart. The truth is that the Commonwealth is going through some growing pains. Every government, nation, state and municipality faces serious challenges when it comes to providing food, power and shelter to an ever-changing demographic. A few of the common misconceptions regarding Puerto Rico highlight some real positives investors can look out for as opportunities:

1. The government debt as a percentage of the island’s economy is significantly lower in Puerto Rico than in the mainland states, and it certainly is nowhere close to Greece’s.

2. Any employment issues are due to a transition from government-supported employment to that of the private sector, something that should benefit the Commonwealth’s balance sheet in the future.

3. A major challenge will be bringing Puerto Rico’s power system up to par with the rest of the mainland. This is fairly expensive for an island to do and will require some time to plan out how to properly fund the projects and still keep it affordable for the people that need power daily. While power rates in Puerto Rico are expensive compared to New York’s, they are lower than another U.S. island, Hawaii. One of the primary goals of the island’s energy infrastructure projects is to boost efficiency with up-to-date plants, making the system less reliant on oil, one of the most expensive ways to generate electricity.

4. Those leaving the country are less educated than the ones that are sticking it out, showing promise for future generations of Puerto Ricans.

Sources: BLS, World Bank, EIA, Daniel Irving, Infrastructure Capital LLC, 2015.

Misconceptions on Puerto Rico

Sources: World Bank, EIA, Bureau of Labor Statistics, 2015. *Greece’s Debt to GNP figure was calculated using debt from http://www.nationaldebtclocks.org/debtclock/greece and GNI from the World Bank.Deterioration of the Puerto Rican economy could have an adverse impact on Puerto Rican bonds and the performance of the funds that hold them. 59

Myth: Puerto Rico Is Just Like Greece

Myth: Puerto Rico’s High Electricity Prices Are a Result of Mismanagement and an Over-Indebted Utility

Myth: The Private Economy Can’t Create Jobs

Myth: The Educated Are All Leaving

24%

15% 32%

15%

Percentage of Puerto Ricans with a Bachelors Degree

Debt to GDP Debt to GNP

Average Retail Price of Electricity to Customers by Sector2015 for States, 2013 for PR and 2012 for USVI (Cents/kWh)

Residential Commercial Industrial All Sectors

Puerto Rico 25.05 27.93 26.19 26.84

Hawaii 33.34 31.07 26.68 30.04

New York 19.29 14.62 6.09 15.36

United States 12.10 10.30 6.62 10.19

Percentage of Puerto Ricans Who Did Not Finish High School

Puerto Ricans on the island

Puerto Rico Public Sector Debt


U.S. Mainland Public Sector Debt


Puerto Rico General Fund and Sales Tax-Supported Debt



Puerto Ricans living stateside Puerto Ricans living stateside

Greece

Public Sector Debt

196%

68%

74%

40%

Greece

Public Sector Debt

117%*

100%

57%

82%

230

250

270

290

310

330

350

3/31/152/28/151/31/1512/31/1411/30/1410/31/149/30/148/31/147/31/146/30/145/31/144/30/143/31/142/28/141/31/1412/31/1311/30/1310/31/139/30/138/31/137/31/136/30/135/31/134/30/133/31/132/28/131/31/1312/31/1211/30/1210/31/129/30/128/31/127/31/126/30/125/31/124/30/123/31/122/29/121/31/1212/31/1111/30/1110/31/119/30/118/31/117/31/116/30/115/31/114/30/113/31/112/28/111/31/1112/31/1011/30/1010/31/109/30/108/31/107/31/106/30/105/31/104/30/103/31/102/28/101/31/1012/31/0911/30/0910/31/099/30/098/31/097/31/096/30/095/31/094/30/093/31/092/28/091/31/0912/31/0811/30/0810/31/089/30/088/31/087/31/086/30/085/31/084/30/083/31/082/29/081/31/0812/31/0711/30/0710/31/079/30/078/31/077/31/076/30/075/31/074/30/073/31/072/28/071/31/0712/31/0611/30/0610/31/069/30/068/31/067/31/066/30/065/31/064/30/063/31/062/28/061/31/0612/31/0511/30/0510/31/059/30/058/31/057/31/056/30/055/31/054/30/053/31/052/28/051/31/0512/31/0411/30/0410/31/049/30/048/31/047/31/046/30/045/31/044/30/043/31/042/29/041/31/0412/31/0311/30/0310/31/039/30/038/31/037/31/036/30/035/31/034/30/033/31/032/28/031/31/0312/31/0211/30/0210/31/029/30/028/31/027/31/026/30/025/31/024/30/023/31/022/28/021/31/02550

600

650

700

750

800

2002 2004 2006 2008 2010 20142012230

250

270

290

310

330

350Non-Government Employees (Right Axis)

Government Employees (Left Axis)

In T

hous

ands

In Thousands

Income Objective

Misconceptions on Puerto Rico

Sources: World Bank, EIA, Bureau of Labor Statistics, 2015. *Greece’s Debt to GNP figure was calculated using debt from http://www.nationaldebtclocks.org/debtclock/greece and GNI from the World Bank.Deterioration of the Puerto Rican economy could have an adverse impact on Puerto Rican bonds and the performance of the funds that hold them. 59

Myth: Puerto Rico Is Just Like Greece

Myth: Puerto Rico’s High Electricity Prices Are a Result of Mismanagement and an Over-Indebted Utility

