2016 Outlook:Standing (or Is that Sitting?) Out in a Crowd

INVESTMENT

OUTLOOK

Table of ContentsOverview ............................................................................................................................................................................................. 1

Summary of Outlook Views ........................................................................................................................................................... 4

Global Macroeconomic Outlook Signals .................................................................................................................................. 5

Developed Markets .................................................................................................................................................................. 5

Emerging Markets .................................................................................................................................................................... 6

Asset Class Signals ........................................................................................................................................................................ 7

Equities ....................................................................................................................................................................................... 7

Fixed Income ............................................................................................................................................................................. 8

Alternatives ................................................................................................................................................................................ 9

The material contained herein is intended as a general market commentary for distribution to investment professionals and fiduciaries only. This is not intended for retail use or distribution. It is for informational purposes only and is intended solely for the person to whom it is delivered by Segal Rogerscasey. Opinions expressed herein are those of the Segal Rogerscasey Investment Committee as of January 2016, when this Investment Outlook was written. These opinions are subject to change and may differ from those of other Segal Rogerscasey employees and affiliates. Past performance is not a guarantee of future results. Not all investment ideas referenced are suitable for all investors and each investor must consider their specific goals, objectives, liquidity, and risk preferences in making decisions regarding the applicability of these ideas to their own circumstances. Additional disclosures are provided at the bottom of the last page of this publication.

Questions? Contact Us.

For more information about the topics discussed in this 2016 Investment Outlook and how our views may help you to shape your investment strategy, contact your Segal Rogerscasey investment consultant, the nearest Segal Rogerscasey office or Tim Barron, Chief Investment Officer, at 203.621.3633 or tbarron@segalrc.com.

To receive each year’s Investment Outlook, quarterly updates and other Segal Rogerscasey publications, join our email list.

Segal Rogerscasey is a member of The Segal Group and a founding member of the Global Investment Research Alliance.

2016 Investment Outlook • Page 1

It is difficult to recall a time when there was such a strong consensus of opinion on so many important aspects of the macroeconomic and capital market environments as there is today. Let us look at a few important illustrations:

� Oil prices — the vast majority of pundits we hear from are indicating that prices will stay low for some time, with a few voices in the wilderness proclaiming the alternative views: either prices go even lower or they return to $50 per barrel or higher.

� China — slow growth dominates the prognostications, with again a small minority lining up on the side of recession or growth acceleration.

� U.S. economy — a new normal of low inflation and anemic growth is the clear chorus, with only a few dissenters suggesting either a downward spiral or a rapid acceleration in economic activity.

� The eurozone is growing only slightly, with stimulus having a limited short-term effect, most say, again with a scant few suggesting alternatives on either side of that projection.

� Then there are inflation and commodities — mired in the quicksand of the consensus of low growth with no pricing power for employees or miners and producers; zero change has become almost a given and buyers are quickly shouted down as blind fools.

Whether the subject is Japan, the U.S. dollar (USD), the emerging markets or gold, the solidarity of the primary views (in order: still stagnant, still rising, risky and worthless) is almost overwhelming.

There are two possible explanations for this somewhat historic sense of agreement regarding economic direction: the future is so clear that any other conclusion is, simply, irrational; or, the future is so cloudy that the safety of the majority view is compelling. If the former is accurate, then the crowds have already taken allocation positions aligned with that view (the crowded trade), and there is little money to be made unless you wish to stand out from the rest and are fortunate or prescient enough to be waiting for the masses to move your way when circumstances change. If the latter is the case, then the reasonable course of action is to wait with the crowd until there is greater clarity of direction or at least until the crowds start to thin, effectively sitting this one out.

It is Segal Rogerscasey’s view that the notion that the future is certain is highly unlikely, that the consensus is due more to a lack of predictability and aversion to being unique than to a heighted sense of awareness of what the future portends. And, to be explained pragmatically somewhat later, we believe that this is a time to keep one’s powder dry. We are not suggesting that valuations do not matter, that there are not pockets of opportunity or that

Overview

“ There are two possible explanations for this somewhat historic sense of agreement regarding economic direction: the future is so clear that any other conclusion is, simply, irrational; or, the future is so cloudy that the safety of the majority view is compelling.”

