Summary of our 1Q-15 Investment Committee Meeting

We held our first quarter 2015 investment committee meeting on December 18. We continue to “stay the course” in maintaining a fairly full exposure to stocks. We believe U.S. stocks continue to offer the most attractive risk/reward among global markets. This is based on our positive outlook for the U.S. economy and corporate earnings and continued low inflation. Growth of the U.S. economy remains the strongest of the developed world economies. We expect U.S. real GDP growth in 2015 of about 3%, compared to virtually zero growth in the Eurozone. Both China and many emerging markets are experiencing slowing in growth. Relative growth of U.S. corporate earnings should remain a positive factor in 2015.

The Federal Reserve continues to remain accommodative of economic growth. While we expect the Fed to begin raising interest rates in 2015, we expect this increase will be a) later in the year and b) gradual and well telegraphed. We do not share the concerns of some that a change in Fed policy will cause a significant upset to financial markets,  particularly if inflation remains low and corporate profit growth remains sound, both of which we expect as of now.

With respect to recent stock market volatility, we note that volatility is a normal element of all financial markets. The mid-December pullback in the stock market was about 5% and well within the normal range of day-to-day, week-to-week volatility going back many years. It seemed worse because of the coincident plunge in oil prices. That said, we think the cyclical bull market is maturing and we do not expect stock market returns going forward to be as strong as the past 5-6 years. Valuation, for one thing, is now above the long-term average and will not be the tailwind it has been for the past six years. We expect market growth going forward will mostly be driven by earnings.

We spent more time this quarter in deliberating our bond investment strategy. As we’ve explained previously, the conundrum (balancing act) facing bond investors is maintaining income in a very low rate environment while protecting against capital risk associated with rising interest rates. We have implemented a structure that underweights the long end of the curve and overweights shorter duration while also holding bonds or bond substitutes (such as utility stocks) that support portfolio income. With respect to equity investments, within U.S. exposure, we increased our weightings to large and mid-cap value (higher dividend-paying) stocks and also increased exposure to real estate. We slightly reduced aggregate exposure to international stocks and held steady our exposure to commodities, primarily in the areas of energy and forest products.