S O LV I N G

FOR 2018
 I N V E S T M E N T P L AT F O R M

BREADTH OF INDEPENDENT PERSPECTIVES ACROSS ASSET CLASSES

EQUITY FIXED INCOME ALTERNATIVES

AUM $284BN1 $101bn $127bn $64bn AUM and Committed Capital

INVESTMENT
PROFESSIONALS2 223 156 130
Global/EAFE Global Investment Grade Private Equity: Alternative Credit:
U.S. Value/Core/Growth Global Non-Investment Grade – Primaries – Private Credit
Emerging Markets Emerging Markets – Co-Investments – Residential Loans
FUNDAMENTAL Regional EM, China Opportunistic/Unconstrained – Secondaries – Special Situations
– Specialty Strategies
Socially Responsive Investing Municipals Hedge Funds:
– Minority stakes in
Income Strategies: Specialty Strategies: alternative firms/DYAL – Multi-Manager
– MLP – CLO Mezzanine – Equity Long/Short
– REITs – Currency – Credit Long/Short
– Corporate Hybrids – Event Driven

Global Risk Premia

QUANTITATIVE U.S. Options
Emerging Markets Global Macro
Custom Beta Commodities

Integration of Environmental, Social and Governance Factors

MULTI-ASSET CLASS SOLUTIONS AND STRATEGIC PARTNERSHIPS

FUNDAMENTAL Global Relative and Absolute Return QUANTITATIVE Risk Parity

Income Focused Global Tactical Asset Allocation
Inflation Management
Liability Aware

1 
As of September 30, 2017. Firm assets under management (AUM) includes $100.6 billion in Equity assets, $127.2 billion in Fixed Income assets and $56 billion in Alternatives assets.
Alternatives “AUM and Committed Capital” includes assets under management for non-Private Equity businesses and Committed Capital since inception for the Private Equity and Private
Credit businesses. Committed Capital since inception reflects all contractual commitments, and those still in documentation, to fund private equity and credit investments, including those
that have since been realized, advised by NB Alternatives Advisers LLC and its affiliates or predecessors since 1987.
2
As of November 1, 2017.
3
 S O LV I N G
FOR 2018

TEN FOR 2018

The heads of our investment platforms identified the key themes they anticipate will guide investment
decisions in 2018. These 10 themes are summarized below and discussed in more detail in the
CIO Roundtable beginning on page 5.

Macro: Global Inflection Point Nears Risks: Clouds Gather as the Year Progresses

1 3

“Goldilocks” Gives Way to Something
More Complicated Geopolitical Climate Remains Unsettled
Though the strength of global economic momentum is unde- Though 2017 mostly failed to deliver the electoral fireworks of
niable, a confluence of factors—including tightening central 2016, elections this year in Italy, Mexico, Brazil and the U.S.—
bank policy, plateauing economic growth and rising market in addition to ongoing disrupters like North Korea, special
volatility—suggests that conditions are unlikely to remain investigations, Brexit, etc.—could upset the current order.
“just right” for all of 2018.

2 Both Monetary and Fiscal Policy are in

Motion Globally
As major central banks wind down unprecedented levels of
monetary stimulus, their efforts are being met—and poten-
tially complicated—by expansionary fiscal policy and reform
initiatives taking root in a number of countries.
4 
China Accelerates Structural Reforms
An emboldened Xi will be more aggressive in reducing
leverage and re-orienting China’s economy toward more
sustainable, high-quality development, to the potential
detriment of near-term growth.

4
Fixed Income: The Chase Continues Equities: Two-Way Markets Return

5 7
 
Market Momentum Could Present
No End to the Search for Yield Opportunities to Reduce Beta Exposure
Biased higher but still low, long-term interest rates continue Strong earnings growth could fuel equities in early 2018,
to send investors into less-familiar corners of the fixed providing investors with chances to trim holdings in
income markets in the hunt for yield, with high valuations high-valuation stocks and redeploy into more attractive
leaving little cushion to absorb a volatility shock. risk-adjusted exposures.

6 8


Credit Drivers Begin to Change Active Management Positioned to Shine

Continued low default rates suggest global credit Market dynamics continue to shift in favor of active
spreads likely will be impacted less by fundamentals management, which could extend the comeback
and more by technical developments such as hedging mounted by stock pickers last year after a period of
costs, LDI-related flows and regulatory changes. underperformance.

Alternatives: Finding Opportunities Amid High Valuations

9 10
 

Low-Vol Strategies for a More Volatile World
Market-neutral and relative-value hedge funds may
help investors earn returns with lower volatility.
Sharpen Quality Focus in Private Assets
Given high private equity valuations, investors can help
mitigate risk by targeting experienced private equity
sponsors with a history of adding operational value or by
moving up the capital structure to first-lien private debt.

5
S O LV I N G
FOR 2018

JOSEPH V. AMATO
PRESIDENT AND
CHIEF INVESTMENT OFFICER—
EQUITIES

ERIK L. KNUTZEN, CFA, CAIA

CHIEF INVESTMENT OFFICER—
MULTI-ASSET CLASS

BRAD TANK
CHIEF INVESTMENT OFFICER—
FIXED INCOME

ANTHONY D. TUTRONE
GLOBAL HEAD OF ALTERNATIVES

6
 CIO ROUNDTABLE

DISRUPTING THE MOMENTUM

With the end of 2017 near, the leaders of our investment platforms gathered to talk about the evolution of the
investment environment over the past 12 months and what they expect for 2018.

Joe Amato: The optimism of the “reflation trade” that ended 2016 gave
way to a “Goldilocks” environment over the course of 2017, fueling the
rise of risk assets of all types and geographies. We remain in that “just
right” state as we enter the new year, with synchronized global growth
for the first time in a decade, low inflation and low volatility.
Erik Knutzen: I think all this makes 2018 a particularly challenging
year to forecast, especially from a full-year perspective. Though I expect
the positive impulse to extend into the early part of 2018, obstacles
ratchet up significantly as the year progresses, moving us away from
Goldilocks into something more complex.

Tony Tutrone: The economic momentum is undeniable. All 45 countries
tracked by the OECD are expected to expand in 2017, which has only
happened three times over the past 50 years. The U.S. is running above
3% and nearing full employment. Euro zone growth has broadened
beyond Germany and the Netherlands, and the region is finally keeping
pace with the U.S. Japan’s in the midst of its longest quarterly growth
streak in more than 20 years. China continues motoring along even as
Beijing pushes toward sustainable long-term reforms.
We anticipate monetary tightening will really start to be felt about
midyear, when year-over-year growth in G-4 central banks’ balance
sheets is expected to turn negative. Obviously, the Fed is furthest along
in terms of normalization. December’s hike brought the upper bound of
the fed funds rate to 1.5%, and the Fed is forecasting three more hikes
in 2018. While its balance-sheet reduction has been uneventful so far,
the runoff accelerates in 2018 and will reach its monthly maximum
of $50 billion by the fall. The European Central Bank plans to halve

SYNCHRONIZED GLOBAL GROWTH TOOK HOLD IN 2017

8%
7% 6.7% 6.8%
6.5%
6%
4.9%
5% 4.3%
4.6%

4% 3.6% 3.7%
3.0% 2.9% 3.2%
3% 2.5%
2.2% 2.3% 2.1% 1.9% 2.1% 2.2%
2% 1.5% 1.8% 1.5%
1.5%
1.0%
1% 0.7%

0%
U.S. Euro Area Japan Canada Australia China Emerging Markets World

2016 GDP Growth Rate 2017 Projected GDP Growth Rate 2018 Projected GDP Growth Rate

Source: International Monetary Fund. Note: IMF projections as of October 31, 2017.

