GS Market Know How 1Q2015

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Market Know-How Insights and Implementation 1Q 2015 Strategic Advisory Solutions

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GS Market Know How 1Q2015

Transcript of GS Market Know How 1Q2015

Page 1: GS Market Know How 1Q2015

Market Know-HowInsights and Implementation 1Q 2015

Strategic Advisory Solutions

Page 2: GS Market Know How 1Q2015

GEOPOLITICSMost geopolitical hotspots currently are, in our view, regionally tethered and of limited broader economic consequence.

COMMODITIESWe are constructive on oil, but we think the next 3–6 months could be challenging as supply and demand seek equilibrium. Gold remains vulnerable to monetary policy shifts.

GLOBAL GROWTHWe expect a broadening recovery, with the US registering an above-trend 3% growth pace, and the Euro-area and Japan modestly accelerating from recent lows.

EQUITIESEarnings growth should help US equities advance. Amid potential currency weakness, Japan and Europe may surprise higher, while Emerging Market outperformance seems unlikely.

ENERGYRising shale oil/gas production has potential to play the swing factor in global energy. MLPs appear well-positioned for the energy opportunity.

CURRENCYEven though Dollar strength has become a well-subscribed theme, monetary policy divergence should provide further scope for a rising Dollar and currency volatility.

MONETARY POLICYIn the US and UK, central banks should begin to tighten policy in the second half, while the Euro-area may see sovereign asset purchases. The Bank of Japan will likely stay accommodative.

FIXED INCOMEUS yields will likely move higher, but may still remain below fair value. Demand for High Yield, Senior Loans, and Emerging Market Debt could persist.

DISRUPTIONWe believe we are in the midst of technology-abetted disruption across virtually every industry—potentially a key driver of idiosyncratic risk and forward returns.

VOLATILITYWith limited leverage, private sector imbalances, and recession risk, we think volatility may offer opportunities to add risk assets.

Macro

Market

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1Q

Divergence Defines Opportunity Above-trend US economic growth, expanding earnings, solid

balance sheets, and contained inflation should provide a

supportive backdrop for risk assets in 2015. Divergent monetary

policies and increasing currency volatility are two other major

themes in the year ahead. In the US, we expect the Federal

Reserve to raise interest rates for the first time in nearly a

decade. Europe and Japan, conversely, should move toward

greater monetary accommodation.

Equity returns should be increasingly governed by earnings

growth and less by Price/Earnings (P/E) multiple and margin

expansion. We believe dividend growth, buybacks, and capital

expenditures (CAPEX) should remain top of mind for equity

investors. In fixed income, corporate credit continues to benefit

from strong fundamentals and a voracious investor appetite

for income. In emerging markets, we expect valuation and

idiosyncratic conditions to offer select opportunities. Lastly, the

divergence in global monetary policies should contribute to

additional Dollar strength.

As we position for 2015, we also reflect upon the trouble

spots throughout the world. While none appear to possess

significant disruptive clout, each can be amplified by fragile

global recoveries and stressed liquidity. As investors, it is good

not only to hone our tactical capabilities, but also to commit to

structural portfolio design that seeks to endure the unforeseen.

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2015

How to ImplementGSAM’s ‘Market Know-How’ explains what investors should

KNOW about current market conditions, and HOW they can

implement an investable strategy. The Market Know-How

is based on our expectations of macro conditions and asset

class performance.

As we look to 2015, we suspect the easy money has been

made—and investors should prepare for the possibility of lower

forward returns than in the recent past. Selectivity and risk

awareness have the potential to become meaningful drivers

of returns. We believe investors should consider maintaining

long-term exposure to risky assets, but also think about

implementing strategies with defensive characteristics, given

the potential for increased market volatility.

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2015

Market Know-How 1Q 2015

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The Fed is coming

Views and opinions are current as of December 2014, and may be subject to change, they should not be construed as investment advice.

Economic and market forecasts presented herein reflect our judgment as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs Asset Management has no obligation to provide updates or changes to these forecasts. Examples are for illustrative purposes only.