Myth: The Private Economy Can’t Create Jobs

Myth: The Educated Are All Leaving

24%

15% 32%

15%

Percentage of Puerto Ricans with a Bachelors Degree

Debt to GDP Debt to GNP

Average Retail Price of Electricity to Customers by Sector2015 for States, 2013 for PR and 2012 for USVI (Cents/kWh)

Residential Commercial Industrial All Sectors

Puerto Rico 25.05 27.93 26.19 26.84

Hawaii 33.34 31.07 26.68 30.04

New York 19.29 14.62 6.09 15.36

United States 12.10 10.30 6.62 10.19

Percentage of Puerto Ricans Who Did Not Finish High School









Puerto Ricans living stateside Puerto Ricans living stateside

Greece

Public Sector Debt

196%

68%

74%

40%

Greece

Public Sector Debt

117%*

100%

57%

82%

230

250

270

290

310

330

350

3/31/152/28/151/31/1512/31/1411/30/1410/31/149/30/148/31/147/31/146/30/145/31/144/30/143/31/142/28/141/31/1412/31/1311/30/1310/31/139/30/138/31/137/31/136/30/135/31/134/30/133/31/132/28/131/31/1312/31/1211/30/1210/31/129/30/128/31/127/31/126/30/125/31/124/30/123/31/122/29/121/31/1212/31/1111/30/1110/31/119/30/118/31/117/31/116/30/115/31/114/30/113/31/112/28/111/31/1112/31/1011/30/1010/31/109/30/108/31/107/31/106/30/105/31/104/30/103/31/102/28/101/31/1012/31/0911/30/0910/31/099/30/098/31/097/31/096/30/095/31/094/30/093/31/092/28/091/31/0912/31/0811/30/0810/31/089/30/088/31/087/31/086/30/085/31/084/30/083/31/082/29/081/31/0812/31/0711/30/0710/31/079/30/078/31/077/31/076/30/075/31/074/30/073/31/072/28/071/31/0712/31/0611/30/0610/31/069/30/068/31/067/31/066/30/065/31/064/30/063/31/062/28/061/31/0612/31/0511/30/0510/31/059/30/058/31/057/31/056/30/055/31/054/30/053/31/052/28/051/31/0512/31/0411/30/0410/31/049/30/048/31/047/31/046/30/045/31/044/30/043/31/042/29/041/31/0412/31/0311/30/0310/31/039/30/038/31/037/31/036/30/035/31/034/30/033/31/032/28/031/31/0312/31/0211/30/0210/31/029/30/028/31/027/31/026/30/025/31/024/30/023/31/022/28/021/31/02550

600

650

700

750

800

2002 2004 2006 2008 2010 20142012230

250

270

290

310

330

350Non-Government Employees (Right Axis)

Government Employees (Left Axis)

In T

hous

ands

In Thousands

Income Objective

Speaker Notes

Here’s what the end of the cycles typically look like:

• Complacency has set in, pundits are ignoring clear warning signs (a flattening yield curve) from the bond market, the best of all market forecasters and equity valuations are elevated.

Here’s where we are as we continue into 2015:

• Only slightly more than half of U.S. adults own stock in any form.*

• The U.S. Treasury yield curve (10-year bond rate minus 3-month T-bill rate) is over 200 basis points wide.**

• Equity valuations are not as cheap as they once were (trading at over 18x on a price-to-trailing 12-month earnings basis) but are still in a price-to-trailing 12-month earnings range, as shown in the valuation bullseye, that is consistent with modest returns.

**Source: Gallup, 4/30/14.**Source: Bloomberg, 2/28/15.

Equity Valuations Are Above Average but in a Range Consistent with Modest Returns

Source: Bloomberg, 5/31/15. The charts are for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

S&P 500 Index Price and Earnings Price-to-Trailing 12M Earnings Ranges & Subsequent 12M Median Returns (since 1940)

60

18x to 20x

8x to 10x

16x to 18x

10x to 12x

12x to 14x

14x to 16x<8x

> 20

4.4%

6.5%

9.1%

15.3%

12.4%

9.6%

6.7%

18.8%

(P/E)

Subsequent Returns

S&P 500EarningsPer Share

$100 1400 1500

$110

$120

$125

$130

14x 15x

Price-to-Earnings (P/E)

16x 16.5x

60-year average

17x 18x 19x

1600 1650 1700 1800 1900

1540 1650 1760 1815 1870 1980 2090

1680 1800 1920 1980 2040 2160 2280

1750 1875 2000 2063 2125 2250 2375

1820 1950 2080 2145 2210 2340 2470

Trailing 12M Earnings

12M Forward Earnings

20x

2000

2200

2400

2500

2600

Today

Growth Objective

Equity Valuations Are Above Average but in a Range Consistent with Modest Returns

Source: Bloomberg, 5/31/15. The charts are for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

S&P 500 Index Price and Earnings Price-to-Trailing 12M Earnings Ranges & Subsequent 12M Median Returns (since 1940)

60

18x to 20x

8x to 10x

16x to 18x

10x to 12x

12x to 14x

14x to 16x<8x

> 20

4.4%

6.5%

9.1%

15.3%

12.4%

9.6%

6.7%

18.8%

(P/E)

Subsequent Returns

S&P 500EarningsPer Share

$100 1400 1500

$110

$120

$125

$130

14x 15x

Price-to-Earnings (P/E)

16x 16.5x

60-year average

17x 18x 19x

1600 1650 1700 1800 1900

1540 1650 1760 1815 1870 1980 2090

1680 1800 1920 1980 2040 2160 2280

1750 1875 2000 2063 2125 2250 2375

1820 1950 2080 2145 2210 2340 2470

Trailing 12M Earnings

12M Forward Earnings

20x

2000

2200

2400

2500

2600

Today

Growth Objective

Speaker Notes

Equity valuations (on a price-to-trailing 12-month earnings basis) may be above long-term averages but the relative value of stocks compared to bonds remains wide from a historical perspective.