7
its monthly asset purchases beginning in January, and it may look to
move its policy rate off zero later in the year. The Bank of Japan may be
slower to act given its multi-decade battle against deflation, but it will
become increasingly difficult for the BOJ to defend open-ended stimu-
lus measures with the Fed and ECB heading in the opposite direction.
Brad Tank: In general, I think that the synchronized global growth will
transition to a synchronized global plateauing in 2018. The business
cycle is aging rapidly, and the tighter conditions Erik mentioned could
start to weigh on its ability to persist. That said, I don’t expect a U.S.
recession in 2018, though 2019 and 2020 are viable possibilities. Chi-
na’s continued deleveraging, which may accelerate in 2018 behind an
even more powerful Xi Jinping, will also play a role in dampening the
global economic acceleration. Less liquidity and slowing but reason-
ably strong economic growth combined with high valuations should
result in renewed volatility across financial markets.
I also see signs that inflation may pick up globally in 2018. In fact, I
think conditions are more hospitable for an increase in inflation than
they have been in years. The output gap in the U.S., for example,
has closed completely, and rising productivity should pressure wages
higher. Producer prices in China have climbed sharply in the past two
years, which should ultimately be felt in consumer prices in many
markets. On top of this, many countries are intent on introducing
expansionary fiscal policy and reform initiatives. The U.S. passed a
$1.5 trillion tax cut. French President Macron has turned out to be
as pro-business as advertised; in just a few months in office he has
liberalized labor laws and cut the deficit, and we expect more reform
in 2018. Japan’s recent budget calls for growth-oriented fiscal policy.
Brazil is looking to trim pension costs in an effort to get its public
debt under control.
Should these efforts spur a meaningful acceleration of inflation, central
banks may be forced to act more quickly than they had planned to—
and more quickly than markets expect.
Amato: It’s really an unprecedented—and precarious—time for cen-
tral banks as they manage the unwind of years of extraordinary accom-
modation. We’re basically in uncharted territory, and the Fed has a new
hand at the tiller in Jay Powell. He’s been a Yellen ally since he joined
the board in 2012, and I expect his approach will be consistent with
the groundwork she laid. That said, the degree of difficulty is certainly
8
higher now than it was a year ago. Meanwhile, the seven-member Fed
board of governors is understaffed, with three vacancies currently and
two more coming in 2018.
Knutzen: The Fed isn’t the only place with job openings. Trump has
had a hard time filling the seats in his administration, at both the
cabinet and sub-cabinet levels. Only about one-third of the key posi-
tions in the administration requiring Senate confirmation have been
filled; two-thirds of the Treasury’s positions remain open and half are
open at Commerce. While part of this can be attributed to Democratic
stonewalling, a lot is due to a lack of qualified candidates willing to
serve. And it’s troubling that some of the most capable members of
the administration—people like Cohn and Tillerson—don’t seem like
they’ll be around much longer.
Tank: I think we can agree that Washington in general seems like
it has the potential to be a source of market headwinds in 2018.
It looks like the Mueller special investigation will continue to make
headlines, whether or not the president ultimately is implicated in
any collusion with the Russians. And it’s safe to expect a conten-
tious midterm election season in 2018. There’s a very real chance
that the Democrats take back the House in 2018—if they do, that
may increase the chances that Trump could be impeached in 2019.
With Republicans likely to keep hold of the Senate, the possibility of
Trump’s removal is remote, though a divided Congress would result
in political gridlock. Come June and July people will start looking
toward the polls to see how these races are trending, which may
rattle markets.
Tutrone: We managed to get through last year’s slate of Europe-
an elections relatively unscathed. This year Italy is the only major
country up for grabs, with parliamentary elections taking place in
March. Italy is still the third-largest economy in Europe, though it
also has the second largest debt-to-GDP ratio and a recovering
banking system. Polls suggest that there’s a possibility that an an-
ti-establishment, anti-Europe party, like the Five Star Movement,
could rise to power there.
There are some interesting emerging markets political races coming up
in 2018. Mexico elects a new president in July. The poll leader there—
Andres Obrador, a left-wing populist—has been outspoken about his
distaste for NAFTA. Should he win, trade negotiations with the U.S.
could grow even more contentious. In Brazil, the runaway leader in
the polls is a former president who was caught up in the Petrobras
corruption scandal and may be facing prison time.
On top of potentially disruptive elections, you have the usual sources
of geopolitical discord. North Korea continues to lob missiles and is
always unpredictable, as is the potential U.S. response to any provo-
cation. Brexit talks continue in Europe, and while there’s been some
progress, a final accord appears far off.
ELECTION RISK PERSISTS: KEY 2018 ELECTIONS
March October
Italian general election Brazilian general election
July November
Mexican general election U.S. midterm elections
Source: Neuberger Berman.
Amato: In contrast with the wild cards Tony mentioned, there’s much
less uncertainty in China after Xi cemented his leadership following the
most recent Communist Party congress. As a result I think Xi may be
more aggressive than most people expect when it comes to promoting
economic and financial reforms and risk containment. China typically
doesn’t announce its GDP growth target until March, but it wouldn’t
be surprising to see it again set at 6.5% for 2018. While it beat that
bogey easily in 2017, this year will be more of a challenge should
Xi follow through on aggressively reining in credit and cutting excess
industrial capacity.
Knutzen: At the end of the day, we need to acknowledge the pos-
itive economic context in which we will be making our investment
decisions. In short, strong macroeconomic fundamentals and corporate
earnings are real and underscore the case for remaining exposed to
growth. The challenge for investors is to do so in a prudent way, with
risks skewed as far as possible in their favor.
Asset allocation becomes more challenging in a world of high val-
uations, a maturing economic cycle and shallow, short-lived market
dips. From a multi-asset class investment standpoint, our approach
for 2018 must be predicated on finding those asset classes and
9
subsectors where meaningful upside potential is still available, and
then seeking to extract that upside potential in more sophisticated,
risk-controlled ways.
FIXED INCOME: THE CHASE CONTINUES
Tank: While the Fed’s slow-and-steady approach to the normaliza-
tion of its target fed funds rate has successfully pushed up the short
end of the Treasury yield curve, longer-term rates have remained
anchored. There are three primary reasons for this, in my view: per-
sistently low inflation, the tethering effect of low global rates on U.S.
rates and the disconnect between the Fed and the market in terms of
the terminal fed funds rate. I see all three of these pressures easing
as 2018 progresses, which suggests that longer-term Treasury rates
may be biased higher.
That said, I believe interest rates across the Treasury curve likely will
remain well below historical levels in 2018 and beyond. And though
the amount of bonds offering negative yields worldwide seems to
have peaked, it remains substantial at about $6 trillion. As a result,
yield-hungry investors may continue to look to other areas of the mar-
kets, with varying degrees of risk, in search of increased yield potential.
For example, we continue to see a ton of inflows into U.S. credit
markets from non-U.S. investors; this may become a problem, as non-
U.S. investors are vulnerable to a pause in economic growth, rising
rates and rising hedging costs. This last point may be the key risk for
credit at the moment, as interest-rate differentials between the U.S.
dollar and other developed markets are pushing the cost of hedging
back to euros or Japanese yen ever higher, complicating the regional
relative-value decision and threatening to debase the appeal of U.S.
credit for non-U.S. investors.
Real rates in the emerging world have continued to attract capital
flows as well, and emerging markets have delivered solid returns over
the past 12 months. Reflation and an upward bias on global bond
yields can pose a risk to the performance of EMD assets. However, a
buffer is likely to come from the consolidation of the cyclical improve-
ment in a large majority of emerging economies and ongoing reforms
in key markets.
GOVERNMENT BONDS WITH NEGATIVE YIELDS HAVE PEAKED BUT REMAIN SIGNIFICANT