More energy, more infrastructure

Drawdowns happen

Changing munis

We live in a data-rich era

No trend lasts forever

Not all income is created equal

Don’t fear the Fed, equities have historically endured

Appreciate the evolution of MLPs

THE KNOW THE HOW

Understand the impact of dividend growers

Seek out more dynamic and diversified muni strategies

Be prepared for disruption

Consider alternative strategies

Expand your income horizon

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The Fed is coming. Equities generally have been resilient in the face of rate hikes.

Don’t fear the Fed. In the US, short-term declines have often proven to be buying opportunities.

1In 32 rate hike cycles, global equities have usually gained.

Favorable economic conditions historically have been a key consideration. Unlike climates of significant inflation, periods of rising rates amid an improving economy have generally been benign for global equity markets.

The S&P 500 has tended to dip initially, then quickly reverse course.

Don’t be shocked by a short-term dip. In the US, at the onset of a rate-hike cycle, the S&P 500 has frequently fallen before bouncing back. The dip generally has been temporary. Because declines have tended to be short-lived, “rate scare” selloffs frequently have turned into attractive buying opportunities.

Source: Goldman Sachs Global Investment Research, GSAM.

Source: Bloomberg, GSAM.

Average Start of 32 Global RateHike Cycles

75th PercentileMedian1

25th Percentile

Global Equity Return:

80

90

100

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140

-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24 Months Relative to Start of Rate-Hiking Cycle

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ty In

dex

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l Bef

ore/

Afte

r the

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rt

of a

Rat

e-Hi

king

Cyc

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Jul-99 Jun-04Feb-94

-10%

-5%

0%

5%

10%

15%

20%

Retu

rn

3–6 MonthsPrior to Hike

3 Months Prior to Hike

First 3 Monthsof Hike

Start of Fed TighteningCycle

Months 3–6of Hike

Months 6–9of Hike

6–9 MonthsPrior to Hike

1. The median of a set of ascending/descending numbers is either the middle number for an odd set of numbers, or the average of the two middle numbers for an even set of numbers. Top chart notes: Returns shown are based on the monthly average performance of equity indices over 32 rate hike cycles from Europe, Australia, Asia and North America. Rate hike cycles are defined as the first policy-rate hike after policy rates pause (stable for the next 12 months). Bottom chart notes: Chart is based on monthly average S&P 500 returns over a three-month period. For a given rate hike cycle, the start of the hike is defined as the average S&P 500 index price of the previous month.Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 13–16.

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Drawdowns happen. S&P 500 drawdowns do not happen often, but they have been unexpected and meaningful in magnitude.

-16% -16%

-9%-7% -7%

-22%

2011 EuropeanDebt Crisis

2010GreekBailout

2012GrowthSlowdown

2014GrowthScare

2012FiscalCliff

AverageDrawdown of at least 10%

Retu

rn

Drawdowns are a normal experience for equity investors.

Large cap equities have generated solid returns over time, although they have been susceptible to bouts of volatility. Sizable drawdowns in the S&P 500 do not take place often, but they have still taken place unexpectedly and meaningfully.

Dividend growers in particular have exhibited notably less downside and long-term outperformance.

As sizable and unexpected drawdowns have taken place in the S&P 500, dividend growers have tended to outperform, potentially making them worthy of consideration as a core equity replacement.

Source: Bloomberg, GSAM.

Source: Bloomberg, GSAM.

S&P 500Dividend GrowersMaximum Calendar Year Drawdown Period for S&P 500

0

50

100

150

200

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300

May-05 May-07 May-09 May-11 May-13

Grow

th o

f $10

0

29-Apr-11 to 3-Oct-11S&P 500: -18.6%Dividend Growers: -13.1%

31-Dec-07 to 20-Nov-08S&P 500: -47.7%Dividend Growers: -34.1%

21-May-13 to 24-Jun-13S&P 500: -5.6%Dividend Growers: -5.8%

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Understand the impact of dividend growers. Historically, they have outperformed the S&P 500 during significant drawdowns.