2016 Investment Outlook • Page 2

the investor should move to a negative-real-return approach of cash in the mattress. Rather, it is our view that the variables enabling investors to forecast capital market returns over the near term are, at best, random.

Known UnknownsWhat is the evidence we would point to in support of the construct that the near term has arrived at a somewhat unique degree of uncertainty? Let us take the earlier-noted items that are generally the subject of examination in the development of forecasts of the upcoming environment. Oil prices have historically been driven by supply and demand based on econometric models assuming rational behavior of buyers and sellers, with the occasional new discovery or substitution strategy causing marginal shifts in prices. There is a general expectation that global growth and a limited supply will create an upward bias to prices with a moderately volatile response to near-term information. Everyone “knew,” for example, that when prices went below the calculated break-even price for “fracked” oil, supply would dry up. Everyone “knew” that when the price went below the balanced budget level for most OPEC countries, drilling would be curtailed. Wrong on both counts. Today, we have a pricing structure dominated by geopolitical influences that, while they can be understood, are dependent upon variables (e.g., ISIS, Iran, the Saudis, the Russians) that defy reasonable predictability.

The world’s second-largest and one of its fastest-growing economies, China, is in the process of attempting to manage an epic experiment on a scale and of a character that has never before been attempted. A country of more than 1.3 billion consumers is to be converted into a Western-style economy while maintaining a totalitarian government. That government intends to simultaneously become a military and diplomatic power of equivalent size with a leadership that has been riddled with corruption. Nearing a potential political upheaval at the 2017 Party Congress, the government is so insular that it is attempting this conversion without any assistance or advice from the International Monetary Fund, the World Bank or Harvard-trained economists other than those who spent six years in Cambridge, Massachusetts, before returning to Beijing. Recent evidence in market and currency controls provides a clear indication of both the complexity and the impact of inexperience. Will there be uncertainty over the next 12 to 18 months? Most assuredly.

The U.S., a bright spot compared to the eurozone and Japan, is facing its own unique challenges. Cash-rich companies are demonstrating so much confidence in their futures that dividends and share buybacks are considered better investments than plants, property or equipment. Consumers have taken their gas pump windfall and stuck it in their mattresses (no reason to use a bank that pays zero interest and does not even give out toasters anymore). The Global Financial Crisis has reminded the greatest generation of unchained consumers (boomers who bought everything on credit) that their retirement savings, no longer supported by those cushy defined benefit plans, are quite vulnerable and that near-zero interest rates are unlikely to be the formula for long-anticipated golf-course living. The large percentage of the population that is the echo generation (now for some reason referred to as the millennials) has decided that, for them, the actions their parents took after getting a first job (buying a home, a car, getting married and having babies) have to be delayed, at least until their college debt has been paid down. Markets crack when the U.S. Federal Reserve (Fed) talks about interest-rate hikes, and they go up when the Fed actually hikes them. And, the FANG stocks (Facebook, Amazon, Netflix and Google) that were barely even heard of a decade ago can almost singlehandedly push the entire S&P 500© Index into positive territory, albeit slightly. Treasuries, a safe haven, gather assets when China’s market blinks in spite of the specter of future Fed-funds increases, which would likely lower prices. Oh, and then there is the November election.

In the eurozone, European Central Bank President Mario Draghi’s “whatever it takes” seems to be turning into “it may take forever.” It has to be tough on the central banker to pick up the morning paper only to read that some other calamity has befallen the member countries and another six months of stimulus evaporates quickly. The certainty of classic central bank policies has moved past supportive to punitive with negative real and, in some cases, absolute interest rates. Again, this is another experiment without precedent that is feeling like a baseball game in the 22nd inning — with every position player used and the shortstop coming in to pitch. Predicting an

“ The world’s second-largest and one of its fastest growing economies, China, is in the process of attempting to manage an epic experiment on a scale and of a character that has never before been attempted.”

2016 Investment Outlook • Page 3

outcome is a coin toss. Plus, there is a burgeoning migrant crisis that has become a source of instability economically and politically.

