raymond james investment strategy quarterly

V O L U M E 8 / / I S S U E 3 / / J U LY 2 0 1 6

Investment Strategy Quarterly is intended to communicate current economic and capital market information along with the informed perspectives of our investment professionals. You may contact your financial advisor to discuss the content of this publication in the context of your own unique circumstances. Published 7/5/2016. Material prepared by Raymond James as a resource for its financial advisors.

PAGE 2 INVESTMENT STRATEGY RECAP

PAGE 4 ECONOMIC SNAPSHOT

PAGE 14 STRATEGIC ASSET ALLOCATION MODELS

PAGE 15 TACTICAL ASSET ALLOCATION WEIGHTINGS

PAGE 16 ALTERNATIVE INVESTMENTS SNAPSHOT

PAGE 16 CAPITAL MARKETS SNAPSHOT

PAGE 17 SECTOR SNAPSHOT

The Investment Landscape: Adapt or Get Left Behind PAGE 8

Q&AU.S. Housing: Renter Nation Rising PAGE 12

Investing for Retirement in Today’s World PAGE 10

Demographics: What's Ahead for the Economy PAGE 6

2

INVESTMENT STRATEGY QUARTERLY

INTERNATIONALBREXIT • The 52%/48% victory

for the ‘leave’ campaign reflects a widespread distrust of Europe-wide policy-making and regulatory intervention in the UK as well as a skepticism about immigration and a nationalism which pre-fers more complete rule from the UK’s Parliament.

• The rejection of the favored choice of most of the UK’s political leadership and almost all countries of note has implications far beyond the UK.

• Financial market volatility was augmented by the resigna-tion of the UK Prime Minister who will stay in office just to oversee the election of his successor.

• “In the near term, we expect elevated volatility and a rally in high-quality investments, such as intermediate- and lon-ger-maturity investment-grade bonds and dividend-paying stocks.”

– Nick Lacy, Chief Portfolio Strategist, Asset Management Services

• “The UK has two years to negotiate its exit from the EU. There is inevitably uncertainty around this move, and whether it will have a direct impact on economic growth over the next few years is clear. After all, most formal economic studies on the impact of a “Brexit” identified clear economic growth declines.”

– Chris Bailey, European Strategist, Raymond James Euro Equities*

U.S. ECONOMYGROWTH• Coming off a soft first quarter, the economic data look stronger

into 2Q16, with the committee anticipating moderate growth in the near term.

• Inflation remains low, but Federal Reserve officials expect a gradual increase back to the Fed’s two percent target as the transitory impact of low prices of oil and other commodities diminish.

• Consumer spending has been supported by job growth and should continue to do so as the job market tightens and wage growth improves.

• The soft trend in fixed business investment can be attributed to decreases in capital spending within the energy sector and elevated levels of business caution. Uncertainties include the pace of global growth, the UK leaving the EU, and the U.S. presidential election.

FEDERAL RESERVE• On Federal Reserve officials raising rates, Chief Economist

Scott Brown stated “They’re looking to resume policy normal-ization, raising short-term interest rates at some point, but they shouldn’t be in any hurry.”

• Given the UK’s referendum vote to leave the European Union, “The probability of a rate move by the U.S. central bank (Fed) has actually shifted from a hike to perhaps a more accommoda-tive stance, although the probability of any move is very low all the way through February 2017.”

–Doug Drabik, Senior Strategist, Retail Fixed Income

• The November election is not as big a factor in the Fed's deci-sion-making process as the markets believe.

STRONG U.S. DOLLAR• The recent flight to safety boosts the dollar (against a

range of currencies, not just the pound), which is likely to remain a restraint for U.S. exporters.

• The dollar appears to have overshot on the way up and has reversed somewhat, but changes to the perceived Fed policy path and uncertainties in Europe are likely to con-tinue holding it up in the near term.

U.S. EQUITIESS&P 500• “While the rally off the February low has made the situation

feel a lot better, keep in mind that we have now gone more than a year without making a new all-time high. So we’re not out of the woods yet, even though the internal readings of the market still aren’t showing major deterioration under the surface.”

–Andrew Adams, Research Associate, Equity Research

INVESTMENT STRATEGY QUARTERLY RECAP

Financial market headwinds for the next six to twelve months include political uncertainty in the U.S., a

strengthening U.S. dollar, significant uncertainty surrounding Britain’s recent referendum on leaving the

European Union (“Brexit”), and earnings growth. Tailwinds include low oil prices, an improving labor market,

and a low interest-rate environment.

*An affiliate of Raymond James & Associates and Raymond James Financial Services.

"This is not a Lehman

moment."

JEFF SAUT, Chief Investment Strategist, Equity Research

There is no assurance that any investment strategy will be successful. Investing involves risks including the possible loss of capital. Dividends are not guaranteed and will fluctuate. There is no assurance any of the trends mentioned will continue or forecasts will occur. Asset allocation and diversification do not guarantee a profit nor protect against loss. Investing in certain sectors may involve additional risks and may not be appropriate for all investors. nternational investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Alternative investments involve specific risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests.

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JULY 2016

VALUATIONS• "The only metric that looks overvalued to me is Shiller’s

Cyclical Adjusted Price Earnings model (CAPE), which at 26.1x earnings is about 10 points over its long-term average. Most of the other valuation tools are either marginally overvalued, or below their long-term average. Indeed, the trailing normalized P/E ratio for the S&P 500 is at 18.0x versus its average of 19.0x, while the price-to-free cash flow ratio is at 23.0x versus its average of 28.1x."

–Jeff Saut, Chief Investment Strategist, Equity Research

EARNINGS• "While it’s true earnings have had negative comparisons

since late 2014, revisions to earnings growth estimates have been improving for nearly four months. Manifestly, the posi-tive to negative earnings estimate revisions (EER) is now at nearly a two-year high from its long-term average. Hence, the earnings worm seems to have turned."

–Jeff Saut, Chief Investment Strategist, Equity Research

BOND MARKETSFLIGHT TO QUALITY• " Over-accommodative monetary policies and a stampede

of influence for firms to conduct M&A activity, stock buy backs, and pay dividends have resulted in financially-en-gineered balance sheets."

– James Camp, Managing Director of Fixed Income, Eagle Asset Management*

• On foreign demand, “the rest of the world is seeking out any-thing with positive yield. Combined with superior liquidity in the U.S. markets, foreign investors are gobbling this stuff up. Additionally, demand has spilled over to the corporate space, and concessions on investment-grade bonds are disappear-ing. There's strong supply and demand is robust. As a result, spreads are tightening.”

–Benjamin Streed, Strategist, Retail Fixed Income

Each quarter, the committee members complete a detailed survey sharing their views on the investment environment, and their responses are the basis for a discussion of key themes and investment implications.