As of November 30, 2017

% Negative
1 2 3 4 5 6 7 8 9 10 10+ Yielding
Switzerland 59%
Germany 64%
Japan 55%
NEGATIVE YIELD
Finland 49%
Denmark 55%
Netherlands 58%
Belgium 36%
France 49%
Sweden 43%
Austria 50%
Spain POSITIVE YIELD 28%
Italy 21%
Norway 0%
U.K. 0%
U.S. 0%

Source: Bloomberg Barclays.

In terms of fixed income positioning for 2018, it may be an opportune
time to take a bit of credit risk off as a way to de-risk the whole port-
folio as spreads become more two-way and range-bound. Basically,
we’ve entered a new zone for fixed income. The cyclical market is over.
Yields could go lower over the next 12 months, but the secular bull
market has already ended. It doesn’t really feel that way thanks to
low correlations among fixed income markets, which have buffered
fixed income investors during recent bouts of trouble. But given narrow
credit spreads and low rates, the lifeline of low correlations is unlikely
to persist. In fact, I think the chance of a broad, cross-markets selloff is
higher today than it has been for years.
Knutzen: From an asset allocator’s perspective, cash is in the discus-
sion for the first time in years, at least for U.S. dollar investors. The risk-
adjusted return outlook on cash now competes with investment grade
credit while also offering the liquidity and optionality to grasp value
opportunities that may result from any sell-off in risk assets.
Tank: I’d add TIPS to the category of investments that may see renewed
interest in 2018. With breakeven inflation rates tracking well below
2%, TIPS currently present an attractive opportunity for investors who
agree with our assessment that inflation will perk up over the course
of 2018.

10
EQUITIES: TWO-WAY MARKETS RETURN
Amato: I think equity market momentum will continue in early 2018,
driven by strong economic and earnings growth. As we discussed pre-
viously, however, clouds are gathering on the horizon; these risks com-
bined with already-extended valuations suggest the beta-driven returns
delivered by stock markets in recent years may give way to something
more nuanced and two-way. While I wouldn’t advocate trying to time
markets, strong positive momentum in the new year would present an
opportunity to shift equity portfolios to a more defensive posture.
In the U.S., we envision a rebound from the smaller, more cyclical com-
panies that have lagged. Larger, higher-quality companies and growth
stocks outperformed to an extraordinary degree in 2017; for example,
while the Russell 1000 Growth Index was up nearly 30%, the Russell
2000 Value Index rose a pedestrian 6%. We heard a lot about the
market leadership of “FANG” stocks in 2017, and such narrowness of
sentiment historically has not been a good sign for equity markets. It
could be an indication that investors are chasing winners rather than
investing for more broad-based growth—a phenomenon typical of
late-cycle behavior. Some catch-up from smaller companies and cyclicals
would be reassuring. The tax bill should help, as smaller companies
would disproportionately benefit from a lower statutory tax rate given
their higher current effective rates.
Non-U.S. equities also should present investment opportunities, in
many cases offering exposure to potential growth catalysts at lower
valuations. In terms of developed markets, both Europe and Japan are
seeing consistent economic growth for the first time in many years,
buoying corporate earnings growth. Brad spoke earlier about how
emerging markets debt has benefitted from the fundamental improve-
ments and ongoing reform across the emerging markets complex, and
we foresee a similar tailwind for its equities.
Knutzen: Options strategies are another possibility to consider. Equity
index put-writing strategies historically have captured more upside
than downside from equity markets over the long term, with lower
volatility.1 Such strategies may be particularly attractive for equity mar-
ket investors concerned about downside risk.
Amato: I’d note that I believe the stage is set for active management
to do well in 2018 after a solid 2017. Our analysis of Morningstar
data shows that in 2017 50% of active U.S. stock funds beat their
benchmarks net of fees and transaction costs, compared to only 25%
in 2016.2 One reason for the rebound in stock picking has been the
collapse in the correlation between stocks. For the S&P 500, for example,
correlation has gone from around 0.60 at the beginning of 2016 to
less than 0.10 today. Similar trends can be seen in a variety of equity
markets globally.

NON-U.S. EQUITIES HAVE LAGGED EVEN AS EARNINGS HAVE IMPROVED

Cumulative Indexed Price Performance

200
180
160
140
120
100
80
60
40
20
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
S&P 500 Index MSCI ACWI ex-US

Source: Bloomberg.