• This shows that the S&P 500 Index earnings yield (inverse of the P/E ratio) is over 300 basis points above that of the 10-Year U.S. Treasury yield.

• The last time that the spread between the S&P 500 Index and the 10-Year U.S. Treasury yield was this high for this long was the late 1970s, just before the beginning of a long-term bull market in the U.S.

• This is not just a domestic story. A look at the other G7 countries and select emerging markets reveals that stocks appear cheap to bonds across most of these developed and emerging market countries.

Stocks Trading Cheap to Bonds Globally

–400

0

400

800

South Korea, 582 bps

Japan, 482 bps

Germany, 480 bps

United Kingdom, 417 bps

Poland, 356 bps

France, 332 bps

Canada, 322 bps

Thailand, 296 bps

USA, 325 bpsB

PS

1973 1983 1993 2003 2013

Stocks cheapto bonds

Bonds cheapto stocks

Source: Ned Davis Research, 5/31/15. The earnings yield is calculated as earnings divided by price. The earnings yield spread on the left is the difference between the S&P 500 earnings yield and the 10-Year U.S. Treasury yield, and the spread on the right is the difference between the earnings yield of the MSCI country specific indices and that country’s 10-year government bond yield. Index definitions can be found on page 73. Past performance does not guarantee future results.

S&P 500 Index Minus 10-Year Treasury Yield MSCI Earnings Yields vs. 10-Year Government Bond Yields(Select Countries)

61

Growth Objective

Stocks Trading Cheap to Bonds Globally

–400

0

400

800

South Korea, 582 bps

Japan, 482 bps

Germany, 480 bps

United Kingdom, 417 bps

Poland, 356 bps

France, 332 bps

Canada, 322 bps

Thailand, 296 bps

USA, 325 bpsB

PS

1973 1983 1993 2003 2013

Stocks cheapto bonds

Bonds cheapto stocks

Source: Ned Davis Research, 5/31/15. The earnings yield is calculated as earnings divided by price. The earnings yield spread on the left is the difference between the S&P 500 earnings yield and the 10-Year U.S. Treasury yield, and the spread on the right is the difference between the earnings yield of the MSCI country specific indices and that country’s 10-year government bond yield. Index definitions can be found on page 73. Past performance does not guarantee future results.

S&P 500 Index Minus 10-Year Treasury Yield MSCI Earnings Yields vs. 10-Year Government Bond Yields(Select Countries)

61

Growth Objective

Speaker Notes

There are many drawbacks to consider when hedging foreign bets to the dollar.

The Built-In Hedge

When you purchase international equities, you get an innate built-in hedge. As a country’s currency declines, the cost of its goods declines as well on a relative basis. That often means higher sales—and potentially better margins—for exporters. Investors who hedge their portfolios may not take a hit when the foreign currency declines, but they are likely to miss out when their foreign stocks rebound.

Corporate Hedging Efforts

It’s important to recognize that foreign multinational companies typically use their own elaborate hedging strategies to protect their assets, revenue and expenses in the major currencies. Hedging at the portfolio level could negate that effect.

Cost

Hedging isn’t free. Hedged portfolios need to pay significant transaction costs to buy currency futures and forwards, which can eat into portfolio returns.

Timing

The rationale for hedging often seems obvious in hindsight. Unfortunately, investors often get their timing wrong and add volatility to their portfolios.

We believe investors are better off leaving their exposure to foreign equities unhedged because evidence shows that hedging does not systematically improve equity returns over long periods of time. As the chart represents, since 1990, investors who didn’t hedge against currencies in the MSCI World Index had better rolling 3-year returns 63% of the time.

Hedged or Unhedged?

Source: MSCI, as of 5/31/15. Index definitions can be found on page 73. Past performance does not guarantee future results.

MSCI EAFE Index (Unhedged) vs. MSCI EAFE Local Index (Hedged)Rolling Quarterly 3-Year Annualized Returns

62

1990 1992 1994 1996 20141998 2000 2002 2004 2006 2008 2010 2012

–15

–10

–5

0

5

10

15%

Hedged index outperforms

Unhedged index outperforms

Over rolling quarterly 3-year annualized returns the unhedged index outperforms 63% of the time

Hedged or Unhedged?

Source: MSCI, as of 5/31/15. Index definitions can be found on page 73. Past performance does not guarantee future results.

MSCI EAFE Index (Unhedged) vs. MSCI EAFE Local Index (Hedged)Rolling Quarterly 3-Year Annualized Returns

62

1990 1992 1994 1996 20141998 2000 2002 2004 2006 2008 2010 2012

–15

–10

–5

0

5

10

15%

Hedged index outperforms

Unhedged index outperforms

Over rolling quarterly 3-year annualized returns the unhedged index outperforms 63% of the time

Speaker Notes

Risk assets tend to map into the business cycle stages (expansion, slowdown, contraction, recovery) in fairly intuitive ways, with risk asset outperformance in the recovery and expansion quadrants, underperformance in the contraction quadrant, and neutral performance in the slowdown quadrant.