INVESTMENT STRATEGY COMMITTEE MEMBERS

Andrew Adams, CMT Research Associate, Equity Research

Chris Bailey European Strategist, Raymond James Euro Equities*

Scott J. Brown, Ph.D. Chief Economist, Equity Research

Robert Burns, CFA, AIF® Vice President, Asset Management Services

James Camp, CFA Managing Director of Fixed Income, Eagle Asset Management*

Doug Drabik Senior Strategist, Retail Fixed Income

J. Michael Gibbs Managing Director of Equity Portfolio & Technical Strategy

Nick Goetze Managing Director, Fixed Income Services

Peter Greenberger, CFA, CFP® Director, Mutual Fund Research & Marketing

Nicholas Lacy, CFA Chief Portfolio Strategist, Asset Management Services

Pavel Molchanov Senior Vice President, Energy Analyst, Equity Research

Paul Puryear Director, Real Estate Research

Jeffrey Saut Chief Investment Strategist, Equity Research

Scott Stolz, CFP® Senior Vice President, PCG Investment Products

Benjamin Streed, CFA Strategist, Retail Fixed Income

Jennifer Suden, CAIA Director of Alternative Investments Research

Tom Thornton, CFA, CIPM Vice President, Asset Management Services

Anne B. Platt, AWMA®, AIF® – Committee Chair Vice President, Investment Strategy & Product Positioning, Wealth, Retirement & Portfolio Solutions

Kristin Byrnes – Committee Vice-Chair Product Strategy Analyst, Wealth, Retirement & Portfolio Solutions

• “All the talk about Fed rate hikes is going to be irrelevant in the big picture because everything is being overshadowed by high demand.”


• Regarding the Brexit vote, “the short-term effect is a flight to quality. Volatility is likely to remain as long as uncertainty prevails. It is important to know what you own and why you own it. Appropriate asset allocation is essential.”


ALTERNATIVES & COMMODITIESALTERNATIVES• “The environment is favorable for alternative strategies

such as long-short equity because they can take advantage of lower correlations across stocks and the elevated vola-tility we are seeing in the market.”

–Jennifer Suden, Director of Alternative Investments Research

• While fundamentals are looking up for alternatives, this is a strategy-specific environment rather than a bullish market for alternatives in general.

COMMODITIES• Oil prices have already near-doubled from February's lows.

The recovery should continue, reaching $60s per barrel toward the end of the year, and even higher in 2017. As energy and other commodities sustain their recovery, not all geographies will benefit. "While some commodity importers such as China and India are in better shape than we expected six months ago, we still see headwinds from commodity-centric economies such as Canada and Brazil. When these latter countries begin to pick up, their cus-tomers will face a rising import bill.”

–Pavel Molchanov, SVP, Energy Analyst, Equity Research.

4


ECONOMIC SNAPSHOT

The Brexit vote caught the financial markets by surprise. The UK’s disentanglement from the European Union will be a long and uncertain process, but the impact on the U.S. economy should be small. Recent data suggest a pickup in U.S. economic growth in the second quarter, led by a rebound in consumer spending. The contraction in energy exploration should be near an end (no longer a drag on overall growth), but soft global growth and election-year uncertainty may restrain business investment in the near term. The Fed remains in tightening mode, but should be in no hurry to raise short-term interest rates.

SCOTT BROWN Chief Economist, Equity Research

STATUSECONOMIC INDICATOR COMMENTARY

PO

SIT

IVE

OU

TLO

OK

GROWTHGDP growth is expected to have picked up in 2Q16, but likely only to a moderate pace. Upside potential (in the near term) appears to be somewhat limited.

EMPLOYMENTNonfarm payrolls were slower in May, reflecting the Verizon strike. A tighter job market should result in moderate job gains in the months ahead.

CONSUMER SPENDING

Wage income growth has been supportive. Lower gasoline prices are still helping, but the positive impact is expected to fade over time.

HOUSING AND CONSTRUCTION

Still a gradual recovery, with scope for further improvement. First-time buyers are still facing restraints, but strains should ease over time.

MONETARY POLICY

With labor market slack being reduced, the Fed remains in tightening mode, looking to resume the process of policy normalization, but officials will proceed cautiously, aware of the potential downside risks from global economic and financial developments.

FISCAL POLICYState and local government budgets are in better shape and spending should add to GDP growth (but not by a lot). Congress has yet to complete a budget for the current fiscal year (which started in October).

THE DOLLARThe dollar appears to have overshot on the way up and has reversed somewhat, but changes to the perceived Fed policy path are likely to continue having an oversized impact.

NEU

TR

AL

OU

TLO

OK

BUSINESS INVESTMENT

The weakness in recent quarters has been concentrated in energy. However, capital spending has been on a soft trend worldwide.

MANUFACTURINGStrength in autos should fade as we approach a sustainable pace of sales. Ex-autos, factory output has been mixed, but generally flat (consistent with a “soft patch,” not a recession).

INFLATIONNo pressure in goods. Some pressure in rents. However, core inflation figures have been more moderate following sharper gains in January and February.

LONG-TERM INTEREST RATES

Long-term interest rates should drift gradually higher as the economy improves and the Fed raises short-term rates. However, we should see limited concern about inflation and a continued flight to safety (lower bond yields) due to global concerns.

REST OF THE WORLD

The global outlook remains relatively soft by historical standards, with a number of downside risks. The Brexit vote adds uncertainty.

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JULY 2016

Looking back to the 1950s, could the average American imagine how much the times would have changed in 20, 40 or 60 years? From the baby boomers of the mid-50s and the millennials of the 90s to the digitized generations of Y and Z, demographics have molded our history while current trends are shaping our future.

Populations in the developed world are aging quickly while emerging markets are ripe with youth and untapped opportunity. Global demographics affect everything from economic growth and productivity to the investment landscape and ever-evolving social norms of house-hold formation. This edition of the ISQ taps into the expertise of our committee members to explore these trends and how they are changing the world we live in.

THE LOST GENERATION Born before 1900

Those who came of age during World War I.

* Different sources use varying dates to mark the beginning and end of American generations. This timeline is sourced from Pew Research Center.

BABY BOOMERS Born 1946 – 1964Also known as the “Me” generation, includes those born after World War II during a period of increased birth rates.

THE GREATEST GENERATION Born before 1928Also known as the G.I. generation, and includes World War II veterans.

THE SILENT GENERATION Born 1928 – 1945

Also known as “The Lucky Few,” and includes Korean War veterans as well as some WWII and Vietnam veterans.

POST-MILLENNIALS Born after 1997

Also known as Generation Z and the

“Homeland” generation.

GENERATION X Born 1965 – 1980

Gen X is between two larger generations, and includes those born after the WWII baby boom.

MILLENNIALS Born 1981 – 1997Also known as Gen Y, this is the first generation to come of age in the new millennium.

1925

1945

1965

1980

2000

1900

GENERATION TIMELINE*

Kristin Byrnes, Committee Vice-Chair, Product Strategy Analyst, Wealth, Retirement & Portfolio Solutions

The Evolution of the American Generation

6


than 1.0% per year for the nonfinancial corporate sector. It’s unclear why pro-ductivity growth has slowed. It could be a measurement problem, but it’s more likely related to the softness in capital spending in recent years. If so, productivity growth should pick up fol-lowing a rebound in business

investment. However, if capital spending does not pick up, we may be facing an extended period of lackluster economic growth – a secular stagnation.

Demographics may also have played a part in the slowdown in productivity growth. As the workforce ages, there tends to be less job hopping (leaving one job to pursue a better job). Much of productivity growth in previous decades was due to “creative destruction.” Jobs are constantly being destroyed in the economy, while new ones are being created. Through international trade, the U.S. has shed low-productivity jobs over the years and replaced them with high-productivity jobs. Many signs now point to a significant decrease in this under-lying flux in the economy. Job destruction is trending very low. Job creation has been moderate, but well below past levels. The turnover rate in manufacturing is about half of what it was before the Great Recession.

THE EFFECTS OF AN AGING POPULATION

The combination of slow labor input (a simple function of the demographics) and slow productivity has important implications for the economy. Productivity growth is critical to improvements in the standard of living. If productivity growth is 0.5% per year, output per worker will be 10.5% higher after 20 years. If productivity growth is 1.5%, output per worker would be 35% higher. Faster productivity growth means that there will be more to divide between labor com-pensation and corporate profits over time.