There was a time when a ruthless dictator in a rogue nation could detonate a nuclear weapon, sending seismometers gyrating wildly and commodity prices jumping in sympathy. Today, however, the markets are so certain that low global growth is a forgone conclusion with resultant flat-lined inflation and demand for anything dug out of the ground and smelted, prices barely react at all. Partially the result of the global nature of suppliers that can adjust to demand by stepping up to fill gaps, this level of stability and the seemingly implacable response to bad news is principally caused by a consensus on growth that is more solid than the steel no one seems to need anymore. In stark contrast to the recent cries of looming shortages and China’s hoarding supplies of everything from heavy minerals to cement, it is amazing how quickly one fact, “commodity inflation is here for good,” is substituted for another, “you can’t make any money holding commodities.” The reality, unfortunately, is that the next cycle of commodity-price rises will occur at precisely the moment they clearly cannot possibly happen. This seems to be approaching.

Topping this all off is the threat of global terrorism and the effect of ISIS, which goes beyond instability in the Middle East, but increasingly has become a symbol of polarization. The Kurds fighting ISIS, the Turks shooting at Kurds, the Saudis in Yemen, the Russians in Syria, and Iraq generally a free-for-all — with not a solution in sight from any world leaders or candidates.

We follow these opening comments with our usual indicators of macroeconomic and capital-market conditions and our perspective, including the all-important valuation metrics, of absolute and relative expectations from various asset classes. Additionally, we can summarize in a few short words our recommendation, given the commentary above: there are not any options on which we are boldly bullish. If your horizon is long and your risk tolerance is high, we suggest you maintain your strategic asset allocation and your rebalancing disciplines to buy on weakness and sell on strength. Seek to buy things that are a little cheaper and sell things that are relatively more expensive. We believe investors with shorter timeframes and more sensitivity to volatility should consider at least moving towards the lower end of their risk-exposure ranges. If there is a signal to return to a more traditional allocation for these investors, it is when the debate about the future begins to rage with the associated mispricing of assets due to this variability of opinion. For both types of investors, we also believe this is a reasonable time to think “quality,” in everything from stocks to high-yield bonds. In times of volatility and uncertainty, at least you can feel more comfortable if you know much of what you hold has characteristics of downside protection and consistency.

While we believe this is not the time to stand out in the crowd, there will be a return to normalcy at some point, as always. In the meantime, it may also be important to have some enhanced ability to employ an approach to be as nimble as Jack of the nursery rhyme in order to avoid the heat and flame of the candlestick.

“ If your horizon is long and your risk tolerance is high, we suggest you maintain your strategic asset allocation and your rebalancing disciplines to buy on weakness and sell on strength. Seek to buy things that are a little cheaper and sell things that are relatively more expensive. We believe investors with shorter timeframes and more sensitivity to volatility should consider at least moving towards the lower end of their risk-exposure ranges.”

Updated Equity, Interest Rate and Fixed-Income Graphs

Segal Rogerscasey has updated many of the equity, interest rate and fixed-income graphs used to formulate our asset class views. Those graphs, which now include data as of December 31, 2015, are available on our website.

2016 Investment Outlook • Page 4

Summary of Outlook Views

Segal Rogerscasey has updated our summary of outlook views for the 2016 Investment Outlook. The tables on the following pages are designed to provide a straightforward snapshot of our observations on key macroeconomic factors in the most important countries driving markets and on the direction of specific asset classes. Gray-shaded cells in the tables indicate changes or additional information since the publication of the third-quarter update to our 2015 Investment Outlook in November 2015.

Key for Segal Rogerscasey’s Outlook Views

Very Positive

Positive

Neutral, Trending Up

Neutral

Neutral, Trending Down

Negative

Very Negative

2016 Investment Outlook • Page 5

Global Macroeconomic Outlook Signals

Developed Markets

Monetary Fiscal Currency CreditDirection of Interest

Rates

Level of Inflation

MomentumMarket

Valuations

U.S. Fair

Spread between Fed’s rate projections and market expectations is substantial. Rebound in earnings per share, but big drag from energy sector. Businesses and consumers both have strong balance sheets and cash available, but spending is still subdued. Congress seems to be working together somewhat better. Auto and housing industries moving forward well. Good yields on stocks. Wage growth only matches subdued levels of inflation. Election year adds uncertainty. No preference on growth versus value or small caps versus large caps due to lack of valuation signals.