1
As measured by the CBOE S&P 500 PutWrite Index versus the S&P 500 Index.
2
Based on analysis of all actively managed U.S.-domiciled open-end equity funds data from Morningstar. Performance is based on fund’s oldest share class relative to
its primary prospectus benchmark.
11
The tenets of capitalism suggest that correlations should go down
when the capital allocation process is driven by company-specific
factors rather than the macroeconomic influences that have prevailed
in recent years. The 2017 rebound in actively managed portfolios is
a timely reminder that these relative performance trends have long
been cyclical, not structural. We think the cycle may have turned in
favor of active.
ALTERNATIVES: FINDING OPPORTUNITIES AMID
HIGH VALUATIONS
Tutrone: Hedge fund performance was vastly improved in 2017 and
the industry is on track to deliver its best performance since 2013,
though it continues to lag broader equity markets. We think the shift
to a higher interest-rate environment and the emergence of more
volatile, two-way markets could result in an expanded opportunity
set for hedge fund managers, particularly those who seek to identify
market-agnostic trading opportunities. This would include uncorrelated
strategies like market-neutral and relative-value hedge funds, which
historically have delivered returns similar to traditional hedge fund cat-
egories (long/short equity, for example) with less volatility. By hedging
out all market beta and focusing exclusively on alpha generation via
12
very idiosyncratic risks, uncorrelated strategies have little to no correla-
tion with broader financial markets. They also tend to exhibit low cor-
relation with traditional hedge fund strategies and can be combined in
a well-balanced portfolio to further enhance the overall risk-adjusted
return profile. While these strategies have struggled at times during the
risk-on/risk-off markets that have characterized the post-crisis years,
they have the potential to be a source of incremental return in the face
of a fading beta trade and hazy forward market direction.
Looking at the private markets, with valuations rich and more and more
deals coming on line, investment discipline is more important than ever.
One way to exercise discipline is by targeting general partners who have
a history of both sourcing high-quality private equity deals and creating
value in these businesses through operational improvements. This track
record should be long enough to capture multiple market cycles, not
merely the post-crisis bull market.
Moving up the capital structure to the debt of private equity-backed
companies is another way to help mitigate risk in private equity while
attempting to capture illiquidity and complexity premiums. We believe
going to the top of the capital structure to focus on senior secured
first-lien debt offers perhaps the best relative value at this time.
 SCORECARD 2017

Below we take a quick look at how our predictions for 2017 fared.

Macro: A Sea Change for Economies and Markets Fixed Income: Normalization Resumes

1. The Rise of Nationalistic Self-Interest Continues to
Upset the World Order
PARTIALLY TRUE
What we said: After political upheavals in the U.K. and U.S. during
2016, French and German voters will be among those in 2017 to
test the persistence of anti-establishment/anti-globalization trends.
What we saw: While mainstream political forces returned to primacy
in 2017, the geopolitical climate remains unsettled.
3. Real Interest Rates in the U.S. Continue to Push Higher
PARTIALLY TRUE
What we said: Expectations for higher growth and inflation are
likely to drive higher Treasury yields and a steeper curve, though we
don’t anticipate a break from the global rate tether.
What we saw: While three increases in the federal funds rate in
2017 pushed short rates higher, longer bond yields were flat and
the curve flattened considerably as a result.

2. Central Bank Impact Fades 4. Credit Still Holds Appeal

NOT TRUE TRUE

What we said: Global central banks appear to have reached an in-

 What we said: The credit cycle is mature, but it doesn’t appear

flection point and will likely drive an increase in interest rates, inflation ready to turn just yet; when it does, more supportive fundamentals
expectations and market volatility, and a stronger U.S. dollar. are likely to help absorb the impact.

What we saw: Monetary policy globally remained highly accom-

 What we saw: The credit cycle has life in it yet; credit spreads

modative in 2017, and we witnessed a return to the familiar low- drifted tighter in 2017, and their narrow levels suggest risks in
growth, low-rates, low-volatility “Goldilocks” environment of the credit are skewed to the downside.
post-crisis years.

13
Equities: Back to Basics
5. Pro-Growth Trump Administration Fuels Outperformance
of U.S. Equities
PARTIALLY TRUE
What we said: A more business-friendly environment—characterized
by lower taxes, loosened regulations and robust fiscal spending—
could provide a tailwind for corporate earnings and stock markets in
the U.S.
What we saw: While the anticipated pro-growth legislation has
been slow to materialize, robust corporate earnings growth drove
U.S. equity indexes higher—though no faster than the pace of
many non-U.S. markets.
6. Alpha—and Active Managers Able to Generate It—
May Stage a Comeback
TRUE
What we said: The removal of artificially low interest rates could
 that require a particularly deft touch from Beijing.
result in individual stock performance once again being differenti-
ated by company fundamentals, to the benefit of high-conviction,
fundamental investors.
What we saw: Intra-stock correlations collapsed over the course

of the year, creating a better environment for stock pickers and a
sharp improvement in active managers’ performance relative to
their benchmarks.
Alternatives: Helping Narrow the Return Gap
9. Volatility Can Work for Investors
PARTIALLY TRUE
What we said: We anticipate that the difference between long-
term investor needs and what can be generated from traditional
sources of beta is likely to persist, highlighting the value of alter-
native risk premia and volatility-capture strategies.
What we saw: Though volatility has yet to re-emerge, the demand
for alternative sources of returns and diversification continues,
buoyed by the consistent attractive performance of strategies like
equity put writing.
14
Emerging Markets: Both Winners and Losers Emerge
7. Economic Orientation Counts

TRUE
What we said: In our view, fears that U.S. policy will drag down
the entire emerging world are overblown; improved global growth
should be generally supportive, though countries likely will be
differentiated based on their key economic drivers—manufacturing
vs. commodities vs. domestic.
What we saw: Buoyed by synchronized global growth combined
with fundamental improvements and ongoing reforms, emerging
markets equities and debt delivered strong returns in 2017.
8. China Risks Remain Significant
TRUE
What we said: The world’s second-largest economy faces a number
of ongoing issues—from asset bubbles to currency management—
What we saw: China’s need to bolster its financial stability hasn’t
abated, and policy measures to accomplish it have contributed to
volatility in the country’s stock and bond markets.
10. Private Debt Remains Attractive
TRUE
What we said: Despite the potential re-emergence of banks as liquidity
providers, it is unlikely that they will rebuild the infrastructure
required to compete in similar, less-liquid credit. In addition, increased
M&A activity will likely keep the private debt market well stocked
with opportunities.
What we saw: The private debt market continued to attract significant
capital in 2017, and the resulting competition for attractive invest-
ment opportunities has led to the emergence of pricing pressures.
 S O LV I N G
FOR 2018

A S S E T A L L O C AT I O N C O M M I T T E E O U T L O O K
 MARKET VIEWS

BASED ON 12-MONTH OUTLOOK FOR EACH ASSET CLASS

Neutral Outlook
Below Normal Above Normal
Outlook Outlook

FIXED INCOME

Cash
Global Bonds

Investment Grade Fixed Income

U.S. Government Securities
Investment Grade Corporates
Agency MBS
ABS / CMBS
Municipal Bonds
U.S. TIPS
High Yield Corporates
Emerging Markets Debt

EQUITY

Global Equities
U.S. All Cap
U.S. Large Cap
U.S. Small and Mid Cap
MLPs
Developed Markets—Non-U.S. Equities
Emerging Markets Equities
Public Real Estate

REAL AND ALTERNATIVE ASSETS

Commodities
Lower-Volatility Hedge Funds
Directional Hedge Funds
Private Equity

As of 1Q 2018. Views shown reflect near-term tactical asset allocation views and are based on a hypothetical reference portfolio. Nothing herein constitutes a
recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. See “Additional Disclosures” at the end
of this presentation for additional information regarding the Asset Allocation Committee and the views expressed.  

