lam - q1 2016 economic & market outlook

Lebenthal Asset Management’s quarterly Economic and Market Outlook provides insight into the economy and perspective on equity, fixed income and international markets.

Lebenthal Asset Management James B. Lebenthal, CFA John CareyDr. Vijay Chopra, CFARon DeutschBarbara DoranPeter FiversonDr. Leila HeckmanMichael D. JamisonChris Liu, CFARobert MorganDr. John MullinGregory SerbeChase SmithDavid Yucius

A S S E T M A N A G E M E N T

ECONOMIC AND MARKET OUTLOOKJANUARY 2016

THE U.S. ECONOMYIn December 2015, the Federal Reserve (the “Fed”) finally began the process of

increasing short term interest rates, raising the Federal Funds rate from a range of

0% to 0.25% to a range of 0.25% to 0.50%.

As this was the first increase in the Fed Funds rate since June 2006, the longest

interval ever, and the first to come after the crisis-era policy implementation, the

Fed was very careful to telegraph that a rate increase was coming, that it would be

minimal, and that future increases would be made in a very deliberative fashion.

In its post-meeting statement, the Federal Open Market Committee said that it

expected “economic conditions will evolve in a manner that will warrant only gradual

increases in the federal funds rate; the federal funds rate is likely to remain, for

some time, below levels that are expected to prevail in the longer run. However,

LEBENTHAL ASSET MANAGEMENT lebenthal.com/assetmanagement 1 January 2016

LEBENTHAL ASSET MANAGEMENT

the actual path of the federal funds rate will depend on the economic outlook as

informed by incoming data.” It is our opinion that the current Board will continue to

be clear about providing policy expectations, without giving an inflexible timetable

for their actions.

As for longer term Treasurys, we saw that in the summer and fall of 2013, when former

Fed Chair Bernanke indicated that there could be a wind-down to Quantitative Easing,

Treasury yields increased. The ten-year Treasury yield went from approximately

1.65% to 3.0%, and the thirty-year Treasury rose from approximately 2.86% to 3.96%.

With this “taper tantrum” in mind, Chair Janet Yellen has been very cautious in her

communications. Thus, we do expect an increase in longer rates, but without the

sharp volatility of 2013. Current rates are hovering around 2.25% for the ten year

Treasury and 3% for the thirty-year Bond. Given the current low level of inflation we

expect a more gradual rise in rates.

We believe the U.S. economy will continue to expand at a 2 to 2.5% rate in real

terms during 2016. Growth will be led, once again, by continuing high levels

of automobile sales, housing activities (new construction across the board,

remodeling and renovations) and general consumer spending on goods and

services, along with life experiences, i.e. cruises, dining, yoga, etc. In our opinion,

the U.S. stock market will achieve new record levels next year as result of the

economic growth and higher corporate earnings that we are forecasting.

Notwithstanding our optimistic outlook, a number of risks have begun to bubble up that bear close monitoring and that we believe may cause higher levels of volatility in 2016:

+ First, several of the most aggressive and leveraged investment funds in high

yield bonds, where many investors sought above-average yields, have recently

run into trouble. Last month the Third Avenue Focused Credit Fund suspended

redemptions so that its remaining $789 million of assets can be liquidated in a

more orderly manner and not be forced to sell its remaining investments at fire

sale prices. It was the fund’s significant degree of aggressiveness that was the

primary cause of action; more than 50% of its assets were unrated, while another

28% was rated CCC. At this point, we believe that this headline-catching news

will be contained to the riskiest investments and not cause a general contagion in

the high yield bond market. For example, the Third Avenue Focused Credit Fund

declined 27% for the year to date until it was closed last month while the SPDR

Barclays High Yield Exchange Traded Fund (JNK), which is more representative

of the general junk bond market, has declined a more modest 8.2% for the year

through December 23, 2015’s closing price. Our outlook is subject to revision as

events in this sector evolve.