Eurozone Cheap

Macro factors are trumping valuations at present. Negative rates persist to support economics. Loan demand has been up seven straight quarters, but gross domestic product (GDP) growth is still stubborn. Unemployment rate high, but has been falling lately. Positive momentum seen in manufacturing. Tailwind from a weak euro, but headwind from a slowing China. Migrant crisis and terrorism threat are not helping.

U.K. Expensive

Interest rates expected to rise in the near term (but that is old news). Lower oil prices do have a favorable impact, and a slowing China has little direct impact. Questions about European Union participation in the future. Bank of England (BOE) indicates that deficits are falling and some stimulative tax cuts may be on the way. U.K. is a bit expensive, but keeps rolling along.

Japan Cheap

Unemployment starting to come down. Wage growth very slightly positive now. GDP trending up slightly. Purchasing Managers Index (PMI) favorable. Seems to be too few “arrows” for Prime Minister Shinzo Abe and, now, too much debt. Mixed view overall, but cheapness is a tailwind. A slow China also not good, but offset somewhat by a weakened yen. Tax reforms a factor to watch.

In this section, key macroeconomic factors are listed in green-shaded cells across the top of each table. The arrows in these tables indicate our view of each factor’s impact on economic growth, except “Direction of Interest Rates,” for which the arrows indicate rate movement.

2016 Investment Outlook • Page 6

Emerging Markets

Monetary Fiscal Currency CreditDirection of Interest

Rates

Level of Inflation

MomentumMarket

Valuations

ChinaFair to Cheap

Spending some of its reserves, but surplus balance is substantial. Consumption now nearing 60 percent of GDP growth on a much lower base level. Tougher to export, particularly to the eurozone. Climate change agreement may indicate some degree of geopolitical normalcy despite China’s actions in the South China Sea. Real-estate investment is slowing, but inventories remain very high. The big question is, how slow is slow? Manipulations of markets have not been well received, but stocks are still not cheap by many measures. Long-term demographic issues continue. Transition to consumption-based economy complicated.

Brazil Cheap

Political problems persist, as does the recession. Debt downgraded to below investment grade. Structural reforms crucial, but pose a major test for lenders, the government and the people. Possible that staying the course in 2016 will create a new beginning in 2017. Longer term, the economy’s combination of resources and demographics are of benefit, but near-term scandals still an issue.

RussiaVery

Cheap

PMI heading back down. Ruble extremely cheap versus the 10-year average. Inflation above 13 percent. Some added government stimulus via deficit spending, but woefully little given the country’s needs. GDP growth in 2015 reverted to negative territory. Unemployment up slightly — but does being stuck between 6 percent and 7 percent really mean anything at all? Policy rates are at 11 percent, down dramatically from a 17 percent high in December 2014. Tough lending conditions persist, but some sense of those bottoming out lately.

India Expensive

Some signs of weakness in PMI numbers. Currency is slightly expensive. Low energy prices should be a tailwind. Flow of funds may help, given growth projections are favorable, but those projections have been flattening, albeit at a very high level. At slightly above 7 percent, growth is faster than what is expected from China. Policy rates easing lately, with one benchmark down to 6.75 percent, from a high of 8 percent in 2015. Rate decreases have not translated into lending costs as of yet.

Other Emerging

Fair to Cheap

Hurt generally by China’s slowdown. Earnings-per-share levels falling since 2011. Cheapness of the economies’ currency will help — eventually. Oil/commodity-price declines help some and hurt others, but should put more money into the hands of consumers. Stress from U.S. interest rate rises will occur in the near term. Overall growth rate still exceeds that of developed economies. Volatility continues.

2016 Investment Outlook • Page 7

Asset Class Signals

Equities Absolute Relative to U.S. Equity Comments

U.S. N/A

Low-single-digit expectations, with volatility via sensitivity to wide range of factors. Valuations modestly more attractive in early 2016, but concerns continue for slow growth. No preference for small caps/large caps or growth/value. Quality is a focus.

