Fourth Quarter Investment Strategy Highlights

We held our Q4 investment policy meeting on September 21, 2015. There were some meaningful changes in our policy following this meeting, which will be reflected in your portfolios.

One of more significant considerations at our meeting was the recent decision by the Federal Reserve to postpone its long-anticipated increase in its Fed funds target range, a decision which has numerous implications. The primary reason for the Fed’s “non-move” was concern over the pace of global growth, which does appear to be slowing due to the slowdown in the Chinese economy. The implication of this is that both interest rates and inflation may remain lower for a longer period than we and other investors expected. In its deliberations, the Fed also reduced its forecast for inflation, estimated global growth rates, and pace of future interest rate increases. All of this implies further continuation of what some have dubbed the “new normal”, a euphemism for an extended period of low growth and low inflation. Other key considerations in our meeting revolved around relative exposure to “growth” versus “value” sectors of the market as well as U.S. versus international exposure.

We now expect an increased level of volatility in the equity markets over the near term primarily due to heightened concerns over global growth, risk of associated slowing in corporate profit growth, and lingering uncertainty over Federal Reserve policy. We believe these factors have increased the near-term risk of some further downside in the stock market and we have taken action to address this risk, discussed below. We continue to remain positive about the long-term outlook for the U.S. economy and stock market and we do not believe this derails the secular bull thesis; however, we felt it prudent to make these adjustments in managing risk in your portfolios.

With respect to changes in your portfolio, we reduced equity exposure by about 5%, on average, reflected in a lower allocation to all equity sectors, both domestic and international. Within equities we raised our allocation to growth stocks versus value stocks because we believe growth companies can maintain stronger relative earnings growth in a slower economy and maintain a higher relative valuation. Our real estate and commodity/natural resource exposures were also reduced slightly; however within natural resources we increased exposure to energy (primarily oil) as we believe it offers good relative value. We maintained exposure to health care, financials, and home builders as we believe they still represent attractive secular growth opportunities. Within the fixed income sector, we slightly increased our overall exposure while increasing our effective duration (time-weighted average maturity). As we now believe rates will stay lower for a longer period than we previously expected, we believe this implies better returns for longer-maturity bonds than we previously expected warranting some lengthening of duration.