A S S E T M A N A G E M E N T

lebenthal.com/assetmanagement 2January 2016

SPENDING ON LIFE EXPERIENCES

CONSUMER GOODS & SERVICES

HOUSINGACTIVITIES

AUTO SALES

U.S. ECONOMIC GROWTH

+ Second, the negative effects of the significant decline in energy and other

commodity prices have just begun to be reflected in reduced capital spending,

dividend cuts, layoffs and bankruptcies in these sectors. Again, it’s the most

aggressive and leveraged companies that have been forced to take these actions.

We believe that these negative effects will likely continue and accelerate next

year as future energy production hedges run off and spot energy and other

commodity prices remain low. Similar to our opinion about the high yield bond

market, we believe that these negative effects will be contained to the riskiest

and most leveraged companies in the energy and commodity industries. It is also

our opinion that the pain that is occurring now and will likely accelerate next year

is the beginning of the healing process for companies to right-size themselves

to operate profitably in the new, lower pricing environment. As this process

continues, we believe that global supply will eventually be reduced enough to

meet demand and spot energy and commodity prices stabilize and begin to

recover. In the meantime, the decline in gasoline prices over the past one and

one-half years has put a meaningful amount of unexpected cash in consumers’

pockets.

+ Finally, we are mindful of the narrowness of the investment performance of the

S&P 500 Index during 2015. The total return for the S&P 500 Index was essentially

flat last year, but the attribution of returns was asymmetric: The total return of

the 10 largest stocks in the Index was up 17%, while the other 490 stocks were

down 5%. In order for the U.S. stock market to achieve our forecast of new record

levels next year, we expect the rally to be more broadly-based and include many

value-oriented stocks in cyclical, energy, industrial and transportation sectors

that declined significantly during 2015. In fact, we believe that a number of

investments in these sectors present attractive long-term opportunities that may

become even more compelling next year.

The bottom line is that we recommend staying the course while being alert and

vigilant to the risks that have begun to materialize as described above.

Notwithstanding our expectation of increased equity market volatility, we believe

that 2016 will be a rewarding year for domestic equity investors.

LEBENTHAL ASSET MANAGEMENTA S S E T M A N A G E M E N T


S&P 500 INDEX VS. TOP 10 LARGEST TOTAL RETURN(YTD performance)

A TALE OF TWO MARKETSSource: Strategas Research/Bloomberg

2015

Jan Jan

90

95

100

105

110

115

120

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2016

10 Largest S&P500 Stocks

S&P 500

S&P ex. 10 Largest Stocks

+17%

-1%

-5%

INTERNATIONAL EQUITIESRegional divergences in monetary policy, exchange rates and the impact of weak

commodity prices have created attractive investment opportunities in international

equities. Even as the Federal Reserve begins to tighten monetary policy, the

European Central Bank (ECB), the Bank of Japan and the People’s Bank of China are

expected to maintain loose monetary policy. The sharp moves in global commodity

prices and exchange rates have created headwinds for several markets and tailwinds

for others. Our country allocation is positioned to benefit from these divergences.

The IMF is forecasting 2016 GDP growth of 1.5% in the Eurozone and 0.6% in Japan.

Despite the weak growth forecasts, we expect the equity markets to benefit from

loose monetary policy in those regions. The ECB recently extended its Quantitative

Easing for another six months through March 2017, and lowered the overnight

deposit rate to -0.30% from -0.20%. Japan has been pursuing quantitative easing

aggressively—even engaging in open market equity purchases. The key Asian markets

of China and India are expected to grow in 2016 at 6.8% and 7.3%, respectively, while

commodity exporters Brazil and Russia are forecast to see GDP declines of -3%

and -3.8%, respectively.

We are overweighted in regions and markets where valuations are attractive and

there are tailwinds from easy monetary policy, low real exchange rates and the

decline in commodity prices. These include Continental Europe, Japan and select

Eastern European markets. We are generally underweighted in countries with large

commodity exposure, such as Australia and Canada in the developed markets and

Latin America and the Mideast in the emerging markets.