U.S. Equities

The U.S. is on the cusp between expansion and slowdown, posting very close to trend growth. Valuations, while slightly higher than historical averages, reflect sustained growth, healthy corporate balance sheets, and less uncertainty about fiscal and monetary policy.

European Equities

Valuations are average on a trailing 12-month earnings basis, but look better when examining 10-year inflation-adjusted earnings. The Eurozone economy, while still weak, is surpassing expectations and the 2014 slowdown appears to be a thing of the past. Many European companies have used the ongoing malaise as an opportunity to streamline businesses and reduce operating costs, and we believe that many multinationals will benefit from the emerging market recoveries and modest U.S. expansion. The outlook brightens with further ECB policy accommodations.

Japanese Equities

Policy-induced recession is over and the economy is now expanding. As long as the Bank of Japan is committed to their monetary policy, currently attractive valuations and the prospect of a weaker yen should support Japanese equities.

Higher U.S. Valuations Reflect Sustained Growth

0

5

10

15

20

25x

MSCIJapan

MSCIUSA

MSCIEurope

10-Yr Average P/E

Current P/E

Recovery

Contraction

Expansion

Slowdown

Recovery

Contraction

Expansion

Slowdown

Recovery

Contraction

Expansion

Slowdown

2 YearsAgo

Current

2 YearsAgo

Current

2 YearsAgo

Current

Sources: OFI Global Multi Asset Group Proprietary Leading Indicator and Organisation for Economic Co-operation and Development (OECD), 5/31/15. Business cycles are based on OECD leading indicators. The charts are for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

Business Cycle: United States

Valuations

Business Cycle: Japan

Business Cycle: Eurozone

63

Growth Objective

Higher U.S. Valuations Reflect Sustained Growth

0

5

10

15

20

25x

MSCIJapan

MSCIUSA

MSCIEurope

10-Yr Average P/E

Current P/E

Recovery

Contraction

Expansion

Slowdown

Recovery

Contraction

Expansion

Slowdown

Recovery

Contraction

Expansion

Slowdown

2 YearsAgo

Current

2 YearsAgo

Current

2 YearsAgo

Current

Sources: OFI Global Multi Asset Group Proprietary Leading Indicator and Organisation for Economic Co-operation and Development (OECD), 5/31/15. Business cycles are based on OECD leading indicators. The charts are for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

Business Cycle: United States

Valuations

Business Cycle: Japan

Business Cycle: Eurozone

63

Growth Objective

Speaker Notes

The picture is mixed in the emerging markets although the economies of the most important players, China and India, are recovering.

After several years of weak performance emerging market (EM) equities are poised for an upside surprise. Beyond low relative valuations (emerging market equities trade at a 22% discount to their developed peers vs. a long-term average of 18%)* and the aforementioned improvement in EM leading economic indicators, the continued decline in developing market inflation to only 5.2% in December 2014 from the 20-year average of 7.9%** is allowing for greater monetary policy flexibility.

Inevitable Fed tightening could raise concerns over another taper tantrum, where countries with large negative external balances may be vulnerable to capital outflows. Most countries in the emerging markets are less vulnerable than they were a couple of years ago. Current account balances have improved over the past two years with India a notable standout.

*Sources: FactSet, MSCI 5/31/15. **Sources: Strategas Research Partners, International Monetary Fund 12/31/14. Latest data available.

Emerging Markets: Economic Recovery, Valuations Favorable

Recovery

Contraction

Expansion

Slowdown

Current

2 Years Ago

EM

10-Yr Average P/ECurrent P/E

0

5

10

15

20

25

MSCI EmergingMarkets Index

MSCI EAFEIndex

S&P 500Index

Sources: Organisation for Economic Co-operation and Development and Bloomberg, 5/31/15. Business cycles are based on OECD leading indicators. Emerging markets are defined by an equal weighted composite of the Leading Economic Indicators of Brazil, China, India, Indonesia, Russia and South Africa.

Business Cycle: Emerging Markets Valuations

64

Growth Objective

Emerging Markets: Economic Recovery, Valuations Favorable

Recovery

Contraction

Expansion

Slowdown

Current

2 Years Ago

EM

10-Yr Average P/ECurrent P/E

0

5

10

15

20

25

MSCI EmergingMarkets Index

MSCI EAFEIndex

S&P 500Index

Sources: Organisation for Economic Co-operation and Development and Bloomberg, 5/31/15. Business cycles are based on OECD leading indicators. Emerging markets are defined by an equal weighted composite of the Leading Economic Indicators of Brazil, China, India, Indonesia, Russia and South Africa.

Business Cycle: Emerging Markets Valuations

64

Growth Objective

Speaker Notes

Value stocks are trading rich to historic averages while growth stocks appear to be trading at discounts. In a world where growth is scarce, investors will pay up for it.

On a Valuations Basis, Favoring Growth Over Value

Growth Stocks Trading Cheap to Value Stocks

Source: FactSet, 5/31/15. The charts are for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

Trailing 12-Month Price-to-EarningsRussell 3000 Growth Index / Russell 3000 Value Index

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Rat

io (%

)

2015201320112009200720052003200119991997199519931991198919871985198319811979

Average

65

Growth Objective

On a Valuations Basis, Favoring Growth Over Value

Growth Stocks Trading Cheap to Value Stocks

Source: FactSet, 5/31/15. The charts are for illustrative purposes only and do not predict or depict the performance of any investment. Index definitions can be found on page 73. Past performance does not guarantee future results.