Changes in the characteristics of the pop-ulation have already had a significant impact on the U.S. economy. Over the next decade, slower labor force growth and aging populations will continue to alter the nature of the U.S. and global economies. Investors should consider the implications and uncertainties, and plan accordingly.

Between 1960 and 2000, real gross domestic product (GDP), the inflation-adjusted measure of overall economic output, grew at an average growth rate of 3.6% per year. Between 2000 and 2015, real GDP growth averaged 1.8%, half as strong as the four previous decades. The difference was due largely to changes in the labor force. Between 1960 and 2000, labor force growth averaged 1.8% per year, as a greater percentage of women entered the workforce. The trend of increasing female labor force participation peaked in the late 1990s. At about the same time, the aging of the popula-tion contributed to a decrease in the overall participation rate. Between 2000 and 2015, labor force growth averaged 0.6% per year. The Bureau of Labor Statistics projects labor force growth of 0.5% per year over the next 10 years.

SLOWING PRODUCTIVITY GROWTH

Barring a sharp increase in immigration or a dramatic increase in output per worker, the slower growth in labor input implies that GDP growth will be lower over the next couple of decades. The Federal Reserve’s long-term projec-tion of potential GDP growth is 2.0%. Implicitly, that forecast assumes that the growth in labor productivity (output per hour worked) will average about 1.5% per year. The fear is that productivity growth may be a lot slower.

Over the last five years, labor productivity growth has aver-aged about 0.5% per year for nonfarm business and a bit less

"Based on past changes in technology, the economy is likely to be transformed over the next few decades in ways we can’t even imagine."

Demographics: What's Ahead for the Economy

Chief Economist Scott J. Brown, Ph.D., shares how demographic trends are affecting the labor force, productivity, and economic growth.

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JULY 2016

KEY TAKEAWAYS:

• Over the next decade, slower labor force growth and aging populations will continue to alter the nature of the U.S. and global economies.

• The combination of slow labor input and slow productivity has important implications for the economy. Productivity growth is critical to improve-ments in the standard of living.

• Based on past changes in technology, the economy is likely to be transformed over the next few decades in ways that we can’t even imagine.

Faster productivity growth will also help reduce the govern-ment’s funding strains for Social Security and Medicare. In the 1980s, President Reagan’s commission on Social Secu-rity recognized that the retirement of the baby boomer generation would significantly boost outlays for these pro-grams. Trust funds were created and built up as workers paid more into these programs than was being distributed. When the baby boomers retired, the government would simply tap into these trust funds. The problem is that the government has borrowed against these trust funds.

The aging of the population will also influence the composi-tion of job growth over the next couple of decades. While the labor force will grow more slowly, some areas of the economy will see more rapid growth. Healthcare and social assistance will account for an increasing share of consumer spending and employment. Professional and business ser-vices should continue to account for a growing share of employment as well. Retail employment growth is expected to slow, while agriculture, manufacturing and federal gov-ernment employment are expected to contract.

Technology may help to boost productivity growth, but that’s far from clear. The economy is already seeing the impact from advances in robotics and artificial intelligence. Self-driving vehicles may be the best example. We have 3 million truck drivers who could be replaced by self-driving trucks. The future manufacturing job may be the person who goes around fixing the robots, but even that job could be replaced by a robot. The challenge with worker displacement will be to create new jobs, but if displacement is large enough, then the distribution of income will become the key issue. However, we’re still a long way from sorting this out. Based on past changes in tech-nology, the economy is likely to be transformed over the next few decades in ways we can’t even imagine.

A TREND TOWARD SLOWER GLOBAL GROWTH

The U.S. economy is not alone in facing an aging population and slow productivity growth. These are worldwide problems. The funding of retirements and healthcare are already major challenges for the advanced economies. With little immigra-tion, Japan’s population is declining. Emerging economies have been playing catch-up and should continue to grow, but their population dynamics suggest slower potential growth than in recent decades. China’s one-child policy, which was phased out in 2015, means fewer workers to support each retiree. Capital spending has been relatively weak, and over-capacity is apparent in a number of industries. Much of that is likely transitional, but it is also part of a trend toward slower global growth.

There is no assurance that any investment strategy will be successful. Investing involves risks including the possible loss of capital. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing in certain sectors may involve additional risks and may not be appropriate for all investors. International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets.

PRODUCTIVITY GROWTHPER YEAR

OUTPUT PER WORKER

(After 20 Years)10.5%

Higher35%Higher

0.5% 1.5%

Faster productivity growth means that there

will be more to divide between labor compen-

sation and corporate profits over time.

PRODUCTIVITY GROWTH(per year)

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A CHANGING INVESTMENT LANDSCAPE

What industries stand to benefit from these changes? What industries are at risk of becoming obsolete? Next are a few areas likely to be affected by shifting demographics.

HEALTHCARE

The combination of an aging population and growing middle class is a primary driver of growth within the healthcare industry. Demographics are changing the type of treatments and services that patients seek. Both the middle class and older populations will grow over time, putting pressure on the current system.

A likely scenario, already seen in the United States, is the growth of assisted-living facilities and other forms of housing that cater to an aging demographic. Additionally, as middle classes expand worldwide, there will likely be increased demand for both private healthcare and health-related services.

In addition to considering treatment, technological and medical advancements related to early detection and diagnosis of dis-ease are likely to progress. This may mean an increase in the utilization of cyber office visits and electronic patient records, allowing for efficiencies in office management, improvements in patient experience, and improved record retention and data sharing. Patients will be able to track their daily health on their mobile devices through apps that relay important health-related information to their physicians. Much of the above is already happening in the developed world, and it is only a matter of time before it becomes more prevalent in developing nations.

INFORMATION TECHNOLOGY

Information technology companies are likely to benefit from changes in demographics as well. Today, the smartphone allows us to check email, text, stream videos, manage calen-dars, listen to music, and the list goes on. It was not too long ago that we would have had a separate cellphone, MP3 player

Over the next several decades, countries and regions around the world will experience differing levels of economic growth and investment opportunity, both of which are greatly affected by changing global demographics. There is no set schedule for how these trends will develop, making it critical to stay informed as the changing environment is likely to offer new opportunities for investors. Some indus-tries will benefit from these trends, some will adapt or cease to exist, and new industries will emerge to serve new needs.

AGING POPULATIONS AND UNTAPPED YOUTH

Nearly one-third of the population in the United States is 50 years of age or older. The demographic trend of the aging population is apparent in many developed countries around the world, but to varying degrees. An extreme case is Japan, where nearly 60% of the population is 40 years of age or older.

To the contrary, overall population disparity around the world, particularly within emerging economies, is skewed toward more youthful cohorts. In fact, an estimated 58% of the world’s popula-tion is 34 years of age or younger. These younger populations have unique needs and wants, including quality education to arm them with the changing skill sets required for future employment.

The Investment Landscape: Adapt or Get Left Behind

UNITED STATES POPULATION

WORLD POPULATION

58% IS 34 YEARS OLD

OR YOUNGER

ONE THIRD

50+ YEARS OLD

Peter Greenberger, Director of Mutual Fund Research & Marketing, takes a deeper look at how the evolving population affects the investing backdrop.

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JULY 2016

and a stylus to manage our time. In addition to these advances, many new devices are enabling consumers to buy goods and services without ever having to show the vendor a credit card. This trend has directly impacted traditional retail as well as financial service firms, particularly banks.