Within Continental Europe, we are overweight in the peripheral markets of

Italy, Spain and Ireland. All three markets benefit from lower commodity prices,

undervalued real exchange rates and positive revisions to their GDP over the last six

months. In addition, Spain has attractive valuations. Sweden, a market outside the euro zone, continues to be overweighted based on its undervalued real exchange rate, low beta risk and positive price momentum. The UK is underweighted despite reasonable valuations as the British pound is overvalued relative to its trading partners and the market has had weak price momentum.

Japan remains an overweight based on a 23% undervalued real exchange rate,

which should be positive for its export sector and earnings, a tailwind from weak

energy and mineral prices which it imports, and a strong year-over-year local

currency price momentum.



THE U.K. IS UNDERWEIGHTED

WE ARE OVERWEIGHT IN THE PERIPHERAL MARKETS OF ITALY, SPAIN

& IRELAND, AS WELL AS SWEDEN


Our emerging market outlook is shaped by the sharp decline in commodity prices,

and the prospects for weaker growth in China. In spite of the reasonable valuations of

emerging markets overall, we continue to be cautious since most markets have seen

downgrades to GDP growth forecasts over the last 6 months, and have higher risk

with widening sovereign spreads and high volatility.

Economic growth in China has slowed as it transitions from an “investment driven” to

“consumption driven” economy. In order to achieve this, the Chinese policy makers

face the difficult challenge of shutting down unprofitable firms and reorienting the

economy, while at the same time avoiding a collapse in output. Due to the correction

in the market earlier in the year, valuations are more attractive, and as a major

importer of commodities, China is benefiting from the collapse in commodity prices.

Despite these positives, we are underweight in China as the real exchange rate is overvalued, and an important risk measure – changes in sovereign yield spreads

over their two year average – has widened. China is also posing a challenge to

other emerging Asian economies due to extensive trade linkages leading us to

underweight Indonesia, Malaysia, Taiwan and Thailand.

We are overweighted in several markets in Eastern Europe, such as Poland and

Hungary, due to attractive valuations and stable GDP forecasts for 2016.

We are cautious on Latin America, which remains stuck in a slow growth mode with

very weak export commodity prices and continued downward GDP growth revisions.

Brazil’s economy has been particularly hurt, with downgrades to its 2016 GDP

growth forecasts of 2.7% over the last six months. Brazil is currently a value trap;

despite the appearance of cheap valuations, the market scores poorly on growth,

risk and momentum.

FIXED INCOMEMUNICIPAL BOND MARKET Now that the Federal Reserve has shifted monetary policy, municipal bonds will

react to these gradual increases in interest rates. The elements that we feel are

more specific to the demand for municipal bonds are the upcoming election, the

perception of the credit quality of municipal bonds and potential climate issues.

While it is way too early to know who the standard bearers are going to be for each

party, a Democratic victory will likely bring renewed discussion of tax increases

on the wealthy to benefit the lower-income and middle classes. When taxes are


JAPAN REMAINS OVERWEIGHTED

WE ARE UNDERWEIGHT IN CHINA


lebenthal.com/assetmanagement 6

increased, the value of tax exemption increases proportionately. In addition to the

national races, there are local elections to consider. These add the possibility of state

or local tax increases. For those states that exempt their bonds from their in-state

taxation, tax free bonds become even more desirable. We feel this will give more

strength to municipal bonds in a time when the bond market will see potential price

erosion as rates increase.

Creditworthiness is always an issue in the $3.7 trillion municipal bond market.