Top chart notes: First five time periods chosen as recent examples of S&P 500 drawdowns. The ‘Average drawdown of at least 10%’ refers to the average of all drawdowns (10% or greater) in the S&P 500, occurring from Dec. 29, 1989 to Nov. 30, 2014. Drawdowns are defined as a period when equities fall. Bottom chart notes: Chart shows the growth of $100 in the S&P 500 TR index and S&P 500 Dividend Aristocrats TR index. The S&P 500 Dividend Aristocrats index measures the performance of S&P 500 constituents that have increased dividends every year for the last 25 consecutive years. The three highlighted periods are selected to illustrate examples of notable historical calendar year drawdowns. Accordingly, highlighted periods include two with significant performance differentials as well as one with a similar performance differential. Analysis based on data from May 2, 2005 to Nov. 30, 2014, which represents earliest common inception. GROWTH OF $100: A graphical measurement of a portfolio’s gross return that simulates the performance of an initial investment of $100 over the given time period. The example provided does not reflect the deduction of investment advisory fees and expenses which would reduce an investor’s return. Please be advised that since this example is calculated gross of fees and expenses the compounding effect of an investment manager’s fees are not taken into consideration and the deduction of such fees would have a significant impact on the returns the greater the time period and as such the value of the $100 if calculated on a net basis, would be significantly lower than shown in this example. Dividends are not guaranteed and a company’s future ability to pay dividends may be limited. Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 13–16.

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There is tremendous insight to be gained from the volume, variety, and velocity of data.

Digital insight is transforming virtually every industry, investing included, amid increasing bandwidth, expanding wireless coverage, and the proliferation of Big Data. In 2013, IBM estimated that the world is generating more than 2.5 billion gigabytes1 of data every day, roughly the equivalent of 250 million football fields full of books.

Investment selectivity may rise in importance as the creative disruption of Big Data takes hold.

Many multi-national companies are now actively engaged in Big Data analytics to better understand customers, products, and processes. In doing so, new markets can be identified, old markets defended, and competitive markets disrupted. It’s often easier for investors to pinpoint the losers than to isolate the winners. We believe investment selectivity should increase in importance.

Source: Goldman Sachs Global Investment Research, IBM, McClatchy-Tribune, GSAM.

Source: GSAM.

1. One gigabyte is one billion bytes, and is a measure of digital information. Please see additional disclosures and definitions on pages 13–16.

Approximately 90% of the world’s datahas been created in only the past two years

SMART PHONES

WEB SEARCH

INTERNET OF THINGS

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Connecting the expanding universeof data can reveal valuable industry,company, and investment insights

Big Data Universe

We live in a data-rich era. Unstructured data and the “Internet of Things” may become the next mega trends.3

Be prepared for disruption, including new winners and losers. The power of data has the potential to drive corporate earnings.

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1. Price/earnings dispersion refers to the magnitude of the difference in stock valuation among all stocks (i.e. increasing Price/Earnings dispersion indicates that valuation is increasingly different from stock to stock). 2. Restructuring activity refers to various corporate activities (e.g. stock buybacks, debt issuance, etc.). Diversification does not protect an investor from market risk and does not ensure profit.Top chart notes: Analysis compares the performance of the S&P 500 (Core Equity), the Barclays US Aggregate Bond Index (Core Fixed Income), and Alternative Strategies (HFRI FoF Index), on an annual basis from Jan. 1, 1990, earliest common inception, to Dec. 31, 2013. HFRI FoF = HFRI Fund of Funds Composite Index; HFRI and related indices are trademarks and service marks of Hedge Fund Research, Inc. (“HFR”) which has no affiliation with GSAM. Information regarding HFR indices was obtained from HFR’s website and other public sources and is provided for comparison purposes only. HFR does not endorse or approve any of the statements made herein. For illustrative purposes only. Bottom chart notes: Equity Long/Short, Event Driven, Relative Value, and Tactical Trading refer to various examples of alternative strategies. Please see glossary for detailed definitions of each.Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 13–16.

Potential Alternative StrategiesPotential Market Conditions Equity Long/Short Event Driven Relative Value Tactical Trading

More company-specific risk

Increasing price/earnings dispersion1

Higher volatility

Increased restructuring activity2

Rising interest rates

Desired Outcome

Higher return

More diversification

Lower volatility

Alternative strategies typically have outperformed core equities during bear markets and fixed income during periods of rising interest rates.

Since 1990, alternative strategies have outperformed at least one element of an investor’s core (equity/fixed income) portfolio in almost 80% of calendar years. In a world of potentially weaker traditional asset class returns, the attraction of alternative strategies could grow.