Trailing 12-Month Price-to-EarningsRussell 3000 Growth Index / Russell 3000 Value Index

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Rat

io (%

)

2015201320112009200720052003200119991997199519931991198919871985198319811979

Average

65

Growth Objective

Speaker Notes

A low-for-long call on interest rates doesn’t mean that interest rates won’t ever move from these levels. How have asset classes responded during various interest rate environments?

Using the average 10-Year U.S. Treasury rate over the past 20 years (4%), we identify two different rate regimes (below 4% and rising, below 4% and falling). The results show that rising interest rate environments have proven to be favorable to equity and equity-like assets.

Growth Assets Historically Outperform in Rising Rate EnvironmentsAsset Class Performance During Various Treasury Rate Environments (1995–2014)

–10

–5

0

5

10

15

20

25%

Small-CapStocks

MasterLimited

Partnerships

Large-CapEquities

EmergingMarketEquities

InternationalEquities

SeniorLoans

CommoditiesGoldCoreBonds

TIPS

–15

–10

–5

0

5

10

15

20

25%

TIPSGoldCoreBonds

MasterLimited

Partnerships

SeniorLoans


Large-CapEquities

Small-CapStocks


Commodities

Lowand Fallingand Rising

Low

Sources: Barclays Live, Credit Suisse, Alerian and Bloomberg, 12/31/14. The average 10-Year Treasury rate over the past 20 years is 4%. “Low” is defined as below 4%. TIPS is represented by U.S. Generic Treasury Inflation Protected Bond Securities. Core Bonds are represented by the Barclays Aggregate Bond Index. Gold is represented by the U.S. dollar spot price of one troy ounce. Commodities are represented by the Dow-Jones UBS Commodity Index. Senior Loans are represented by the Credit Suisse Leveraged Loan Index. International Equities are represented by the MSCI EAFE Index. Emerging Market Equities are represented by the MSCI Emerging Market Index. Large-Cap Stocks are represented by the Russell 1000 Index. Master Limited Partnerships are represented by the Alerian MLP Index. Small-Cap Stocks are represented by the Russell 2000 Index. Index definitions can be found on page 73. Past performance does not guarantee future results. 66

Growth Objective

Growth Assets Historically Outperform in Rising Rate EnvironmentsAsset Class Performance During Various Treasury Rate Environments (1995–2014)

–10

–5

0

5

10

15

20

25%

Small-CapStocks

MasterLimited

Partnerships

Large-CapEquities



SeniorLoans

CommoditiesGoldCoreBonds

TIPS

–15

–10

–5

0

5

10

15

20

25%

TIPSGoldCoreBonds

MasterLimited

Partnerships

SeniorLoans


Large-CapEquities

Small-CapStocks


Commodities

Lowand Fallingand Rising

Low

Sources: Barclays Live, Credit Suisse, Alerian and Bloomberg, 12/31/14. The average 10-Year Treasury rate over the past 20 years is 4%. “Low” is defined as below 4%. TIPS is represented by U.S. Generic Treasury Inflation Protected Bond Securities. Core Bonds are represented by the Barclays Aggregate Bond Index. Gold is represented by the U.S. dollar spot price of one troy ounce. Commodities are represented by the Dow-Jones UBS Commodity Index. Senior Loans are represented by the Credit Suisse Leveraged Loan Index. International Equities are represented by the MSCI EAFE Index. Emerging Market Equities are represented by the MSCI Emerging Market Index. Large-Cap Stocks are represented by the Russell 1000 Index. Master Limited Partnerships are represented by the Alerian MLP Index. Small-Cap Stocks are represented by the Russell 2000 Index. Index definitions can be found on page 73. Past performance does not guarantee future results. 66

Growth Objective

Speaker Notes

Investors often seek alternative investments that are not only diversified from the equity and fixed income markets but from each other as well. Alternative assets such as Master Limited Partnerships, real estate investment trusts, commodities, cat bonds and gold may help to diversify portfolios with multiple benefits including potentially reducing the volatility of an overall portfolio.