A 2015 KPMG study that examined mobile banking found that “adoption rates are highest in developing countries – reaching 60 - 70% in China and India – rather than developed nations, such as the U.S., Canada and the UK.” The same study also found that the demographic with the highest utilization were individuals in their mid- to late-30s. With nearly 60% of the world’s population under the age of 35, it is hard to imagine a shift away from this trend any time soon.

The up-and-coming “sharing economy” is dramatically changing how consumers obtain transportation, grocery shop, do laundry and order takeout. Businesses are tapping into this model as well by outsourcing delivery services to local markets to mini-mize cost and delivery time, while freight transporters are gaining efficiencies through mobile apps that match up ship-pers and carriers. Industries such as traditional retail, transportation, restaurants and autos will need to adapt to this changing environment or they could face the consequence of becoming obsolete.

THE EVOLUTION OF INVESTMENT MANAGEMENT

The investment management industry is evolving to meet the challenge of a changing investor base. These changes impact everything from investment strategy and philosophy to product development. Younger investors, among others, are seeking out investments that align with their values. Both the interconnectedness of the world and access to information have increased general awareness of social and environ-mental issues. This awareness flows through to the types of investments people are willing to make. For example, the

increased appetite for sustainable investing strategies stems from both millennials and female investors seeking out com-panies that are not only fundamentally sound, but also consider corporate governance as well as the environmental and social impact of how they conduct business.

THE VALUE OF HUMAN CONTACT

As the population changes in age and preference, so does the investment landscape that individuals rely on to attempt to grow their assets and achieve their financial goals. The breadth of products and strategies is greater than ever as are the options for obtaining investment advice. The complexity of the investment industry coupled with the lack of time or desire to understand the intricacies of it has supported the traditional financial advisory relationship, and that is likely to persist going forward.

KEY TAKEAWAYS:

• Industries positioned to benefit from an aging pop-ulation and growing middle class are healthcare and information technology, among others.

• Industries such as traditional retail, transportation, restaurants, and autos will need to adapt to the “sharing economy” business model that is welcomed by younger generations, or they could face becoming obsolete.

• Younger investors, among others, are seeking out investments that align with their values.

• The breadth of investment products and strategies is greater than ever as are the options for obtaining investment advice.

There is no assurance that any investment strategy will be successful. Investing involves risks including the possible loss of capital. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing in certain sectors may involve additional risks and may not be appropriate for all investors. International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets.

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the 20-year period, ending 1996, the same portfolio earned 12.6%; a dramatic difference.

Of all the financial decisions investors need to make in life, choosing an appropriate portfolio that meets investment objec-tives throughout retirement is one of the most critical. In the past, this concern didn’t exist since these decisions typically fell in the hands of the employer through pensions and defined ben-efit plans. These types of plans promised to pay retirees a specified monthly benefit until death. These “guaranteed” income streams meant that the primary concern of the retiree was staying under budget.

Today, it is much more common for employers to offer defined contribution plans in which the employer, employee or both make contributions on a regular basis. While some firms offer guidance, it is ultimately up to the individual to make the decisions and maintain the portfolio over time.

THE BALANCED PORTFOLIO: THEN VERSUS NOW

Today’s retirees are facing a far different investment landscape than 20 or 30 years ago. Those who relied on bonds to help fund their retirement income needs are now faced with historically low yields on high-quality bonds. One of the best predictors of bond returns is the current yield, which measures the return an investor would expect if the bond was purchased and held for a year. With yields at their lowest levels since post-WWII, relying on bonds for income will not produce meaningful cash flow as in the past. Additionally, the stock market is not expected to pro-duce the same levels of returns it has in the past, further slowing asset accumulation.

Whether investors decide to work longer and save more, or increase portfolio risk while lowering income needs, adjust-ments to these key inputs can increase the likelihood of achieving retirement goals.

The classic balanced portfolio is a 60/40 allocation with 60% invested in stocks and 40% in bonds*. Over the last 20 years, this type of portfolio earned an average total return of 7.3%, while for

Investing for Retirement in Today's World

A primary factor contributing to lower returns in the current market is lower-yielding bonds. Will interest rates rise in the future and once again provide meaningful income to investors?

Eventually, they should. The difficulty lies in predicting how long it will take and to what degree they will rise. If yields don’t change from their current levels, that 40% allocation to bonds would only earn approximately 2%, a contribution of 0.8% to the portfolio’s total return. If stocks were to earn 10% and bonds earned 2%, the portfolio would have a 6.8% total return.

What about the double-digit returns earned by balanced investors 20 years ago? The reality is that we are living in a different world, and there is no conceivable way to achieve those returns going forward without the stock market earning more than 15% per year; an unlikely scenario.

BOND PORTFOLIO RETURN

2% 3% 4% 5%E

QU

ITY

PO

RT

FO

LIO

RE

TU

RN

5% 3.8% 4.2% 4.6% 5.0%

6% 4.4% 4.8% 5.2% 5.6%

7% 5.0% 5.4% 5.8% 6.2%

8% 5.6% 6.0% 6.4% 6.8%

9% 6.2% 6.6% 7.0% 7.4%

10% 6.8% 7.2% 7.6% 8.0%

TOTAL RETURN EXPECTATIONS FOR A

60/40 PORTFOLIO OF STOCKS AND BONDS

In order for an investor to earn 7.3% on the portfolio going for-ward, stocks would need to earn more than 9% and bonds would need to earn more than 4%. Can this happen? It could, but most likely won’t given the near-term outlook for capital markets.

Nick Lacy, Chief Portfolio Strategist, Asset Management Services, provides context for portfolio construction in the current market environment.

*This portfolio is for illustrative purposes only. Bonds are represented by the Barclays U.S. Aggregate Bond Index and equities by the Standard & Poor’s 500 Index.

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JULY 2016

RETURNS: DON’T LOOK IN THE REAR-VIEW MIRROR

What should investors expect for returns going forward? Should they simply rely on history or look at current conditions to estimate future returns? There are 90 years of history one can draw on for inspiration, but is it relevant to consider data from the 1930s through the 1970s in today’s world?

We know that bonds have historically returned their yields to investors. If we look back 20 years ago, the yield on the average investment-grade bond was 6.3%. Today, those same bonds are yielding around 2% or less in the U.S., which means returns on bonds are going to have a hard time earning more than that.

WHAT SHOULD INVESTORS DO?

In order to attempt to achieve the level of long-term returns experienced in the past, investors may need to own more risky assets. The traditional 60/40 portfolio may need to increase to a 70/30 or 80/20 in order to meet objectives. The danger of this allocation change is that investors will be exposed to greater downside risks compared to the original allocation, which could result in a very big difference in returns.

The downside risks for increasing equity can be very impactful. As illustrated in the following hypothetical table, if the stock market pulls back 10% and an investor owns 60% in stocks, stocks would lose 6%, with investment-grade bonds helping to offset some of those losses.

The challenges retirees face today are very different from those in the past. We are now living in a lower-returning, lower income-producing world, at least for the foreseeable future. Whether investors choose more conservative income require-ments or amp up risk in order to earn more from their portfolios, it is important to fully understand the implications of these actions, particularly the added downside risk associated with more aggressive allocations. Before making what could very well end up being a major shift in return or risk objectives, con-sult your financial advisor to discuss a plan of action.

Investing for Retirement in Today's World

The performance mentioned does not include fees and charges, which would lower an investor’s returns. Past performance may not be indicative of future results. There is no assurance that any investment strategy will be successful. Investing involves risks including the possible loss of capital. The market value of fixed income securities may be affected by several risks including interest rate risk, default or credit risk, and liquidity risk. There is no assurance any of the trends mentioned will continue or forecasts will occur.