Alternative strategies have a number of potential benefits.

Alternative strategies could potentially help investors find differentiated returns versus major asset classes, reduce portfolio risk, and mitigate the effects of severe drawdowns, particularly in equity markets.

Source: Bloomberg, GSAM.

Source: GSAM.

‘90 ‘91 ‘92 ‘93 ‘94 ‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13

18 30 12 26 1 38 23 33 29 26 12 8 10 29 11 7 16 10 5 26 15 8 16 32

Alternative StrategiesCore Fixed Income Core Equity

Annu

al R

etur

ns %

9 16 8 10 -3 18 14 16 9 21 4 3 1 12 7 5 10 7 -21 11 7 2 5 9

-3 14 7 10 -3 11 4 10 -5 -1 -9 -12 -22 4 4 2 4 5 -37 6 6 -6 4 -2

No investment trend lasts forever. Traditional asset class performance may be underwhelming in the future.4

Consider owning a diversified range of alternative strategies. Seek to adapt to the possibility of a low-return environment.

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Non-traditional income sources have historically proven to be less sensitive to rising interest rates.

In 2014, fixed income markets surprised many forecasters with a return to lower interest rates and higher duration. Going forward, this combination of lower income and higher interest rate sensitivity may increase fixed income volatility.

Source: Bloomberg, Barclays, GSAM.

Return During Rising Rate Periods-10% -5% 0% 5% 10%

S&P 500 Dividend Aristocrats Index (Dividend Growers)DJ US Select Real Estate Residential Index (REITs)Alerian Master Limited Partnerships Index (MLPs)

Russell 1000 Value Index (Large Value)

Barclays US High-Yield Loans Index (Bank Loans)

Barclays US High Yield Index (High Yield)

Barclays High Yield Municipal Bond IndexJPM GBI-EM Global Diversified Index

Barclays US Corporate Bond Index

Barclays US Aggregate Bond Index

Barclays US Aggregate Municipal Bond Index

Barclays US 1–3 Year Treasury Index

Barclays US Intermediate Treasury Index

Barclays US Long Treasury Index

Trad

ition

al In

com

e So

urce

s

Non-traditional Incom

e Sources

A portfolio’s cash flow could potentially be improved and risks diversified with the introduction of non-traditional income sources.

These sources include Real Estate Investment Trusts, High Yield Bonds, and Master Limited Partnerships. While hedging capabilities of traditional fixed income remain vital to portfolio design, they introduce concentrated rate risk—which non-traditional income sources could potentially mitigate.

Source: Barclays, GSAM.

Non-traditionalIncome

Portfolio

10% Dividend Growers

20% REITs

20% High Yield

20% Bank Loans

20% MLPs

10% Large Value

Yield Without Duration Total Return During Recent Rate Spikes

Yield Return Volatility Oct-10 Apr-13

Non-traditional Portfolio 5.2% 8.6% 10.2% 4.4% 0.5%

Barclays Aggregate 3.1% 5.3% 3.3% -1.3% -2.3%

10-Year Treasury 2.2% 6.8% 6.0% -3.7% -3.4%

S&P 500 1.9% 7.7% 15.5% 10.8% 2.9%

Not all income is created equal. If rates normalize, traditional fixed income investors should be prepared for more volatility.5

Expand your horizons to consider non-traditional income sources. Be mindful of the rate risk in your portfolio.

Top chart notes: Performance based on time periods when the US 10-Year Treasury rate rose at least 100 basis points in 3 months from 1996 to 2014. A basis point is 1/100th of a percent. For each index the maximum available time period was used. For index definitions please see disclosures. Bottom chart notes: Index names for the abbreviated asset classes in the non-traditional income portfolio can be found in the top chart. The performance results are based on historical performance of the indices used. The result will vary based on market conditions and your allocation. The non-traditional income portfolio represents a diversified portfolio whose allocation is depicted in the chart. The performance statistics are from May 31, 2006, earliest common inception, to Nov. 28, 2014. Yield shown is current dividend yield for equities and current yield as of Nov. 28, 2014 for fixed income.Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 13–16.

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Energy supply growth over the last few years has remained extraordinary.