2015 has seen bitter political battles in several states, with the Commonwealth of

Pennsylvania only recently enacting a budget that was due last July, and the State

of Illinois still without a final budget. Despite the dramatic and partisan headlines,

we have tended to take a longer perspective. There were not massive defaults in the

recent recession. Even though several California cities, Jefferson County, Alabama,

and Detroit have had to use Chapter 9 of the bankruptcy laws, this is still the

exception. The vast majority of bonds are paid principal and interest on time. Thus,

we believe that it is positive when the press examines budget issues, when pension

problems are in the spotlight, and liability funding is questioned. This type of inquiry

leads to resolution. The financial troubles of Puerto Rico are dramatic, but they serve

as a warning for other municipalities. If Puerto Rico could get into trouble, could our

city or state be doing the same thing? Again, the more light is shined upon a financial

practice, the better the long term outcome will be.

There is a growing concern in the municipal bond market regarding the possible

effects of global climate change and energy production. It is too soon to assess the

impact on municipal power plants and water and sewer systems, but they could grow

in magnitude over the coming years as aging facilities must be brought up to future

safety and emissions standards.

From a technical perspective, it is likely that there will be less supply in 2016 than

2015. As rates increase, there may be less refunding of older higher coupon bonds.

We have also noticed that municipalities have been very reluctant to issue bonds

without a bona fide purpose. Infrastructure needs rebuilding, but without the

Federal Government as partner, big projects are not going to get started. Here in

the northeast, there is a desperate need for an additional railroad tunnel under the

Hudson River. The existing tunnel is over 100 years old and rail traffic continues

to increase with the growth of New York City. After years of stasis, it appears that

enough Federal funds are finally going to be forthcoming to be able to build it. The

Tappan Zee Bridge replacement structure could not have been built without Federal

funds to supplement New York Thruway toll revenues. This damper on excess supply

should help the market provide stability during a time of general volatility.

In summary, despite the possible impact of higher rates on bond prices, negative

headlines from Puerto Rico, and other issues in the financial press, we continue to be

constructive on the value of tax-exempt bonds. In our opinion, the vast majority of

municipalities will continue to fund debt service without interruption and meet their

obligations promptly. This should help the market to stay attractive to bond investors.

CORPORATE FIXED INCOMEThe past year has been volatile for credit markets. Problems that started in the

energy sector have spread to much of the market with weak liquidity acting as

kerosene on a brushfire. The combination of high volumes of corporate bond issuance,

increasing susceptibility to retail outflows and shrinking broker dealer balance

sheets has created a problematic liquidity backdrop. This has exacerbated the moves

in corporate bond prices and created opportunities going into the new year.

January 2016

It is positive when the press examines budget issues, when pension problems are in the spotlight, and liability funding is questioned



About Lebenthal Asset Management

Lebenthal Asset Management manages equity and tax-exempt and taxable bond portfolios for high net worth individuals, institutions, and non-profit organizations. The firm is head-quartered in New York City, with a legacy that is rooted in Lebenthal & Co., founded in 1925 by Louis and Sayra Lebenthal.

The information contained in this document is based on data received from third parties which we believe to be reliable and accurate. Lebenthal, however, has not independently verified the informa-tion and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. The material is not intended to be a formal research report and does not constitute an offer to sell, or a solicitation of any offer to buy or sell, securities or currencies of any entity or government. Any opinions expressed herein are our current opinions only. In addition, it should not be assumed that any of the securities and/or strategies discussed herein were or will prove to be profitable. Past performance is no guarantee of future results and any strategies described herein which have the potential for profit also present the possibility of loss. There are no guarantees that any risk man-agement strategies or investment strategies described herein will be successful notwithstanding any efforts to mitigate risk. International investing presents certain risks not associated with investing solely in the U.S., such as currency fluctuation, political and economic change, social unrest, changes in government regulations, differences in accounting, and the lesser degree of accurate public information available. Please refer to your Brokerage Account statement from your custodian as your official account statement for performance information and account activity. Lebenthal Asset Management, LLC, is a wholly owned subsidiary of “Lebenthal Holdings, LLC". Lebenthal Asset Management, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”). Lebenthal & Co., LLC is a Registered Broker-Dealer and Mem-ber FINRA & SIPC. © Copyright 2016, Lebenthal Asset Management, LLC. All Rights Reserved. This report may not be reproduced, distributed or transmitted in whole or in part in any media without the express written permission of Lebenthal Asset Management, LLC.