16
 REGIONAL FOCUS

FIXED INCOME, EQUITIES AND CURRENCY

Neutral Outlook
Below Normal Above Normal
Outlook Outlook

REGIONAL FIXED INCOME

U.S. Treasury 10 Year
Bunds 10 Year
Gilts 10 Year
JGBs 10 Year
EMD Local Sovereign
EMD Hard Sovereign
EMD Hard Corporates

REGIONAL EQUITIES

Europe
Japan
China
Russia
India
Brazil

CURRENCY

Dollar
Euro
Yen
Pound
Swiss Franc
EM FX (broad basket)

“We respect the economic and market momentum currently driving risk assets, and
express that in our positive views on non-U.S. equities, U.S. small caps, cyclical value
stocks and shorter-duration strategies.”
— ERIK L. KNUTZEN, CFA, CAIA
CHIEF INVESTMENT OFFICER—MULTI-ASSET CLASS

As of 1Q 2018. Views shown reflect near-term tactical asset allocation views and are based on a hypothetical reference portfolio. Nothing herein constitutes a
recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. See “Additional Disclosures” at the end
of this presentation for additional information regarding the Asset Allocation Committee and the views expressed.

17
 ASSET ALLOCATION COMMITTEE OUTLOOK 1Q2018

A G A M E O F T W O H A LV E S
Erik L. Knutzen, CFA, CAIA
Chief Investment Officer—Multi-Asset Class

As every sports fan knows, strategy must be path-dependent. Think about football—the version we Americans insist on
calling “soccer,” which might explain why we failed to qualify for this year’s FIFA World Cup. If you’re a goal down with a
quarter of the game to go, you will end the game on the attack. Go two up in the first half, and while you might substitute a
center forward for a fullback, you’d still seek to ride your momentum. Only once you’ve knocked in a third would you “park
the bus” on the goal line, as my U.K. colleagues put it. As we move into 2018 we are two goals to the good, with synchro-
nized global growth and a big U.S. tax overhaul. It may already be opportune to bring on short-duration fixed income and
low-volatility hedged strategies as a substitute for some corporate credit. But economic and market momentum is still with
us, and we think we can press for a third goal before halftime with inflation-sensitive assets. As we approach the midpoint of
the year, volatility, rising interest rates, a late-cycle slowdown and potential political risks could come back at us, looking for
equalizers; at this point, it could be a good time to use continued market momentum to shift, gradually, to a more defensive
formation. Appropriately enough, in our view, the World Cup year of 2018 looks primed to be a game of two halves. In this
quarter’s Asset Allocation Committee Outlook, we set out our thoughts on a game plan for this environment.

Global equities, as measured by the MSCI World Index, enjoyed high
double-digit returns through 2017. Emerging markets were up by around
30%. The S&P 500 Index posted a positive total return in every month of
2017. Volatility bounced around near its all-time lows for much of the year.
Conditions like these tend not to last forever.
Against this background, the Asset Allocation Committee (AAC) debat-
ed whether to downgrade its 12-month outlook for global equities from
Above Normal to Neutral. In the end we let it stand, and the reason was
well articulated by one AAC member: “Do we want to forego return
potential, not because we got worried about rich prices in an environment of
clear-and-present risks, but because we got worried that nothing looks partic-
ularly cheap in an environment that just seems eerily quiet?”
Equities are not cheap, but neither are they terribly rich. Even if they were,
rich or full valuations do not cause market corrections in themselves. Mar-
kets respond to catalysts.
18
MSCI World ended 2017 trading at 17 times forward earnings and MSCI
Emerging Markets at just 12 times. The S&P 500 Index is at over 18 times
forward earnings, which assumes 10 – 11% earnings growth through
2018—and it is not unreasonable to see half of that coming from U.S. cor-
porate tax reform and the other half from nominal GDP growth, before any
other tailwinds are taken into account. These are not extreme valuations.
Some pockets, such as value stocks and the energy sector, appear still to
offer value.
When it comes to immediate downside risks, we note signs of late-
cycle behavior, from disappearing high yield bond covenants to parabolic
bitcoin appreciation, but the overwhelming catalysts we see moving into the
first quarter of 2018 are momentum from synchronized global growth, the
benign inflation and monetary-policy background, and pro-growth policies
such as tax reform in the U.S.
Things could change through the second half of 2018, however. As always, DIVERGENCE IN U.S. AND NON-U.S. EQUITY
precise timing is impossible, but we envision catalysts for higher market VALUATIONS PERSIST DESPITE IMPROVING EARNINGS
GROWTH OUTSIDE THE U.S.
volatility becoming more visible as we look later into the year.

First, we expect inflation to reappear, which may encourage central banks

200
to hike interest rates more quickly than the market currently anticipates. At
MSCI ACWI ex USA Index
the same time, balance-sheet reduction will be gathering pace at the Federal 180 S&P 500 Index
Reserve and the European Central Bank will be advanced in its asset-purchase
160
tapering. Risk premia may have to adjust especially quickly in Europe.

Then there is the likelihood of further slowing in China’s economy, as conditions 140

tighten around the shadow banking system and the authorities focus on the 120
quality rather than the pace of economic growth. That is likely to have knock-on
effects on commodity prices and other growth drivers in emerging markets, and 100
to soften our global synchronized cycle later in 2018.
80
Among the more predictable political risks, 2018 brings potentially eventful
60
elections in Brazil, Italy and the U.S. Markets will start to look at opinion polls
in late summer for any signs that the Democrats might regain a majority in 40
‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17
either house of Congress in November’s midterm elections, which could tie the
current administration’s hands for the remainder of its term. In the meantime,
we have ongoing coalition talks in Germany, Robert Mueller’s special counsel 30%
investigation in the U.S., and of course the Brexit negotiations. 25%

In other words, the AAC expects 2018 to be a game of two halves, and that 20%

makes it a challenge to articulate a consistent 12-month outlook. At this 15%

point, our views still reflect our expectation that strong positive economic 10%
and market momentum can persist into the first half, and we favor remaining 5%
positioned to ride it. Should the first half play out as we anticipate, it would 0%
be opportune to begin using such continued momentum to adopt a more
-5%
defensive stance later in the year while remaining ready to act should risks
-10%
manifest themselves sooner rather than later. In addition, for some months
-15%
already we have identified a few areas of elevated downside risk to avoid,
as well as some areas of potential value. -20%
-25%
2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17(e)
RESPECT THE CURRENT POSITIVE MOMENTUM
S&P 500 EPS Growth, YoY change STOXX 600 Topix
The aspects of our view that express confidence in current positive momen-
tum will be familiar to readers of our 4Q 2017 AAC Outlook.
Source: International Monetary Fund. Note: Projections as of October 31, 2017.
Overall, we retain an Above Normal outlook for global equity returns enter-
ing 2018, and most AAC members prefer non-U.S. over U.S. equities, and In fixed income we still lean toward high yield over investment grade, and
emerging equities over developed. While we have become more Neutral on prefer credit over governments and shorter duration over long.
China, on the whole we still see the emerging world as a beneficiary of
synchronized global growth. We favor U.S. small caps over large caps, and We think current momentum should be respected and favor maintaining expo-
value stocks over growth. The latter overlaps with sector-level preferences sure while also standing ready to adopt a more defensive stance should risks
for financials and energy. manifest themselves sooner rather than later in 2018.