We continue to believe an extensive build out of US energy infrastructure is required. We also expect new infrastructure entrants to continue to invest in the space—and we believe MLPs remain well-positioned in the energy renaissance.

A focus on smaller and younger MLPs could prove beneficial for investors.

Historically, when the MLP universe was smaller, the Alerian MLP Index provided investors with sufficient exposure to the best performers. However, as the asset class has evolved, we believe smaller and younger MLPs offer the potential for more rapidly growing and tax-efficient distributions.

Source: Bloomberg, Energy Information Administration (EIA), GSAM.

Source: Bloomberg, GSAM.

WTI Oil Price (LHS)US Crude Supply Growth (RHS)

Forecast

60

70

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90

100

110

120

Pric

e ($

/bar

rel)

5

6

7

8

9

10

Barrels/day (millions)

2011 2012 2013 2014 2015 2016

< $2bn 8.0%

> $2bn 5.9%

13.7%

4.9%

2008–2012

1986–2008

Median 2013 MLP Distribution Growth Average 2013 Distribution Growth for MLP IPOs

Mar

ket C

ap

Year

of I

PO

More energy, more infrastructure. Recent pressure on oil prices does not change the need for a US pipeline infrastructure build out.6

Appreciate the evolution of MLPs. As the universe expands, we believe that smaller size and newer vintage are key considerations.

Top chart notes: WTI refers to West Texas Intermediate Crude Oil. LHS refers to the axis on the ‘Left Hand Side.’ RHS refers to the axis on the ‘Right Hand Side.’ The economic and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Bottom chart notes: Data reflects growth in quarterly distribution from Q4 2012 to Q4 2013; For IPOs in Q3 and Q4 2012, analysis reflects minimum quarterly distribution as disclosed in public company filings. Analysis includes universe of midstream Energy Master Limited Partnerships (MLPs) that are currently publicly traded (as of Mar. 31, 2014) and were publicly traded for the full year 2013. Excludes names with variable distribution policies and General Partners structured as MLPs. Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 13–16.

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Port

folio

Allo

catio

n

Years to Maturity

Duration1-equivalent Portfolios: 4.6 Years

1

13%

5% 5%

13%

10% 11% 12% 12% 12% 12% 12%

13% 13% 10% 10% 8% 8%

2 3 4 5 6 7 8 9 10 15 20High Yield

Muni

20%

11%

Muni LadderReturnYieldVolatility

4.7%1.4%3.5%

Diversified MunisReturnYieldVolatility

4.9%2.2%2.6%

New municipal bond supply is limited and the availability of the highest rated bonds has collapsed.

Tighter fiscal budgets and the impairment of AAA-rated insurers have reshaped the muni market. Since 2007, the number of AAA-rated munis has declined from roughly 70% of the muni market to 13% today. This trend has coincided with the precipitous decline in the availability of coverage by AAA-rated insurers.

The muni market’s nuances may present investment opportunities.

We believe detailed security research, broader sector and credit exposure, and an adaptive process are key. By broadening the maturity distribution and credit profile of a muni portfolio, investors could potentially enhance cash flow and return while reducing volatility through active strategies.

Source: Barclays, GSAM.

Source: Barclays, GSAM.

49.4%

32.9%

7.4%18.7%

68.8%

13.0%

2007 2014

% Barclays Aggregate Municipal Bond Index AAA AA A

Changing munis. The days of “set it and forget it” are over amid a new scarcity of AAA-rated municipal investments.7

Seek out more dynamic and diversified muni strategies. Active strategies could potentially exploit market nuances.