Non-U.S. Developed

Maybe slightly less return than U.S., but close to a poor tie. Watch the USD vs. the euro, as the former may strengthen with rates rising. Japan seems modestly attractive at this stage. Quality is a focus.

Emerging

Still volatile, and while we like it long-term, our shorter-term outlook calls for some tough sledding. Active management is important for investors.

Equities

In this section, arrows indicate our views on the direction of the asset classes listed in the left column of each table.

2016 Investment Outlook • Page 8

Fixed Income

Fixed Income Absolute Relative to U.S. Core Comments

U.S. Core N/A No great bear market in bonds, but little money to be made now.

Non-U.S. CoreStill concerned on currency. Yields less attractive relative to U.S. Global divergence still a factor, so be active.

Emerging Market Debt (EMD) (Local Currency)

Currency concerns and volatility, but expect to earn those higher yields. Sovereign and corporate spreads relatively attractive.

Emerging Market Debt (USD Denominated)

As with EMD local, USD stays strong. Actively manage.

High YieldSpreads high and so far defaults low vs. averages, but the latter may ramp up. Quality important.

Bank Loans As with High Yield.

Treasury Inflation-Protected Securities

For inflation hedge, but where does that come into play? Falling break-evens help attractiveness vs. nominal Treasuries.

Structured Credit/ Middle Market

Still money to be made here due to continued market dislocation, but concerns about lower-quality end.

Long Bonds Appropriate for hedging, but little else.

2016 Investment Outlook • Page 9

Alternatives

Alternatives Absolute Targeted Areas/Comments

Hedge Funds

Favorable on equity hedge shorts, market neutral and select event-driven credit/distressed given increased volatility and economic uncertainty. Less favorable on event-driven equity/activist due to slowing corporate activity. Neutral on macro, as there should be select opportunities in rates, commodities and currencies, but trading success variable.

Private EquityFavor small buyouts, growth equity, venture innovation and select special situations, but heightened concerns from slowing global growth, corporate transaction volume and persistent elevated valuations.

Real Estate

Favor select value-add and opportunistic strategies, but deal competition strong and declining macroeconomic factors could constrain tenant demand. Core assets continue to reflect high pricing barriers.

Infrastructure

Favor value-add and small to mid-sized cap strategies, and renewed government focus on aging assets is positive. However, overall transaction volume is slow, substantial capital remains un-invested and deal competition is intense for core assets.

Commodities

Supply issues, slackening demand and strong USD contribute to cyclical price dislocation and negative performance. Potential upside as fundamentals eventually improve, and current pricing provides relatively inexpensive source of future inflation protection.

Energy

Near-term supply/demand issues and volatility represent significant headwinds, but dislocation presents entry pricing opportunities across public and private energy sector — especially for low-cost producers and strong operators.

Timber

Favorable due to income generation and inflation hedge, but a slower domestic economy, reduced exports to China and increased competition for larger properties that has increased valuations are moderating influences. Favor a diversified global approach.

Farmland

Strong institutional demand sustains increased valuations, while commodity pricing decline and continued USD strength impacting returns. Remains a positive portfolio diversifier, and favor a diversified global approach.

Questions? Contact Us.For more information about the topics discussed in this 2016 Investment Outlook and how our views may help you to shape your investment strategy, contact your Segal Rogerscasey investment consultant, the nearest Segal Rogerscasey office or Tim Barron, Chief Investment Officer, at 203.621.3633 or tbarron@segalrc.com.

To receive each year’s Investment Outlook, quarterly updates and other Segal Rogerscasey publications, join our email list.

Segal Rogerscasey is a member of The Segal Group and a founding member of the Global Investment Research Alliance.

Copyright © 2016 by The Segal Group, Inc. All rights reserved.

Segal Rogerscasey provides consulting advice on asset allocation, investment strategy, manager searches, performance measurement and related issues. The information and opinions herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Segal Rogerscasey’s Investment Outlook, “Standing (or is that Sitting?) Out in a Crowd,” and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor. Please contact Segal Rogerscasey or another qualified investment professional for advice regarding the evaluation of any specific information, opinion, advice, or other content. Of course, on all matters involving legal interpretations and regulatory issues, plan sponsors should consult legal counsel.