The recent sell-off in high-yield bonds has hit equity exchange-traded funds linked

to the securities, including the SPDR Barclays High Yield Bond ETF and the iShares

iBoxx $ High Yield Corporate Bond ETF. The decline coincided with travails in at

least three funds last month. Lucidus Capital Partners, founded in 2009, said it had

liquidated its portfolio and plans to return the $900 million it has under management

to investors next month. Just like the previously mentioned Third Avenue Focused

Credit Fund, Stone Lion Capital Partners also stopped returning cash to investors,

after clients sought redemptions that could not be met in current market conditions.

We feel that much like 2015 has been a stockpickers’ market, where industry and

security selection has been paramount, the corporate credit market presents the

same kind of environment going into 2016. While energy is about 16 % of the high

yield market, there has been a negative halo effect on much of the rest of the market.

We feel that there will be many opportunities to lock in attractive yields as most

credit levels have seen their spreads to Treasurys widen this quarter. The higher

quality end of high yield (the BB credits) is, we believe, the area of best risk-adjusted

return in high yield, while investment grade bonds look best in BBB area. With the

Fed now raising rates, there will also be opportunities to buy closed end funds.

Many of these funds are trading at discounts to their net asset value, which makes

for a compelling opportunity going into 2016.

With the Fed now raising rates, there will also be opportunities to buy closed end funds

Lebenthal Lisanti Capital Growth is a New York based, woman-owned investment management firm specializing in small and SMID cap growth investing. The firm advises the Lebenthal Lisanti Small Cap Growth Fund (ASCGX) and serves the institutional marketplace through separate accounts for public plan, corporate, endowment and foundation clients.

Mary Lisanti, Portfolio Manager

ECONOMIC AND MARKET OUTLOOKJANUARY 2016

U.S. SMALL CAP STOCKSWe continue to be positive on the outlook for smaller cap growth stocks in 2016.

We expect it to continue to be a stockpickers’ market, although we do expect the

opportunity set to be slightly different from prior years.

The last few years have belonged to the unit growth stories. Because unit growth has

been so hard to find, those companies that could grow revenues at extremely high

rates would see their stocks amply rewarded; this occurred regardless of whether the

company made money or the valuation was reasonable. It was, to some extent, “any

price for growth.” The prospect of the Federal Reserve continuing to raise rates, we

think, begins to change the landscape. As we look out over the next year, we believe

several changes will occur which will be very significant for the smaller-cap end of

the market. In addition to the Fed raising rates, it is likely that in the first part of 2016

we will be at the low in global growth, but the prospect of China’s GDP stabilizing

and European QE having some impact does imply that global GDP prospects will

look a bit higher as we exit 2016.

We believe that the combination of the Federal Reserve raising rates and global GDP

stabilizing, if not lifting a bit, implies that small caps have to make their money “the

old fashioned way”—they have to earn it. In this scenario, earnings growth will be the

driver of returns, more so than multiple expansion. We also believe that while the first

half of the year might continue to belong to the domestically focused companies, it is

possible that more internationally oriented companies, such as those in the industrial

space, might do a bit better in the second half of 2016, particularly as we look out

to 2017. If this scenario does indeed turn out to be accurate, then certain parts of

LEBENTHAL LISANTI CAPITAL GROWTH lebenthal-lisanticg.com 8January 2016

LEBENTHAL LISANTI CAPITAL GROWTH lebenthal-lisanticg.com 9

the small cap market that have done very well might struggle a bit—for example,

biotechnology companies.