1. Duration is a measure of a bond’s price sensitivity to a change in interest rates. Top chart notes: According to ratings that Barclays uses, if Moody’s, Standard & Poor’s, and Fitch all provide a credit rating, the Barclays Aggregate Municipal Bond Index (Index) rating is the median of the three agency ratings. If only two agencies provide ratings, the Index rating is the more conservative rating. If only one agency provides a rating, the Index rating reflects that agency’s rating. The objective of a rating from a rating agency is to help provide investors a means in evaluating risk. The rating should reflect the agency’s opinion in terms of creditworthiness of the bond’s issuer. For example, a rating of “AAA” is the highest possible rating and a rating of “D” is the lowest possible rating. Bottom chart notes: The muni ladder portfolio is a hypothetical portfolio, attempting to represent what a typical muni laddered portfolio could potentially look like. The performance results are based on historical performance of the indices used. The analysis is based on data from Jan. 1, 2006, earliest common inception, to Nov. 28, 2014. The result will vary based on market conditions and your allocation. The diversified muni portfolio is a hypothetical portfolio, intending to demonstrate that greater diversification could potentially lead to better results. Both hypothetical portfolios have an equal duration of 4.6 years. For both hypothetical portfolios, the maturity allocations are equally weighted across the maturity spectrum, where allocations exist (e.g. a 1–2 year maturity would be split 50% 1 year and 50% 2 year). The muni ladder portfolio is represented by the 1–10 Year Managed Money Short/Intermediate index. The diversified portfolio includes Barclays Muni Revenue bonds from maturities 1 through 6, the Barclays 7 Year (6–8) Muni Index, and the Barclays High Yield Muni Index. Yield shown is Yield to Worst as of Nov. 28, 2014.Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 13–16.

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1Q2015

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Our Contributors

Heather Kennedy Miner, CFA Managing Director, Global Head of Strategic Advisory Solutions

Heather is the global head of Strategic Advisory Solutions, which delivers GSAM’s perspectives on global markets, strategic asset allocation, and innovative business practices. Strategic Advisory Solutions provides this suite of integrated solutions to help our clients grow and enhance their businesses.

John Tousley, CFA Managing Director, Head of Market Strategy

John is a senior market strategist with GSAM’s Strategic Advisory Solutions. He leads the Market Strategy team, focusing on global capital markets, macro strategy, and implementation. John specializes in developing tactical and strategic investment insights within a risk-aware framework.

Candice Tse Vice President, Senior Market Strategist

Candice is a senior market strategist with GSAM’s Strategic Advisory Solutions. She is responsible for economic and market strategy, along with client engagement on investment solutions. Candice’s areas of expertise include Womenomics and emerging markets.

Allen Sukholitsky, CFA Vice President, Senior Market Strategist

Allen is a senior market strategist with GSAM’s Strategic Advisory Solutions. He focuses on economic and market strategy as well as client engagement on investment implementation. Allen is responsible for helping clients make sense of the markets and turning insights into actionable strategies.

Brendan Conway Vice President, Senior Financial Writer

Brendan is a senior financial writer with GSAM’s Strategic Advisory Solutions. He helps drive content production for Market Strategy, Portfolio Strategy, and Business Practices, as well as for other teams across GSAM.

Steven Russolillo Associate, Financial Writer

Steven is a financial writer with GSAM’s Strategic Advisory Solutions. He is responsible for producing content for Market Strategy, Portfolio Strategy, and Business Practices. Steven contributes to the weekly Market Monitor, monthly Market Pulse, and various other publications across GSAM.

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Investors should also consider some of the potential risks of alternative investments: Alternative Strategies. Alternative strategies often engage in leverage and other investment practices that are speculative and involve a high degree of risk. Such practices may increase the volatility of performance and the risk of investment loss, including the entire amount that is invested. Manager experience. Manager risk includes those that exist within a manager’s organization, investment process or supporting systems and infrastructure. There is also a potential for fund-level risks that arise from the way in which a manager constructs and manages the fund. Leverage. Leverage increases a fund’s sensitivity to market movements. Funds that use leverage can be expected to be more “volatile” than other funds that do not use leverage. This means if the investments a fund buys decrease in market value, the value of the fund’s shares will decrease by even more. Counterparty risk. Alternative strategies often make significant use of over- the- counter (OTC) derivatives and therefore are subject to the risk that counterparties will not perform their obligations under such contracts. Liquidity risk. Alternative strategies may make investments that are illiquid or that may become less liquid in response to market developments. At times, a fund may be unable to sell certain of its illiquid investments without a substantial drop in price, if at all. Valuation risk. There is risk that the values used by alternative strategies to price investments may be different from those used by other investors to price the same investments. The above are not an exhaustive list of potential risks. There may be additional risks that should be considered before any investment decision.

Equity securities are more volatile than fixed income securities and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.