KEY TAKEAWAYS:

• Of all the financial decisions an investor needs to make around retirement, how to invest retirement assets is one of the most critical.

• We are now living in a lower-returning, lower income-pro-ducing world, at least for the foreseeable future.

• Whether investors decide to work longer and save more, or increase portfolio risk while lowering income needs, adjust-ments to these key inputs can increase the likelihood of achieving retirement goals.

• The downside risks for increasing equity exposure can be very impactful, and consulting your financial advisor to discuss a plan of action is highly recommended.

DOWNSIDE RISKS FOR INCREASING

EQUITY CAN BE IMPACTFUL

BOND RETURN 2% 4% 6%STOCK RETURN -10% -15% -20%

60% -5.2% -7.4% -9.6%70% -6.4% -9.3% -12.2%80% -7.6% -11.2% -14.8%90% -8.8% -13.1% -17.4%

100% -10.0% -15.0% -20.0%

EQ

UIT

Y

12


Q. WHAT FACTORS ARE CONTRIBUTING TO THE

DECLINE IN HOMEOWNERSHIP AND THE SUBSE-

QUENT RISE IN DEMAND FOR RENTALS?

A. Lifestyles are changing dramatically with the coming-of-age of the millennial generation, and homeownership is no longer perceived as fulfillment of the American Dream. Even if this generation were to decide that homeownership was preferable, most are unable to afford the ownership lifestyle of choice, resulting in a trend that we refer to as “Renter Nation Rising.” Affordability and socio-demographic shifts are both playing a huge role.

Median household incomes have not kept up with core inflation over the past 15 years and have trailed inflation in housing replacement costs by an even wider margin. Fol-lowing the mortgage crisis in 2008, underwriting standards also tightened, further challenging the ability of buyers, especially first-time buyers, to qualify for a mortgage. Tack on rising student debt burdens, currently approaching a balance of $1.25 trillion, and graduates looking to take on mortgage debt have strong headwinds holding them back from homeownership. Consequently, the rental housing boom looks like it could carry on for a few more years as the youngest millennials are 18 years of age and just graduating from high school.

The lifestyle choices for most college graduates over the next four years are all too obvious: either rent or move in

with family and friends. Meanwhile, the cost to become a homeowner is seemingly moving even further away from these young buyers unless they can achieve dramatic income growth. Wage growth is necessary to close the qualification gap for a mortgage with existing home prices currently escalating at 5 - 6% annually and mortgage rates likely moving higher as well.

Q. CAN THE “MINI-BOOM” OF MILLENNIALS

SUPPORT THE INCREASED SUPPLY OF

BABY-BOOMER INVENTORY SET TO HIT THE

MARKET OVER THE NEXT DECADE?

A. Yes, but it likely spells “average” for the U.S. housing market for the next few years in terms of starts as the 73 million boomers retire and downsize and the 80 million millennials mature and absorb some of the inventory. The cohort of 26- to 64-year-olds, which is the prime ownership time frame, will grow at the slowest rate in history over the next few years as boomers exit the age bracket and millennials enter. The Gen X cohort, sitting between these two bookends of the U.S. population, is well into its housing lifestyle and will trade up with income growth but is unlikely to produce any dramatic shift in an otherwise moribund demographic outlook.

Having said this, be aware that the U.S. is currently tracking 1.1 million to 1.2 million housing starts, which is reasonably supportive of the economy, and existing home prices are currently escalating and closing the gap between existing and new home prices. In addition, the inventory overhang from the overbuilt single-family market has been absorbed, which of course is very good news. However, we don’t see a near-term scenario where housing starts spike up to the 1.5 million level that historical trends and population growth estimates would imply is needed in the U.S. economy, due to factors we have cited.

Paul Puryear, Director of Real Estate Research, weighs in on key factors and trends shaping the U.S. housing market.

SIN

CE

20

04

75.2MILLION

76.5 MILLION

9.4MILLION

Q&A U.S. Housing: Renter Nation Rising

13

JULY 2016

Q. HOW ARE WOMEN, AS RELATED TO DEMOGRAPHIC

TRENDS, SHAPING THE HOUSING MARKET?

A. Less than half of the households in the U.S. (48%) are now traditional married-family households. Single and nonfa-mily households have overtaken the majority, and the traditional married households with children, now only 20% of the total, appear to be in secular decline. Birth and fertility rates are lower, the new generation is delaying marriage, or not getting married at all, and a surprising 40% of children in the U.S. are born to an unwed mother.*

There are now 6 million more college-educated women than men in the work force, and the imbalance is growing, creating an education divide. As more female heads of households pursue careers, this further challenges the all-important married household with children category, where historically the homeownership rate was 80%. Single females with children have a homeownership rate of 32%, dramatically below the U.S. average currently at 63.5%.

Millennials are marrying later, starting families later and choosing different housing lifestyles. Households that do have families will be moving away from many of the urban-infill locations they sought out after their college years, to the suburbs, looking for the right school districts. This is a trend we will continue to track, but we expect this group to skip the all-important starter home purchase at $125,000 - $175,000 and start their homeownership years with what is otherwise described in the industry as the higher price point first or second move-up houses. Conse-quently, without a ramp in the all-important starter home category, which historically has been 40% of the new home market, it will be a challenge for the U.S. market to get back to 1.5 million starts.

KEY TAKEAWAYS:

• Lifestyles are changing dramatically with the com-ing-of-age of the millennial generation and home ownership is no longer perceived as fulfillment of the American Dream.

• Millennials are marrying later, starting families later and choosing different housing lifestyles.

• Median household incomes have not kept up with core inflation or housing replacement costs, mort-gage underwriting standards have tightened, and rising student debt burdens are creating strong head-winds holding graduates back from homeownership.

• Changing demographic trends among women, including increased education, and increases in single women having children are also affecting the rental versus ownership trend.

*U.S. Census Bureau 2014, American Community SurveyInvesting involves risks including the potential loss of principal. There is no assurance the trends mentioned will continue or the forecasts discussed will occur. The value of real estate investments may be adversely affected by several factors, including supply and demand, rising interest rates, property taxes, and changes in the national, state and local economic climate. Past performance may not be indicative of future results.

The new generation is delaying marriage, or not getting married at all.

40% of children in the U.S. are born to an unwed mother.

Single females with children have a homeownership rate of 32%, dramatically below the U.S. average currently at 63.5%.

14


Raymond James asset allocation targets are based on the contributors’ changing views of the risk and return in the various asset classes, looking out over three or more years. The alternative investments' allocation currently represents a managed futures strategy, specifically, a medium-term, trend-following strategy. Historically, trend-following strategies have performed well in periods of heightened market volatility. Medium-term includes periods greater than three months, but less than a year.

*Refer to page 18 for multi-sector bond asset class definition.

CONSERVATIVE CONSERVATIVE BALANCED BALANCED BALANCED

WITH GROWTH GROWTH

EQUITY 31% 51% 64% 78% 93%

U.S. Large Cap Equity 19% 31% 33% 36% 43%

U.S. Mid Cap Equity 3% 7% 9% 11% 13%

U.S. Small Cap Equity 2% 3% 4% 5% 5%

Non-U.S. Developed Market Equity 7% 10% 14% 18% 23%

Non-U.S. Emerging Market Equity 0% 0% 4% 4% 5%

Publicly-Traded Global Real Estate 0% 0% 0% 4% 4%

FIXED INCOME 67% 47% 31% 15% 0%

Investment Grade Long Maturity Fixed Income 0% 0% 0% 0% 0%

Investment Grade Intermediate Maturity Fixed Income 43% 31% 22% 15% 0%

Investment Grade Short Maturity Fixed Income 5% 0% 0% 0% 0%

Non-Investment Grade Fixed Income (High Yield) 4% 5% 4% 0% 0%

Global (non-U.S.) Fixed Income 0% 0% 0% 0% 0%

Multi-Sector Bond* 15% 11% 5% 0% 0%

ALTERNATIVE INVESTMENTS- MANAGED FUTURES 0% 0% 3% 5% 5%

CASH & CASH ALTERNATIVES 2% 2% 2% 2% 2%

STRATEGIC ASSET ALLOCATION MODELS

15

JULY 2016

Refer to page 19 for model definitions. *Refer to page 18 for multi-sector bond asset class definition.