Correlations of Assets to Equities, Fixed Income, and to Each Other

–0.4

–0.2

0.0

0.2

0.4

0.6

0.8

1.0

GoldSwiss ReCat Bond

Index

FTSENAREITEquityREITIndex

HFRIRelativeValue:Multi-

Strategy

BloombergCommodity

Index

CSLeveraged

LoanIndex

AlerianMLPIndex

U.S. DollarIndex

–0.4

–0.2

0.0

0.2

0.4

0.6

0.8

1.0



Strategy

CSLeveraged

LoanIndex

BloombergCommodity

Index

AlerianMLPIndex

Swiss ReCat Bond

Index

GoldU.S. DollarIndex

–0.25–0.12

–0.03

0.07 0.110.22 0.24

0.35

–0.53

0.08

0.24

0.52 0.520.61 0.66

0.75

Correlation with Barclays Aggregate Bond Index Correlation with S&P 500 Index

HFRI Relative Value: Multi-Strategy

Swiss Re Cat Bond Index

CS Leveraged Loan Index

Bloomberg Commodity Index Gold

FTSE NAREIT Equity REIT Index

U.S. Dollar Index

Alerian MLP Index

HFRI Relative Value: Multi-Strategy 1.00 0.39 0.83 0.59 0.20 0.48 –0.41 0.58

Swiss Re Cat Bond Index 0.39 1.00 0.32 0.17 0.07 0.20 –0.16 0.17

CS Leveraged Loan Index 0.83 0.32 1.00 0.43 0.03 0.54 –0.25 0.56

Bloomberg Commodity Index 0.59 0.17 0.43 1.00 0.51 0.33 –0.67 0.45

Gold - Continuous Contract 0.20 0.07 0.03 0.51 1.00 0.11 –0.41 –0.02

FTSE NAREIT Equity REIT Index 0.48 0.20 0.54 0.33 0.11 1.00 –0.39 0.34

U.S. Dollar Index –0.41 –0.16 –0.25 –0.67 –0.41 –0.39 1.00 –0.29

Alerian MLP Index 0.58 0.17 0.56 0.45 –0.02 0.34 –0.29 1.00

Sources: FactSet, 5/31/15. HFRI as of 4/30/15. Diversification does not guarantee profit or protect against loss. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on page 73. Past performance does not guarantee future results. 67

Correlations of Assets to Equities, Fixed Income, and to Each Other

–0.4

–0.2

0.0

0.2

0.4

0.6

0.8

1.0

GoldSwiss ReCat Bond

Index



Strategy

BloombergCommodity

Index

CSLeveraged

LoanIndex

AlerianMLPIndex

U.S. DollarIndex

–0.4

–0.2

0.0

0.2

0.4

0.6

0.8

1.0



Strategy

CSLeveraged

LoanIndex

BloombergCommodity

Index

AlerianMLPIndex

Swiss ReCat Bond

Index

GoldU.S. DollarIndex

–0.25–0.12

–0.03

0.07 0.110.22 0.24

0.35

–0.53

0.08

0.24

0.52 0.520.61 0.66

0.75

Correlation with Barclays Aggregate Bond Index Correlation with S&P 500 Index

HFRI Relative Value: Multi-Strategy

Swiss Re Cat Bond Index

CS Leveraged Loan Index

Bloomberg Commodity Index Gold

FTSE NAREIT Equity REIT Index

U.S. Dollar Index

Alerian MLP Index

HFRI Relative Value: Multi-Strategy 1.00 0.39 0.83 0.59 0.20 0.48 –0.41 0.58

Swiss Re Cat Bond Index 0.39 1.00 0.32 0.17 0.07 0.20 –0.16 0.17

CS Leveraged Loan Index 0.83 0.32 1.00 0.43 0.03 0.54 –0.25 0.56

Bloomberg Commodity Index 0.59 0.17 0.43 1.00 0.51 0.33 –0.67 0.45

Gold - Continuous Contract 0.20 0.07 0.03 0.51 1.00 0.11 –0.41 –0.02

FTSE NAREIT Equity REIT Index 0.48 0.20 0.54 0.33 0.11 1.00 –0.39 0.34

U.S. Dollar Index –0.41 –0.16 –0.25 –0.67 –0.41 –0.39 1.00 –0.29

Alerian MLP Index 0.58 0.17 0.56 0.45 –0.02 0.34 –0.29 1.00

Sources: FactSet, 5/31/15. HFRI as of 4/30/15. Diversification does not guarantee profit or protect against loss. Correlation expresses the strength of relationship between distribution of returns of two sets of data. The correlation coefficient is always between +1 (perfect positive correlation) and –1 (perfect negative correlation). A perfect correlation occurs when the two series being compared behave in exactly the same manner. Index definitions can be found on page 73. Past performance does not guarantee future results. 67

Speaker Notes

This section is designed to help articulate some of your core wealth management capabilities and concepts. Historically we are a left-brain industry talking to a right-brain client; often relying too heavily on charts, graphs, statistics and data rather than providing a broader framework and context, and creating compelling clarity through the use of analogy, metaphor and story. This section has a number of “recurring client conversations” that all advisors have designed to bring together left-brain structure with right-brain delivery.

Positioning

Your P

ractice

Positioning Your Practice

Positioning

Your P

ractice

Positioning Your Practice

Speaker Notes

Our entire practice has been designed to address the two fundamental questions that every client has of our industry.

Question #1 is, “will I make it?” We have found the majority of people we meet haven’t even defined “it.”

• First, we take you through an immersive discovery process and help you define everything you’re trying to accomplish in your financial life.

• Then we take a look at everything you’re doing to determine whether in fact what you hope happens has a chance to occur.

• If those two align we will pat you on the back and say congratulations, you’re well on your way.

• If there is a deficiency or shortfall we will surface the issue and give you rational solutions to get back on track.

2. This brings us to question #2, “Do I have any financial blind spots?”

• Here our team does a 360° look at you from a financial perspective, looking for anything that could do yourself, your family or your business harm. Once again if we uncover something, we will surface the issue and give you rational solutions to close that risk exposure.

So at the end of this exhaustive process you have answered the two fundamental questions that everyone has: “Will I make it and do I have any financial blind spots.”

69

The Two Questions Everyone Wants an Answer to

Will I make it? Do I have any financial blindspots?

69

The Two Questions Everyone Wants an Answer to

Will I make it? Do I have any financial blindspots?

Speaker Notes

We incorporate the same three-step process used by the medical profession.

1. In the diagnostic phase the doctor focuses on three areas: your past medical history, your current symptoms and your future objectives for your long-term well-being.