19
MORE CAUTIOUS ON CREDIT
While we still prefer corporate bonds over governments, corporate credit is one
place where we have already adopted a more cautious view.
The price action during the fourth quarter of 2017—equity markets reaching
new highs while credit struggled to stay flat—showed how corporate bonds
can dislocate from equity at this stage in the cycle.
We note three things. First, despite defaults remaining historically low overall,
we have seen fundamental earnings deterioration in some high yield names.
Second, any sign of a growth slowdown would be expected to be credit-neg-
ative, but with spreads as tight as they are, rising interest rates may also
pose a risk from the opposite direction.
That combination of short duration and optionality also makes it well-suited to
one of our central scenarios: a gradual re-emergence of inflation. That scenario is
also why the AAC’s slightly more conservative outlook for credit risk is balanced by
an upgraded view on inflation-sensitive assets. This view is supported by the fact
that these assets tended to be among the few that underperformed during 2017.
Examples include master limited partnerships (MLPs), which were down some
10% and now yield around 7% despite the fact that oil averaged $43/bbl
during 2016 and $50/bbl in 2017. Our 12-month outlook for commodities
moved from Neutral to Above Normal this quarter, and this mirrored our pref-
erence for the energy sector in equities. In fixed income, as well as preferring
cash and shorter duration, AAC members unanimously favor Treasury inflation-
protected securities (TIPS) over nominal bonds.

And finally, as we discussed in our previous Outlook, interest-rate differen- COMMODITIES LOOK MORE ATTRACTIVE IF INFLATION IS
tials between the U.S. dollar and other developed markets are pushing the EXPECTED TO RISE
cost of hedging back to euros or Japanese yen ever higher. This is perhaps
the key risk at the moment, as the marginal positioning in U.S. credit is today
8% Bloomberg Commodity Index, YoY change (rhs) 80%
dominated by non-U.S. dollar investors. The risk of these investors heading U.S. Headline CPI, YoY change (lhs)
for the exits right now remains low, but forward markets indicate that hedg-
6% 60%
ing costs are set to rise further in 2018, building up the pressure.

Taking all that into account, the AAC is beginning to take the view that the pric- 4% 40%
ing of corporate credit risk is outpacing the fundamentals of corporate earnings,
2% 20%
and that there are other places to get income, albeit with varying degrees of risk,
that appear less vulnerable to interruptions in flows. One such place might be
0% 0%
emerging markets debt, where inflows continue to be steady and positive.
-2% -20%
MORE POSITIVE ON SHORT-DURATION AND
INFLATION-SENSITIVE ASSETS -4% -40%

Another place to look for income and low-volatility returns that are not
-6% -60%
so exposed to the credit and interest-rate risks of corporate bonds might ‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 ‘17
be lower-volatility hedged strategies, where we maintain our longstanding
Above Normal 12-month outlook. Source: Bloomberg.

Short-duration fixed income is also beginning to look more attractive. For
some, that might even include the possibility of a cash holding—U.S. dollar
investors, at least, can look forward to the prospect of risk-adjusted returns
from cash competing with investment grade credit in 2018.
While it does not have the duration to respond positively in the event of
a substantial sell-off in risk assets and a bid for government bonds, short-
duration assets do offer the liquidity and optionality to seize the resulting
value opportunities.
Summing up, while it would be easy to conclude that our view has become more
defensive over the past quarter, that would not reflect the nuances at play. We
respect the momentum currently driving both the fundamentals of the economy
and the pricing of financial risk assets, and express that in our positive views
on non-U.S. equities, U.S. small caps, cyclical value stocks and shorter-duration
strategies. We also anticipate a turnaround in the inflation story. We do think
the newfound return potential of cash can help investors manage portfolio beta
down slightly, and we are also mindful of the asymmetrical downside risks build-
ing in credit. Nonetheless, we expect one or two more AAC quarterlies to see
the light before a genuinely defensive stance is evident in our views.

20
 UP FOR DEBATE

U.S. TAX REFORM: WHO WINS, WHO LOSES?

One Asset Allocation Committee member recalled a time, leading up The loss of these tax exemptions led to a rush of muni-bond
to the financial crisis, when analysts would confidently call the top issuance at the end of 2017—supply hit peaks last seen after the
in corporate profit margins after 20 years of appreciation. The cost mid-1980s tax reform—and that led to technically attractive
of capital couldn’t fall any lower, they said. Neither could the cost of pricing that is likely to dominate trading for the first half of 2018.
labor. In the U.S., there was also the small matter of a much higher That attractiveness, especially against other parts of the fixed
corporate tax rate weighing on many companies’ profits. income market, led us to upgrade our 12-month outlook from
Below Normal to Neutral.
Since then, of course, rates have collapsed, wages have stagnated,
and robots and artificial intelligence have started eating into paid
jobs. The final shoe, U.S. tax reform, dropped at the end of 2017. MUNICIPAL BOND ISSUERS HAVE RUSHED TO MARKET
IN ANTICIPATION OF LOSS OF TAX EXEMPTION
In previous Outlooks we have noted that smaller, more domestically
oriented U.S. companies stand to benefit more than larger multina-
tionals, simply because they are more exposed to the U.S. corporate Municipal 30-Day Supply Volume (in thousands)
tax rate.
$30
The technology and health care sectors are the least likely to benefit.
Retail may reverse a long period of underperformance.
$25
Capital-intensive businesses and their suppliers are likely to benefit
from the fact that the bill allows for the immediate expensing of as- $20
sets with a life of less than 20 years, a massive shift in incentives for
businesses to make capex investments now. Those incentives should
$15
eventually feed into the wider economy, too.

The disallowance of tax deductibility on interest payments in ex- $10

cess of 30% of EBITDA will punish excessively leveraged business
strategies, but companies with debt-to-EBITDA ratios of less than
$5
approximately 4.0, or with an interest coverage ratio greater than
3.3, are likely to be unaffected, and will benefit from the headline
$0
corporate tax cut. 3/15 7/15 11/15 3/16 7/16 11/16 3/17 7/17 11/17

The changes are particularly important for the U.S. municipal bonds
market. They effectively eliminate “advance refunding” of tax-
exempt bonds. This is when, in order to lock in low interest rates,
a trust is created to pay the interest on higher-coupon municipal
debt that is not yet callable, and new, lower-coupon debt is issued
to fund the trust.
That debt has represented some 50% of total annual new-issue
volume over recent years. The bill also eliminates tax exemption for
private-activity bonds, and could push up the cost of borrowing by
as much as a third for many colleges, hospitals and airports, to name
a few typical issuers.
Source: Bloomberg.
Finally, the AAC debated the potential impact of repatriating over-
seas profits on the U.S. dollar. A lot depends on how much of the
estimated $3.5 trillion is brought home and how much is held in
non-dollar currencies. Estimates range from 20% to as high as
40%. On the whole, the AAC concluded that repatriation may
present some short-term upside risk, but that central-bank policy
and inflation dynamics will likely be the more important determi-
nant of dollar strength over the medium term.