For investors who choose to be more active in their portfolios and make adjustments based on a shorter-term outlook, the tactical asset allocation dashboard above reflects the Raymond James Investment Strategy Committee’s recommendations for current positioning relative to our longer-term strategic models. Your financial advisor can help you interpret each recommendation relative to your individual asset allocation policy, risk tolerance and investment objectives.

OVERALL EQUITY Elevated valuations may present challenges for investors, however economic news has been more positive and should be reflected in improved earnings and sentiment.

U.S. Large Cap EquityWhile trading near full value at this point, large caps tend to provide greater stability compared to other equity investments in times of uncertainty.

U.S. Mid Cap EquityMid caps are expensive relative to large and small caps, justifying an underweight at this time.

U.S. Small Cap EquityFollowing a 25% drawdown from a year ago, small caps are reasonably valued based on historical norms and relative to other asset classes.

Non-U.S. Developed Market EquityHigher dividend yields are relatively attractive but tempered by volatility surrounding the Brexit vote. Post-Brexit selling may create opportunities for otherwise healthy compa-nies and ongoing QE overseas should support these markets over time.

Non-U.S. Emerging Market EquityEM is attractively priced following a prolonged period of negative sentiment and heightened volatility. A rebound in commodity prices as well as stabilization of Chinese growth should boost long-term growth prospects.

Publicly Traded Global Real EstateAs a stand-alone GIC sector, demand should increase temporarily as funds are required to fill allocations to the sector. The interest-rate sensitivity of the sector can also help diversify while providing equity-like returns over time.

OVERALL FIXED INCOMEShort-term rates may rise at some point in the U.S. but central bank policies globally should continue to put downward pressure on bond yields. Strategic allocations should remain intact.

Investment Grade Long Maturity Fixed Income

The yield curve will likely continue to flatten as inflation remains muted. Long-duration fixed income remains an excellent hedge for equity volatility.

Investment Grade Intermediate Maturity Fixed Income

Intermediate-term FI remains somewhat insulated from Fed/central bank monetary policy based on a historically low number of opportunities in the rest of the global fixed income market.

Investment Grade Short Maturity Fixed Income

Short-maturity bonds will experience greater volatility as they are most tied to monetary policy. As a result, <2 year maturities will likely see significant volatility as we have in the past.

Non-Investment Grade Fixed Income (High Yield)

Spreads remain above their LT average. While an increase in defaults is expected, higher yields should compensate. Active management is highly recommended in this space due to the equity-like risks.

Global (non-U.S.) Fixed IncomeGlobal sovereign debt yields are too low, but corporate debt may have room to run. 70% of global sovereigns yield <1%, with nearly 30% having <0% (negative) yields. Pockets of opportunity exist in the emerging market local currency space.

Multi-Sector Bond*Manager selection remains critical in this space given the heavy exposure to credit risk. It is critical to understand what each strategy owns and how it contributes to overall portfolio risk to avoid unintended overexposure.

ALTERNATIVE INVESTMENTSL/S equity, global macro, and managed futures can all benefit from the current market environment with many strategies able to benefit from both long and short sides of trades.

CASH & CASH ALTERNATIVESInvestors should maintain appropriate levels of cash in their portfolios. Cash is a poten-tial buffer against many market risks and provides funding for buying opportunities.

TACTICAL COMMENTSUN

DE

RW

EIG

HT

SLIG

HT

UN

DE

RW

EIG

HT

NE

UT

RA

L

OV

ER

WE

IGH

T

SLIG

HT

OV

ER

WE

IGH

T

● April 2016 ● July 2016

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TACTICAL ASSET ALLOCATION WEIGHTINGS

16


CAPITAL MARKETS SNAPSHOT

*Price Level **Total Return

ALTERNATIVE INVESTMENTS

EQUITY LONG/SHORT

Long/short equity managers are typically long-biased, so they will generally participate, albeit to a limited degree, in rising markets, but also have the potential to protect on the downside. While many long/short equity managers endured a difficult start to the year, lower intra stock correlations and equity market volatility should make for a fertile environment for stock pickers. It should be noted however, that the space has experienced a meaningful amount of “crowding” in recent years and selecting managers that are able to differentiate themselves from peers has become even more important for long/short equity investors.

MULTI-MANAGER/ MULTI-STRATEGY

For investors seeking a lower volatility, lower beta strategy, a broadly diversified multi-manager strategy could be a relevant option.

MANAGED FUTURESDivergence in economic policy and elevated levels of volatility are tailwinds for the strategy. Additionally, the ability to go both long and short the various asset classes (fixed income, commodities, currency, and equities) allows the strategy to benefit even in times of financial distress.

EVENT DRIVEN

Event-driven managers may face some headwinds in the near term given the upcoming presidential election, which generally leads to a more muted environment for M&A transactions. In addition, many companies continue to digest the transactions completed during 2015, a record year for deal making. Activist investments may be indirectly impacted by recent developments in some high profile trades, while the timing on distressed investments continues to remain somewhat uncertain as opportunities outside of a few select sectors have been slow to emerge.

EQUITY MARKET NEUTRAL

As intra-stock correlations have decreased, managers have the potential to benefit from both the long and short exposure within the portfolio. For an investor who is bearish on equities, this could be a suitable option given its lack of dependence on market movements.

COMMODITIESThough commodities as a whole may continue to show signs of recovery throughout the year, the potential for downside risk remains significant. Beyond oil markets, industrial metals face the headwind of a decline in demand across emerging market economies.

GLOBAL MACROSimilar to managed futures, divergence in economic policy and elevated levels of volatility are tailwinds for the strategy. Additionally, the ability to go both long and short across the various asset classes (fixed income, commodities, currency, and equities) allows the strategy to benefit even in times of financial distress.

ALTERNATIVE INVESTMENTS SNAPSHOT JENNIFER SUDEN Director of Alternative Investments Research

EQUITY AS OF 6/30/2016* 2Q 2016 RETURN** 12-MONTH RETURN

Dow Jones Industrial Average 17,929.99 2.07% 4.50%

S&P 500 Index 2,098.86 2.46% 3.99%

NASDAQ Composite Index 4,842.67 -0.23% -1.68%

MSCI EAFE Index 1,608.45 -1.46% -10.16%

RATES AS OF 6/30/2016 AS OF 3/31/2016 AS OF 6/30/2015

Fed Funds Target Range 0.25 - 0.50 0.25 - 0.50 0.00 - 0.25

3-Month LIBOR 0.64 0.63 0.28

2-Year Treasury 0.62 0.76 0.64

10-Year Treasury 1.50 1.83 2.35

30-Year Mortgage 3.56 3.83 3.98

Prime Rate 3.50 3.50 3.25

COMMODITIES AS OF 6/30/2016 2Q 2016 RETURN 12-MONTH RETURN

Gold $1,320.75 6.77% 12.79%

Crude Oil $48.33 26.06% -18.73%

This report is intended to highlight the dynamics underlying major categories of the alternatives market, with the goal of providing a timely assessment based on current economic and capital market environments. Our goal is to look for trends that can be sustainable for several quarters; yet given the dynamic nature of financial markets, our opinion could change as market conditions dictate.