2. The doctor then takes the information and provides a prognosis.

3. Only then does the doctor make targeted recommendations designed to take you on your unique medical journey.

We take that same three-step approach in our practice.

1. Step one is deep discovery. In this discovery phase we look at your past financial history, your current financial structure and your future financial objectives for your long-term well-being.

2. Step two is to take all of that information, data and insight and come back with a written plan of attack.

3. Then and only then do we make specific targeted recommendations designed to fulfill that plan and take you on your unique financial journey.

STEP 3

Treatment

STEP 2

Prognosis

STEP 1

Diagnosis

STEP 3

Recommendation

STEP 2

Planning

Physician’s Process Our Process

STEP 1

Discovery

Our Three-Step Process

70

STEP 3

Treatment

STEP 2

Prognosis

STEP 1

Diagnosis

STEP 3

Recommendation

STEP 2

Planning

Physician’s Process Our Process

STEP 1

Discovery

Our Three-Step Process

70

Speaker Notes

When asked by a client or prospect why you formed a team, you’re being challenged to explain the rationale, structure and value your team provides.

Response: We formed a team because of one simple word: complexity!

While the human condition has never been better, life has also never been that complex. The complexity is multidimensional and is transforming our industry.

The demographic and financial complexity, geopolitical complexity and extremely interrelated markets create complexities in which, when someone sneezes in China, we get a cold in the United States and Europe. It requires the fully integrated capability of the banking industry, the brokerage industry and the insurance industry. People spend their entire lives in one of these industries, but we now must bring all three to bear on your complex financial challenges. A single person is incapable of knowing all that’s necessary to deploy this complex integrated model. This is why we formed a team; to apply the collective insights and capabilities of those three industries to solve the complex financial needs of our clientele. We believe one individual is simply incapable of knowing all that’s necessary to address these challenges.

Depth of Knowledge

Bank Brokerage Insurance

Breadth of Capability

Comprehensive Financial Plan

Why We Formed a Team

71

Depth of Knowledge

Bank Brokerage Insurance

Breadth of Capability

Comprehensive Financial Plan

Why We Formed a Team

71

Speaker Notes

As part of our comprehensive wealth management strategy, we help you protect against three major contingencies that can devastate you, your family and/or your business financially:

1. You can die too soon

2. You can live too long

3. Or you can break down on the journey

We work closely with your attorney to ensure that your estate is structured and funded in a way that mitigates these three contingencies.

Unlike any other investment decision we make, this one is always on the clock. If we decide to invest in a particular stock or portfolio manager, we can do that pretty much at any time in the near future with nominal impact. However, when it comes to contingency planning and the use of insurance products “everyone has a Monday and Tuesday in their lives... on Monday they’re insurable, and on Tuesday they’re not.”

As a matter of principle we always make sure to pack our lifesavers before we take your financial craft out to sea.

Everyone has a Monday and a Tuesday in their lives...On Monday they’re insurable, on Tuesday they’re not.

Die too soon

Livetoo long

Break downon the journey

Contingency Planning: The Big Three

72

Everyone has a Monday and a Tuesday in their lives...On Monday they’re insurable, on Tuesday they’re not.

Die too soon

Livetoo long

Break downon the journey

Contingency Planning: The Big Three

72

Index Definitions

The S&P 500 Index is a market capitalization weighted index of the 500 largest domestic U.S. stocks.

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

The Barclays Aggregate Bond Index is an index of U.S. Government and corporate bonds that includes reinvestment of dividends.

The Barclays Aggregate U.S. Treasuries Index represents public obligations of the U.S. Treasury with a remaining maturity of one year or more.

The Barclays Aggregate Agencies Index, Agency Mortgage-Backed Securities (MBS) Index and Commercial Mortgage-backed Securities (CMBS) Index represent the U.S. Government Related-Agencies, U.S. MBS and CMBS components of the Barclays U.S. Aggregate Bond Index, respectively.

The Barclays Aggregate Corporate Bond Index represents primarily investment-grade corporate bonds within the Barclays Aggregate Bond Index.

The Barclays High Yield Bond Index covers the universe of fixed rate, non-investment- grade debt. The JPMorgan GBI-EM Global Diversified Index tracks total returns for local-currency-denominated money market instruments in the emerging markets.

The Barclays Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term tax-exempt bond market and includes bonds rated investment-grade by at least two of the three major rating agencies (Moody’s, S&P and Fitch).

The JPMorgan Domestic High Yield Index tracks the investable universe of domestic below-investment-grade bonds in the United States.

The JPMorgan EMBI Global Diversified Bond Index is a uniquely weighted version of the EMBI Global Index, which limits the weights of those countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt outstanding.

The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships (MLPs).

The MSCI World Index is designed to measure global developed market equity performance.

The MSCI Emerging Markets (EM) Index is designed to measure global emerging market equity performance.

The MSCI EAFE Index is designed to measure developed market equity performance, excluding the U.S. and Canada.

The MSCI EAFE Hedged to USD Index is 100% hedged to the USD by selling each foreign currency forward at the one-month forward weight.

The Credit Suisse Leveraged Loan Index is a composite index of senior loan returns representing an unleveraged investment in senior loans that is broadly based across the spectrum of senior bank loans and includes reinvestment of income (to represent real assets).

The Merrill Lynch AAA Municipal Indices measure the performance of U.S. tax-exempt bonds rated AAA.