21
 UP FOR DEBATE
WILL INFLATION REAPPEAR IN 2018?
Despite synchronized global growth and falling unemployment,
inflation remained muted during 2017. U.S. Core CPI even declined
over the summer.
That inspired a lot of commentary about potential structural down-
ward pressures on inflation, from globalization and online shopping
to the robotization of the workforce. We believe this is premature.
Falling unemployment coexisted with low inflation for some years
during the early 1960s, after all, immediately before a 20-year peri-
od of inflation shocks.
We can identify a number of signs of incipient rising inflation today.
The U.S. output gap has closed, suggesting that any pickup in
growth from here would be inflationary. China’s Producer Price Index
has risen fast since 2016. As many finished goods bought by Amer-
ican consumers originate or pass through China’s manufacturing
sector, we would expect that to feed into U.S. CPI soon, as it has
done historically.
Bureau of Labor Statistics data show that, while low-wage jobs have
accounted for almost 41% of U.S. jobs growth since 2007 and high-
wage jobs only 25%, it is also true that the low-wage sector has
seen the biggest jump in year-on-year wage growth during 2017.
Other indicators, such as the Employment Cost Index and the Atlanta
Fed Tracker, also show signs of a pickup in labor’s pricing power.
Officialdom is ready to offer support: both Mario Draghi of the Euro-
pean Central Bank and Haruhiko Kuroda of the Bank of Japan have
urged labor unions to increase their wage demands. The declining
savings rate suggests that even with low wage growth, consumers
are growing more confident to spend.
Finally, broader data sets than those picked up by traditional infla-
tion measures, such as the Underlying Inflation Gauge (UIG) calcu-
lated by the Federal Reserve Bank of New York, tend to show a much
clearer upward trend in prices, beginning in early 2016.
While the AAC’s central scenario is for a benign return to rising
inflation globally, to levels approaching central bank’s targets rather
than heights well in excess of them, this was enough to see upgrades
in our 12-month outlooks for inflation-sensitive assets such as
TIPS, MLPs, energy-sector equities and commodities.
22
FIX ED INCOME
GLOBAL FIXED INCOME
U.S. Government/Agency: The AAC maintained a Below Normal outlook.
In 2018, the Federal Reserve expects to hike rates three more times and will
continue reducing its balance sheet. The Fed expects two rate increases each
in 2019 and 2020. The cost to investors of hedging U.S. dollar exposures
is likely to rise further due to the reduction in the Fed’s balance sheet, as
interest rate differentials between the dollar and other currencies widen,
and as investment banks’ reserves decline. That may reduce the relative at-
tractiveness of U.S. investment grade securities for non-U.S. dollar investors.
U.S. Municipal Bonds: The AAC upgraded its outlook to Neutral from
Below Normal. Under the proposed tax reforms, certain tax-exempt bonds
may be disallowed after 2017 (advance refunding, private activity bonds and
tax credit bonds). That led to a substantial increase in supply to the market
in the weeks leading up to the end of the year, creating a short-term value
opportunity. Supply is expected to be lower under the new tax rules.
Developed Market Non-U.S. Debt: The AAC maintained a Below Normal
outlook on concerns around valuations in the European bond market. While
it is expected to remain accommodative, the European Central Bank will
begin reducing monthly asset purchases in January, which could cause rates
to move higher. The Bank of Japan continues with its yield-targeting strategy
at the long end of the curve.
High Yield Fixed Income: The AAC maintained a Neutral view. Within
fixed income, high yield is still preferred to investment grade both for its
higher expected return as well as its shorter duration, though tight spreads
are a reason for the Neutral outlook overall. The AAC notes that fundamen-
tal deterioration in, and outflows from, the telecom sector could pose risks.
Emerging Markets Debt: The AAC maintained its Above Normal outlook,
as this asset class still appears relatively cheap despite the recent rally. EMD
is a large beneficiary of synchronized global growth, low inflation, low rates
and a weak dollar. The asset class could benefit from continued inflows if the
global growth environment extends.
EQ U IT Y
U.S. EQUITIES
The AAC maintained a Below Normal outlook for U.S. large cap and a Neutral
outlook for U.S. small and mid cap. Large caps with multinational operations
are most likely to benefit from dollar weakness and repatriation of cash
under the proposed tax reforms, but small- and mid-cap companies should
benefit more from the current U.S. administration’s policies in general. On
tax reform, specifically, many large companies already pay less than the
headline tax rate. The AAC anticipates style rotation into value stocks from
growth in both U.S. large and small caps, as these are more attractively
valued at the moment, and are also more likely to benefit from tax reform
and deregulation. However, markets will take time to distinguish winners
and losers from these dynamics. Large-cap valuations are elevated, but not
necessarily enough to constitute a timing signal. Risks include geopolitics
(such as tension around North Korea) and the potential for the Fed or ECB to
tighten policy too early or too aggressively, as markets are underestimating
the importance of the liquidity that the central banks have provided.
MLPs
PUBLIC REAL ESTATE
The AAC maintained a Below Normal outlook as valuations are full and the
asset class is less likely to benefit from global growth and late-cycle dynam-
ics than some other risk assets. While listed real estate has performed rela-
tively well during past rate-hike cycles, rising rates nonetheless pose a risk.
NON-U.S. DEVELOPED MARKET EQUITIES
The AAC maintained its Above Normal outlook. In Europe, the economy is
recovering strongly and unemployment rates have declined rapidly. The ECB
remains accommodative, but risks are attached to the very strong euro as
the central bank begins to reduce asset purchases in January and discusses
how the QE program will wind down. The forthcoming election in Italy is also
a key risk. Japanese equities tend to benefit from a weaker yen flowing
through to corporate earnings, and the Bank of Japan remains committed
to propelling the economy forward and its yield-targeting policy. The Com-
mittee felt that if there were any signs of the current synchronized global
growth breaking down and slowing, they would be seen first in Japan. The
U.K. has seen some important progress in its Brexit negotiations with the
European Union, but market reactions seem to be isolated to the U.K. for
the time being.