Dividends are not guaranteed and a company’s future ability to pay dividends may be limited.

Master Limited Partnerships (“MLPs”) may be generally less liquid than other publicly traded securities and as such can be more volatile and involve higher risk. Investments in securities of an MLP involve risks that differ from investments in common stocks, including risks related limited control and limited rights to vote on matters affecting the MLP, risks related to potential conflicts of interest between the MLP and the MLP’s general partner, cash flow risks, dilution risks and risks related to the general partner’s right to require unitholders to sell their common units at an undesirable time or price. MLPs are also generally considered interest-rate sensitive investments. During periods of interest rate volatility, these investments may not provide attractive returns.

MLPs may also involve substantially different tax treatment than other equity-type investments, and such tax treatment could be disadvantageous to certain types of investors, such as retirement plans, mutual funds, charitable accounts, foreign investors, retirement accounts or charitable entities. In addition, investments in MLPs may trigger state tax reporting requirements. Generally, a master limited partnership (“MLP”) is treated as a partnership for Federal income tax purposes. Therefore, investors in an MLP may be subject to certain taxes in addition to Federal income taxes, including state and local income taxes imposed by the various jurisdictions in which the MLP conducts business or owns property. In addition, certain tax-exempt investors in an MLP, such as tax-exempt foundations and charitable lead trusts, may incur unrelated business taxable income (“UBTI”) with respect to their investment. UBTI may result in increased Federal, and possibly state and local, tax costs, and may

also result in additional filing requirements for tax exempt investors. Non-US investors may be subject to US taxation on a net income basis and have US filing obligations as a result of investing in MLPs. The tax reporting information for MLPs generally is provided to investors on an annual IRS Schedule K-1, rather than an IRS Form 1099. To the extent the Schedule K-1 is delivered after April 15, you may be required to request an extension to file your tax returns.

MLP distributions consist largely of return of capital and not of current income. The ultimate composition of these distributions may vary due to a variety of factors including projected income and expenses, depreciation and depletion, and any tax elections made by the MLP. The final characterization of such distribution will be made when an MLP can determine each investor’s share of the MLP’s income, expenses, gains and losses. The final tax status of the distribution may differ substantially from this information.

An investment in real estate securities is subject to greater price volatility and the special risks associated with direct ownership of real estate.

Investments in fixed-income securities are subject to credit and interest rate risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline in the bond’s price. Credit risk is the risk that an issuer will default on payments of interest and principal. This risk is higher when investing in high yield bonds, also known as junk bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than their original cost upon redemption or maturity.

Although Treasuries are considered free from credit risk, they are subject to interest rate risk, which may cause the underlying value of the security to fluctuate.

Income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT).

Risk Disclosures

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This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes.

Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice.

This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

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Canada: This material has been communicated in Canada by Goldman Sachs Asset Management, L.P. (GSAM LP). GSAM LP is registered as a portfolio manager under securities legislation in certain provinces of Canada, as a non-resident commodity trading manager under the commodity futures legislation of Ontario and as a portfolio manager under the derivatives legislation of Quebec. In other provinces, GSAM LP conducts its activities under exemptions from the adviser registration requirements. In certain provinces, GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts and is not offering to provide such investment advisory or portfolio management services in such provinces by delivery of this material.

Japan: This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd.

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No part of this material may, without GSAM’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

Goldman, Sachs & Co., member FINRA.

© 2015 Goldman Sachs. All rights reserved.

Date of first use: 1/7/2015. 149292.MF.MED.OTU.

General Disclosures

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Glossary

Equities

The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes. It is not possible to invest directly in an unmanaged index.

The S&P 500 Dividend Aristocrats index measures the performance of S&P 500 constituents that have increased dividends every year for the last 25 consecutive years.

The Russell 1000 Value Index is an unmanaged index of common stock prices that measures the performance of the large-cap value segment of the US equity universe.

The Alerian MLP Index is a composite of the 50 most prominent energy MLPs calculated by Standards & Poor’s using a float-adjusted market capitalization methodology. “Alerian MLP Index,” “Alerian MLP Total Return Index,” “AMZ,” and

“AMZX” are trademarks of Alerian and their use is granted under a license from Alerian.