17

JULY 2016

SECTOR SNAPSHOT

This report is intended to highlight the dynamics underlying the

10 S&P 500 sectors, with a goal of providing a timely assessment

to be used in developing your personal portfolio strategy. Our

time horizon for the sector weightings is not meant to be short-

term oriented. Our goal is to look for trends that can be sustainable

for several quarters; yet given the dynamic nature of financial

markets, our opinion could change as market conditions dictate.

Most investors should seek diversity to balance risk versus

reward. For this reason, even the least-favored sectors may be

appropriate for portfolios seeking a more balanced equity

allocation. Those investors seeking a more aggressive invest-

ment style may choose to overweight the preferred sectors

and entirely avoid the least favored sectors. Investors should

consult their financial advisors to formulate a strategy cus-

tomized to their preferences, needs and goals.

These recommendations will

be displayed as such:

Overweight: favored areas

to look for ideas, as we expect

relative outperformance

Slight Overweight: next favored areas to look for ideas

Equal Weight: expect in-line relative performance

Slight Underweight: expect relative underperformance in

general, but opportunities exist within select subsectors

Underweight: unattractive expectations relative to the other

sectors; exposure might be needed for diversification

For a complete discussion of the sectors, please ask your financial

advisor for a copy of Portfolio Strategy: Sector Analysis.

J. MICHAEL GIBBS Managing Director of Equity Portfolio & Technical Strategy

RECOMMENDED WEIGHT SECTOR S&P WEIGHT COMMENTS

OVERWEIGHT

INFORMATION TECHNOLOGY 20.2%

Valuation is generally attractive and we are comfortable with the technical backdrop. The rally back in the overall index (especially improvement within semiconductors) improves the outlook.

CONSUMER DISCRETIONARY 12.4%

Valuation is attractive and fundamental trends are generally favorable. Consumer spending suggests the trends are sustainable. The intermediate trend is still positive, but weakness in the equal-weight index should not be ignored.

INDUSTRIALS 10.2%Valuation scores well in numerous categories and technical momentum for the broad group continues to improve with lagging transports as the only negative.

EQUAL WEIGHT

FINANCIALS 15.7%Fundamentals are mixed. Banks are struggling with low NIM and regulations while REITs are strong. Valuation looks attractive across the broad sector, relative to averages. A slight discount (banks) is probably justified based on fundamentals.

HEALTH CARE 14.7%Fundamentals are attractive for most areas of health care and valuations are in line with averages on an absolute basis. On a relative basis, the sector is quite attractive.

CONSUMER STAPLES 10.4%

2016 earnings estimate (+3.8%) improved. Upper single-digit growth is expected in 2017 and 2018. We remain cautious due to elevated margins and the sector is expensive on most measures on an absolute and relative basis.

ENERGY 7.3%

Fundamentals at the company level remain a challenge, but production trends are favorable to support higher prices. Valuations are generally high when earnings are depressed and that is the case now. Crude prices will continue to influence stock prices and a short-term positive trend continues to build. Resistance could appear near the Nov. 2015 highs. This sector is likely to remain volatile.

MATERIALS 2.9%2016 estimates have recently trended higher after the plunge seen over the previous 12 months. Valuation looks attractive on EV/EBITDA measures. Momentum continues to build, and price and relative strength are confirming each other.

UNDERWEIGHT

UTILITIES 3.5%

Fundamentals should be stable assuming the economy grows in the 2+% range. Valuations are expensive on most measures. Relative strength moved above resistance, causing an uptick in short-term momentum but the lack of a breakout keeps us neutral on this trend.

TELECOM 2.8%

Fundamental trends are favorable with EBITDA growth in the low 6% area expected in 2016. Valuation is okay but trading at a premium on an absolute and relative basis. This interest-sensitive sector continues to trade well. Six-month relative strength trends are OK.

18


ASSET CLASS DEFINITIONS

U.S. Large Cap EquityRussell 1000 Index: Based on a combination of their market cap and current index membership, this index consists of approximately 1,000 of the largest securities from the Russell 3000. Representing approximately 92% of the Russell 3000, the index is created to provide a full and unbiased indicator of the large cap segment.

U.S. Mid Cap EquityRussell Midcap Index: A subset of the Russell 1000 index, the Russell Midcap index measures the performance of the mid-cap segment of the U.S. equity universe. Based on a combination of their market cap and current index membership, includes approximately 800 of the smallest securities which represents approximately 27% of the total market capitalization of the Russell 1000 companies. The index is created to provide a full and unbiased indicator of the mid-cap segment.

U.S. Small Cap EquityRussell 2000 Index: The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The Russell 2000 Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do not distort the performance and characteristics of the true small-cap opportunity set.

Non U.S. Developed Market EquityMSCI EAFE: This index is a free float-adjusted market capitalization index that measures the performance of developed market equities, excluding the U.S. and Canada. It consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.

Non U.S. Emerging Market EquityMSCI Emerging Markets Index: A free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of December 31, 2010, the MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.

Real EstateFTSE NAREIT Equity: The index is designed to represent a comprehensive performance of publicly traded REITs which covers the commercial real estate space across the US economy, offering exposure to all investment and property sectors. It is not free float adjusted, and constituents are not required to meet minimum size and liquidity criteria.

CommoditiesBloomberg Commodity Index (BCOM): Formerly known as the Dow Jones-UBS Commodity Index, the index is made up of 22 exchange-traded futures on physical commodities. The index currently represents 20 commodities, weighted to account for economic significance and market liquidity with weighting restrictions on individual commodities and commodity groups to promote diversification. Performance combines the returns of the fully collateralized BCOM Index with the returns on cash collateral (invested in 3 month U.S. Treasury Bills).

Investment Grade Long Maturity Fixed IncomeBarclays Long US Government/Credit: The long component of the Barclays Capital Government/Credit Index with securities in the maturity range from 10 years or more.

Investment Grade Intermediate Maturity Fixed IncomeBarclays US Aggregate Bond Index: This index is a broad fixed income index that includes all issues in the Government/Credit Index and mortgage-backed debt securities. Maturities range from 1 to 30 years with an average maturity of nearly 5 years.

Investment Grade Short Maturity Fixed IncomeBarclays Govt/Credit 1-3 Year: The component of the Barclays Capital Government/Credit Index with securities in the maturity range from 1 up to (but not including) 3 years.

Non-Investment Grade Fixed Income (High Yield)Barclays US Corporate High Yield Index: Covers the universe of fixed rate, non-investment grade debt which includes corporate (Industrial, Utility, and Finance both U.S. and non-U.S. corporations) and non-corporate sectors. The index also includes

Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. Original issue zeroes, step-up coupon structures, 144-As and pay-in-kind bonds (PIKs, as of October 1, 2009) are also included. Must publicly issued, dollar-denominated and non-convertible, fixed rate (may carry a coupon that steps up or changes according to a predetermined schedule, and be rated high-yield (Ba1 or BB+ or lower) by at least two of the following: Moody’s. S&P, Fitch. Also, must have an outstanding par value of at least $150 million and regardless of call features have at least one year to final maturity.