The AAC upgraded its outlook from Neutral to Above Normal. Depressed
valuations due to low oil prices earlier this year provide an opportunity for
MLPs to recover; they currently provide an attractive yield relative to fixed
income and other dividend yielding assets such as REITs and utilities. MLPs
also have long-term contracts, take-or-pay contracts and fee-based assets
that potentially provide a hedge against inflation.
MLPS ARE ATTRACTIVELY VALUED
EMERGING MARKETS EQUITIES
TThe AAC maintained its Above Normal outlook. Emerging economies and
equities should continue to benefit from synchronized global growth, low
inflation and low interest rates. Balance-sheet adjustments have taken place
across many economies, making them less susceptible to the potential neg-
ative impact of dollar strength as the Fed tightens policy. China’s managed
slowdown remains a key risk, as does any sign of a slowdown in global growth.

14% Alerian MLP Index Spread

Average REAL AND ALTERNATIVE ASSETS
12%

10% COMMODITIES
The AAC voted to upgrade its outlook from Neutral to Above Normal. Should
8%
inflation pick up due to higher energy prices, pent-up demand and wage
6% increases, commodities could act as a hedge. Oil remains range-bound
as supply, driven by U.S. shale coming back on line and continued OPEC
4% production cuts, is capping the upside in prices.

2%

0%
‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16

Source: Alerian, Bloomberg.

23
HEDGE FUNDS
The AAC maintained its Above Normal outlook for lower-volatility hedged
strategies and its Neutral outlook for directional hedged strategies. As a re-
sult of concerns around fixed income valuations, some investors are looking
for “ballast” to go into their diversifying and lower-volatility portfolios. At
the same time a lack of market direction, paired with rising dispersion within
markets, may be improving the picture for the alpha-driven strategies that
tend to be characteristic of the lower-volatility group.
PRIVATE EQUITY
The AAC maintained its Above Normal outlook. Despite elevated valuations,
private equity still looks attractive relative to public equities, especially when
taking into account the liquidity premium. Today’s private equity deals are
notably less risky than those of 2007, and one reason for that higher level of
quality is the presence of more private companies relative to public, creating
a wider set of opportunities to choose from.
CURRENCIES
USD: The AAC has upgraded its outlook from Neutral to Above Normal. In
the near term we are slightly more bullish, as short-term yield differentials
remain supportive, U.S. economic data has been improving, and both tax
reform and the substantial short held by the market could cause a surprise
on the upside. The risks revolve around the still-unresolved U.S. debt ceiling,
subdued inflation, the potential for convergence between ECB and Fed
policies, and the fact that Fed tightening is largely priced in already and the
dollar is moderately overvalued on a PPP basis.
Euro: The AAC has downgraded its outlook from Neutral to Below Normal.
There are signs that the strong euro is causing some concerns within the ECB,
which has fixed a very accommodative policy for the next 10 months, despite
inflationary pressures remaining weak. Market participants are also still long
the euro. The risk to our view is the ECB appears more relaxed on the growth
outlook, which is likely to be boosted by the current synchronized global
growth environment, and which PMIs and business surveys suggest will be
above trend in 2018. The euro zone also runs a large current account surplus.
24
Yen: The AAC maintained its Above Normal outlook. Japan’s economy is enjoy-
ing one of the longest expansions since the 1990s, leading to tentative signs that
the Bank of Japan is preparing the market for reduced stimulus. Japan also runs
a large current-account surplus. Market participants are short yen despite the
fact that PPP and real exchange rates suggest undervaluation, and that long-yen
remains a valid trade during periods of risk aversion. Risks to this view include
persistent low inflation and the central bank’s yield-curve targeting, which is ex-
acerbating already wide rate differentials with other currencies and encouraging
the use of the yen as the funding currency for global carry trades.
GBP: The AAC upgraded its outlook from Neutral to Above Normal. Sterling
remains undervalued based on PPP measures despite supportive forward-
looking fundamental data, a rate hike from the Bank of England and progress
in Brexit negotiations. Risks to the view include some disappointing recent
economic data, especially on consumer spending, and the ongoing uncer-
tainties of Brexit.
Swiss Franc: The AAC maintained its Below Normal outlook. The franc is
still very overvalued based on PPP measures, and safe-haven flows may con-
tinue to unwind as Europe’s economic prospects improve and investors use
the currency to fund global carry trades. Concerns about low inflation means
that the Swiss National Bank is likely to lean against any rapid appreciation.
Risks to the view include Switzerland’s positive current-account balance,
continued strong growth and the potential for higher inflation. Any uptick in
geopolitical tensions could reignite safe-haven trades.
 S O LV I N G
FOR 2018

ABOUT THE

A S S E T A L L O C AT I O N C O M M I T T E E

Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the
next 12 months on each of the asset classes noted and, through debate and discussion, to refine our market outlook.
The panel covers the gamut of investments and markets, bringing together diverse industry knowledge, with an
average of 25 years of experience.

COMMITTEE MEMBERS
Joseph V. Amato Andrew Johnson
Co-Chair, President and Head of Global Investment Grade
Chief Investment Officer—Equities Fixed Income

Erik L. Knutzen, CFA, CAIA David G. Kupperman, PhD

Co-Chair, Chief Investment Officer—Multi-Asset Class Co-Head, NB Alternative
Investment Management
Ashok Bhatia, CFA
Senior Portfolio Manager—Fixed Income Ugo Lancioni
Head of Global Currency
Thanos Bardas, PhD
Senior Portfolio Manager, Head of Global Rates Brad Tank
Chief Investment Officer—Fixed Income
Timothy F. Creedon, CFA
Director of Global Equity Research Anthony D. Tutrone
Global Head of Alternatives
Ajay Singh Jain, CFA
Head of Multi-Asset Class
Portfolio Management

25
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy,
sell or hold a security. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommen-
dation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Neuberger Berman is not providing this material in
a fiduciary capacity and has a financial interest in the sale of its products and services. Neuberger Berman, as well as its employees, does not provide tax or legal
advice. You should consult your accountant, tax adviser and/or attorney for advice concerning your particular circumstances. Information is obtained from sources
deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material
and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services
may not be available in all jurisdictions or to all client types. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity
are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated
investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

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

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against the potential rewards. Neither Neuberger Berman nor its employees provide tax or legal advice. You should contact a tax advisor regarding the suitability
of tax-exempt investments in your portfolio. Government bonds and Treasury bills are backed by the full faith and credit of the United States Government as to the
timely payment of principal and interest. Investing in the stocks of even the largest companies involves all the risks of stock market investing, including the risk that
they may lose value due to overall market or economic conditions. Small- and mid-capitalization stocks are more vulnerable to nancial risks and other risks than
stocks of larger companies. They also trade less frequently and in lower volume than larger company stocks, so their market prices tend to be more volatile. Invest-
ing in foreign securities involves greater risks than investing in securities of U.S. issuers, including currency uctuations, interest rates, potential political instability,
restrictions on foreign investors, less regulation and less market liquidity. The sale or purchase of commodities is usually carried out through futures contracts or
options on futures, which involve signi cant risks, such as volatility in price, high leverage and illiquidity.

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