The DJ Wilshire Real Estate Securities Index is an unmanaged index of publicly traded REITs and real estate operating companies.

Fixed Income

The 10-Year Treasury is a US Treasury debt obligation that has a maturity of 10 years.

The Barclays US Aggregate Bond Index represents an unmanaged diversified portfolio of fixed-income securities, including US Treasuries, investment-grade corporate bonds, and mortgage-backed and asset-backed securities.

The Barclays 1–10 Year Managed Money Short/Intermediate Index is a rules-based, market-value-weighted index engineered for the tax-exempt bond market. It represents the Managed Money Short/Intermediate (1–10) component of the Managed Money Index, a subset of the Municipal Bond market.

The Barclays US 1–3 Year Treasury Index represents the 1–3 year maturity range of the US Treasury Index.

The Barclays US Intermediate Treasury represents the intermediate maturity range of the US Treasury Index.

The Barclays US Long Treasury represents the long maturity range of the US Treasury Index.

The Barclays Municipal Bond Index 7 Year (6–8) is the 6–8 Year component of the Municipal Bond index.

The Barclays US Corporate Index represents the corporate component of the US Credit Index.

The Barclays Revenue 1 Year (1–2) Index is the 1–2 Year sub-component of the broader Barclays Revenue Bond Index.

The Barclays Revenue 3 Year (2–4) Index is the 2–4 Year sub-component of the broader Barclays Revenue Bond Index.

The Barclays Revenue 5 Year (4–6) Index is the 4–6 Year sub-component of the broader Barclays Revenue Bond Index.

The Barclays US High-Yield Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market.

The J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) is an unmanaged market capitalization Index that tracks total returns for USD-denominated debt instruments issued by emerging market sovereign and quasi-sovereign issuers.

The Barclays US Aggregate Municipal Bond Index is an unmanaged broad-based total return index composed of approximately 8,000 investment grade, fixed rate, and tax-exempt issues, with a remaining maturity of at least one year.

The Barclays US High Yield Municipal Bond Index (formerly the Lehman Brothers High Yield Municipal Bond Index) is an unmanaged index made up of bonds that are noninvestment grade, unrated, or rated below Ba1 by Moody’s Investors Service with a remaining maturity of at least one year.

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Alternative Strategies

The Hedge Fund Research, Inc. (“HFR”) Fund of Funds Composite Index is an equal-weighted index of over 500 domestic and offshore fund of funds. All funds report in USD and report Net of All Fees returns on a monthly basis. All funds included in the index must have at least $50 million in assets under management or have been actively trading for at least 12 months.

Source: Hedgefundresearch.com.

In an effort to distinguish funds by what they own, as well as by their prospectus objectives and styles, Morningstar developed the Morningstar Categories. While the prospectus objective identifies a fund’s investment goals based on the wording in the fund prospectus, the Morningstar Category identifies funds based on their actual investment styles as measured by their underlying portfolio holdings (portfolio and other statistics over the past three years).

Equity Long/Short refers to the Morningstar category for Long/Short Equity and Bear Market, where the goal is to generate returns through long and short equity views through bottom-up fundamental, top-down macro and quantitative investment styles.

Event Driven refers to the Morningstar category for Market Neutral, Long/Short Equity, and Nontraditional Bond, where the goal is to profit from corporate events, such as mergers and spinoffs through merger arbitrage, event driven, and long/short credit investment styles.

Relative Value refers to the Morningstar category for Market Neutral, where the goal is to profit from perceived mispricings within and across various securities through convertible arbitrage, equity market neutral, and volatility arbitrage investment styles.

Tactical Trading refers to the Morningstar category for Managed Futures, Multialternative, and Multicurrency, where the goal is to profit from long and short directional positions in equities, bonds, commodities, and currencies through trend following, countertrend, discretionary macro/GTAA, and absolute return currency investment styles.

It is not possible to invest in an unmanaged index.

Glossary continued

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GSAMFUNDS.com

As of September 30, 2014. GSAM leverages the resources of Goldman, Sachs & Co. subject to legal, internal, and regulatory restrictions. Assets Under Supervision (AUS) includes assets under management and other client assets for which Goldman Sachs does not have full discretion. SASMARKET1Q15

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