From where we sit, the earnings growth for the small cap growth market, as

measured by the Russell 2000 Growth Index, still looks very healthy. Estimates call

for earnings growth on the order of 30% or so in 2016, which would be better than

the S&P 500. Keep in mind that this growth is not distributed evenly—the fastest

growers will far outpace that number. As always, what drives earnings growth in

the smaller cap end of the market is creativity and innovation. We see no shortage

of that in the companies we research; if anything, we believe that creativity and

innovation are accelerating as companies gain confidence that we will not see a

repeat of 2008-2009.

We think the biggest “upside surprise” in the smaller end of the market could be

the return of investor confidence, as the global economy stabilizes, the dislocations

caused by the drop in energy prices are absorbed by the economy, and we get

potentially a bit more stability in the political landscape with the election of a new

President. (As an aside, we are heartened by the recently passed Federal spending

bill, which contains several items that are positive for smaller companies: the repeal

of the “medical device tax” for several years, and the delay of the implementation

of the “Cadillac tax” for healthcare until 2020. If one puts that together with the

$305 billion highway spending bill signed by President Obama in December, you

could almost imagine that government is actually beginning to focus on helping the

economy grow). If investor confidence increases, and time horizons lengthen, then

smaller capitalization stocks could do better than we expect in 2016—making it even

more fun for stockpickers.

IMPORTANT INFORMATION: Effective March 2, 2015, the Fund changed its Adviser, formerly, AH Lisanti Capital Growth, LLC, to Lebenthal Lisanti Capital Growth, LLC, and its name, formerly the Adams Harkness Small Cap Growth Fund, to the Lebenthal Lisanti Small Cap Growth Fund.

Before investing, you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. This and other information is in the prospectus, a copy of which may be obtained by calling (800) 441-7031. Please read the prospectus carefully before you invest.

An investment in the Fund is subject to risk, including the possible loss of principal amount invested. The Fund invests in smaller companies, which carry greater risk than is associated with larger companies for various reasons such as narrower markets, limited financial resources and less liquid stock.

The Russell 2000 Growth Index measures the performance of the small-cap growth segment of the U.S. equity universe. It includes those Russell 2000 companies with higher price-to-value ratios and higher forecasted growth values. One cannot invest directly in an index.

Foreside Fund Services, LLC is the distributor for the Lebenthal Lisanti Small Cap Growth Fund.

The information contained in this document is based on data received from third parties which we believe to be reliable and accurate. Lebenthal, however, has not independently verified the information and does not otherwise give any warranty as to the truth, accuracy, or completeness of such third party data, and it should not be relied upon as such. The material is not intended to be a formal research report and does not constitute an offer to sell, or a solicitation of any offer to buy or sell, securities or currencies of any entity or government. Any opinions expressed herein are our current opinions only. In addition, it should not be assumed that any of the securities and/or strategies discussed herein were or will prove to be profitable. Past performance is no guarantee of future results and any strategies de-scribed herein which have the potential for profit also present the possibility of loss. There are no guarantees that any risk management strategies or invest-ment strategies described herein will be successful notwithstanding any efforts to mitigate risk. International investing presents certain risks not associated with investing solely in the U.S., such as currency fluctuation, political and economic change, social unrest, changes in government regulations, differences in accounting, and the lesser degree of accurate public information available. Please refer to your Brokerage Account statement from your custodian as your official account statement for performance information and account activity. Lebenthal Lisanti Capital Growth, LLC is an SEC Registered Investment Adviser under the Investment Advisers Act of 1940 (“Advisers Act”). Lebenthal Lisanti is a separate legal entity from Lebenthal Asset Management. Lebenthal Asset Management maintains a minority interest in Lebenthal Lisanti Capital Growth. © Copyright 2016, Lebenthal Lisanti Capital Growth, LLC. All Rights Reserved. This report may not be reproduced, distributed or transmitted in whole or in part in any media without the express written permission of Lebenthal Asset Management, LLC.

January 2016

We think the biggest “upside surprise” in the smaller end of the market could be the return of investor confidence

lam - q1 2016 economic & market outlook

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