The MSCI Italy, MSCI Germany, MSCI United Kingdom, MSCI Canada, MSCI France, MSCI U.S., MSCI Thailand, MSCI Poland, MSCI Mexico, MSCI Korea, MSCI Russia, MSCI Argentina and MSCI Europe ex. U.K. represent equity market performance in those countries or regions.

The Citigroup Non-U.S. World Government Bond Index (USD Unhedged) is composed of foreign government bonds with maturities over one year.

The Bloomberg Commodity Index is composed of commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange.

The HFRI RV (Hedge Fund Research, Inc. Relative Value) Multi-Strategy Index employs an investment thesis predicated on realization of a spread between related yield instruments in which one or multiple components of the spread contains a fixed income, derivative, equity, real estate, MLP or combination of these or other instruments.

The FTSE National Association of Real Estate Investment Trusts (NAREIT) Equity REITs Index is an index consisting of certain companies that own and operate income-producing real estate that have 75% or more of their respective gross invested assets in the equity or mortgage debt of commercial properties.

The Merrill Lynch BBB Municipal Bond Index is an index designed to measure the performance of below-investment-grade municipal bonds. BBB is the highest grade of rating by Moody’s that is considered below investment grade.

SBBI U.S. Small Company Stock Index is an unmanaged index of stocks of small U.S. companies.

SBBI U.S. Large Company Stock Index is an unmanaged index of stocks of large U.S. companies.

SBBI U.S. Long-Term Government Bond Index is an unmanaged index generally representative of the bond market.

SBBI U.S. (30-day) Treasury Bills is generally representative of the rate of return on a savings investment.

Swiss Re Cat Bond Index is constructed to track the total return for U.S. dollar- denominated catastrophe bonds.

The Russell 1000 Index measures the performance of large-capitalization stocks.

The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 2000 Index measures the performance of small-capitalization stocks.

The Russell 2000 Growth Index measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.

The Russell Midcap Index measures the performance of mid-capitalization stocks.

The Russell Midcap Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values.

The Russell Midcap Value Index measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values.

Shiller Home Price Index tracks changes in home prices throughout the United States.

Consumer Price Index (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.

The Gold Spot price is quoted as U.S. dollar per troy ounce.

The U.S. existing home sales median price tracks changes in residential property prices of existing single-family homes, condos and co-op sales.

The DMS Global Index, DMS Japan Index, DMS Spain Index, DMS Australia Index, DMS Canada Index, DMS United Kingdom Index, DMS United States Index, DMS France Index, DMS Europe Index, DMS Italy Index, and DMS Germany Index represent equity market performance in those countries or regions.

The 10-Year U.S. Treasury Yield is generally considered to be a barometer for long-term interest rates.

Treasury Inflation Protected Securities is generic U.S. Government inflation-index bonds.

Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of any investment. Past performance does not guarantee future results.

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Special Risks

Alternative asset classes may be volatile and are subject to liquidity risk. Commodity-linked investments are considered speculative and have substantial risks, including the risk of loss of a significant portion of their principal value. Prices of commodities and commodity-linked investments may fluctuate significantly over short periods due to a variety of factors, including agricultural, economic and regulatory developments. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and political and economic uncertainties. Emerging and developing market investments may be especially volatile. Investments in securities of growth companies may be volatile. Investing in MLPs involves additional risks as compared to the risks of investing in common stock, including risks related to cash flow, dilution and voting rights. Each Fund’s investments are concentrated in the energy infrastructure industry with an emphasis on securities issued by MLPs, which may increase volatility. Energy infrastructure companies are subject to risks specific to the industry such as fluctuations in commodity prices, reduced volumes of natural gas or other energy commodities, environmental hazards, changes in the macroeconomic or the regulatory environment or extreme weather. MLPs may trade less frequently than larger companies due to their smaller capitalizations which may result in erratic price movement or difficulty in buying or selling. Additional management fees and other expenses are associated with investing in MLP funds. Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall. Below-investment-grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Event-linked securities otherwise known as Cat Bonds are fixed income securities for which the return of principal and interest payment is contingent on the non-occurrence of a trigger event that leads to physical or economic loss. If the trigger event occurs prior to maturity, event-linked securities may lose all or a portion of its principal and additional interest. Investments in securities of real estate companies may be especially volatile. Because they do not have an active trading market, shares of Real Estate Investment Trusts (REITs) may be illiquid. The lack of an active trading market may make it difficult to value or sell shares of REITs promptly at an acceptable price. Senior loans are typically lower rated and may be illiquid investments (which may not have a ready market). A portion of a municipal bond fund’s distributions may be taxable and may increase taxes for investors subject to the alternative minimum tax (AMT). Capital gains distributions are taxable as capital gains.

This presentation has been filed as a complete presentation and is designed to be presented in its entirety in the order shown. The views contained in the preceding document represent the opinions of OppenheimerFunds as of 5/31/15, are subject to change based on subsequent developments, are not intended as investment advice, and are not intended to predict or depict the performance of any investment. Consult your financial advisor.

Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.

Before investing in any of the Oppenheimer funds, investors should carefully consider a fund’s investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting oppenheimerfunds.com or calling 1 800 CALL OPP (225 5677). Read prospectuses and summary prospectuses carefully before investing.Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc. 225 Liberty Street, New York, NY 10281-1008 © 2015 OppenheimerFunds Distributor, Inc. All rights reserved.

DS0000.350.0615 June 11, 2015

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