Q2 Investment Strategy Meeting Summary

We held our Q2 investment strategy meeting on March 28. The general investment landscape has not changed significantly since our December meeting. The outlook for U.S. equities remains positive. U.S.  economic and corporate earnings growth both remain healthy in 2014. After a weather-impacted Q1, we expect U.S. real GDP growth to accelerate to 2.5-3% by second half-2104. We see corporate earnings rising 8-10% and we expect inflation to remain subdued. While we expect the Federal Reserve will continue its taper of quantitative easing, we do not expect the process to be overly disruptive for financial markets.

There is some evidence of increased environmental risk reflected in recent pockets of speculative froth (particularly social media) and recent extremes in investor sentiment readings. There has also been considerable discussion recently in the media about the 5-year anniversary of the current bull market. The average bull market since 1945 has been about 4.5 years in duration. We acknowledge this “birthday” has significance, however, we continue to remain positive on underlying fundamentals that should support higher equity prices. Geopolitical factors, particularly Crimea and Ukraine, have also increased environmental risk somewhat. We are watching these developments, but as of now we do not expect a major impact on U.S. equities.

With respect to international investments, we continue to see a mixed picture. We think there is increasing risk of a further slowing in China’s economy that will have repercussions for global economic growth, particularly for emerging market economies. Europe has exited its long recession, however the growth outlook appears anemic and the recovery remains fragile.  For these reasons we continue to overweight U.S. equities in our investment strategy.

We still believe the secular bull market in bonds ended in July 2012 and that bond yields will most likely continue on a gradual upward path.  As we stated in our December commentary, the potential for rising interest rates renders bond investments less attractive. In order to reduce interest rate sensitivity in your portfolios we have focused on reducing durations by maintaining long and intermediate bond exposures at the minimal end of our allocation range.

With respect to changes in our investment models, within our U.S. holdings, we shifted more of our allocations towards value both in large and small cap equity exposure. We reduced weightings in our models to both international equities and REITs, and are now slightly underweight a normal allocation in those areas. Within natural resources, we added exposure to timber and forest products as we believe there is increasing potential for rising timber prices over the next couple of years. There were no significant changes in our fixed income weightings or holdings.