Global (Non-U.S.) Fixed IncomeBarclays Global Aggregate Bond Index: The index is designed to be a broad based measure of the global investment-grade, fixed rate, fixed income corporate markets outside of the U.S. The major components of this index are the Pan-European Aggregate, and the Asian-Pacific Aggregate Indices. The index also includes Eurodollar and Euro-Yen corporate bonds, Canadian government, agency and corporate securities.

Multi-Sector BondThe index for the multi-sector bond asset class is composed of one-third the Barclays Aggregate US Bond Index, a broad fixed income index that includes all issues in the Government/Credit Index and mortgage-backed debt securities; maturities range from 1 to 30 years with an average maturity of nearly 5 years, one-third the Barclays US Corporate High Yield Index which covers the universe of fixed rate, non-investment grade debt and includes corporate (Industrial, Utility, and Finance both U.S. and non-U.S. corporations) and non-corporate sectors and one-third the J.P. Morgan EMBI Global Diversified Index, an unmanaged index of debt instruments of 50 emerging countries.

The Multi-Sector Bond category also includes nontraditional bond funds. Nontraditional bond funds pursue strategies divergent in one or more ways from conventional practice in the broader bond-fund universe. These funds have more flexibility to invest tactically across a wide swath of individual sectors, including high-yield and foreign debt, and typically with very large allocations. These funds typically have broad freedom to manage interest-rate sensitivity, but attempt to tactically manage those exposures in order to minimize volatility. Funds within this category often will use credit default swaps and other fixed income derivatives to a significant level within their portfolios.

Alternatives InvestmentHFRI Fund of Funds Index: The index only contains fund of funds, which invest with multiple managers through funds or managed accounts. It is an equal-weighted index, which includes over 650 domestic and offshore funds that have at least $50 million under management or have been actively trading for at least 12 months. All funds report assets in US Dollar, and Net of All Fees returns which are on a monthly basis.

Cash & Cash AlternativesCitigroup 3 Month US Treasury Bill: A market value-weighted index of public obligations of the U.S. Treasury with maturities of 3 months.

KEY TERMSLong/Short EquityLong/short equity managers typically take both long and short positions in equity markets. The ability to vary market exposure may provide a long/short manager with the opportunity to express either a bullish or bearish view, and to potentially mitigate risk during difficult times.

Global MacroHedge funds employing a global macro approach take positions in financial derivatives and other securities on the basis of movements in global financial markets. The strategies are typically based on forecasts and analyses of interest rate trends, movements in the general flow of funds, political changes, government policies, inter-government relations, and other broad systemic factors.

Relative Value ArbitrageA hedge fund that purchases securities expected to appreciate, while simultaneously selling short related securities that are expected to depreciate.

Multi-StrategyEngage in a broad range of investment strategies, including but not limited to long/short equity, global macro, merger arbitrage, statistical arbitrage, structured credit, and event-driven strategies. The funds have the ability to dynamically shift capital among the various sub-strategies, seeking the greatest perceived risk/reward opportunities at any given time.

19

JULY 2016

Event-DrivenEvent-driven managers typically focus on company-specific events. Examples of such events include mergers, acquisitions, bankruptcies, reorganizations, spin-offs and other events that could be considered to offer “catalyst driven” investment opportunities. These managers will primarily trade equities and bonds.

Special SituationsManagers invest in companies based on a special situation, rather than the underlying fundamentals of the company or some other investment rationale. An investment made due to a special situation is typically an attempt to profit from a change in valuation as a result of the special situation, and is generally not a long-term investment.

Managed FuturesManaged futures strategies trade in a variety of global markets, attempting to identify and profit from rising or falling trends that develop in these markets. Markets that are traded often include financials (interest rates, stock indices and currencies), as well as commodities (energy, metals and agriculturals).

INDEX DEFINITIONSBarclays U.S. Aggregate Bond IndexA broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. Securities must be rated investment-grade or higher using the middle rating of Moody’s, S&P and Fitch. When a rating from only two agencies is available, the lower is used. Information on this index is available at [email protected].

DISCLOSUREAll expressions of opinion reflect the judgment of Raymond James & Associates, Inc. and are subject to change. Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. The performance mentioned does not include fees and charges which would reduce an investor’s return. Dividends are not guaranteed and will fluctuate. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss. Investing in certain sectors may involve additional risks and may not be appropriate for all investors.

International investing involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Investing in emerging and frontier markets can be riskier than investing in well-established foreign markets.

Investing in small- and mid-cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor.

There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.

U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term obligations of the U.S. government.

While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, or state or local taxes. In addition, certain municipal bonds (such as Build America Bonds) are issued without a federal tax exemption, which subjects the related interest income to federal income tax. Municipal bonds may be subject to capital gains taxes if sold or redeemed at a profit.

If bonds are sold prior to maturity, the proceeds may be more or less than original cost. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency.

Commodities and currencies are generally considered speculative because of the significant potential for investment loss. They are volatile investments and should only form a small part of a diversified portfolio. Markets for precious metals and other commodities are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising.

Investing in REITs can be subject to declines in the value of real estate. Economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments.

High-yield bonds are not suitable for all investors. The risk of default may increase due to changes in the issuer's credit quality. Price changes may occur due to changes in interest rates and the liquidity of the bond. When appropriate, these bonds should only comprise a modest portion of your portfolio.

Beta compares volatility of a security with an index.

The process of rebalancing may result in tax consequences.

Alternative investments involve specific risks that may be greater than those associated with traditional investments and may be offered only to clients who meet specific suitability requirements, including minimum net worth tests. Investors should consider the special risks with alternative investments including limited liquidity, tax considerations, incentive fee structures, potentially speculative investment strategies, and different regulatory and reporting requirements. Investors should only invest in hedge funds, managed futures, distressed credit or other similar strategies if they do not require a liquid investment and can bear the risk of substantial losses. There can be no assurance that any investment will meet its performance objectives or that substantial losses will be avoided.

The companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence.

Investing in the energy sector involves risks and is not suitable for all investors.

The performance mentioned does not include fees and charges which would reduce an investor’s returns. The indexes are unmanaged and an investment cannot be made directly into them. The Dow Jones Industrial Average is an unmanaged index of 30 widely held securities. The NASDAQ Composite Index is an unmanaged index of all stocks traded on the NASDAQ over-the-counter market. The S&P 500 is an unmanaged index of 500 widely held securities. The Shanghai Composite Index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange.

MODEL DEFINITIONSConservative Portfolio: may be appropriate for investors with long-term income distribution needs who are sensitive to short-term losses yet want to achieve some capital appreciation. The equity portion of this portfolio generates capital appreciation, which is appropriate for investors who are sensitive to the effects of market fluctuation but need to sustain purchasing power. This portfolio, which has a higher weighting in bonds than in stocks, seeks to keep investors ahead of the effects of inflation with an eye toward maintaining principal stability.

Conservative Balanced Portfolio: may be appropriate for investors with intermediate-term time horizons who are sensitive to short-term losses yet want to participate in the long-term growth of the financial markets. The portfolio, which has an equal weighting in stocks and bonds, seeks to keep investors well ahead of the effects of inflation with an eye toward maintaining principal stability. The portfolio has return and short-term loss characteristics that may deliver returns lower than that of the broader market with lower levels of risk and volatility.

Balanced Portfolio: may be appropriate for investors with intermediate-term time horizons who are sensitive to short-term losses yet want to participate in the long-term growth of the financial markets. This portfolio, which has a higher weighting in stocks, seeks to keep investors well ahead of the effects of inflation with an eye toward maintaining principal stability. The portfolio has return and short-term loss characteristics that may deliver returns lower than that of the broader equity market with lower levels of risk and volatility.

Balanced with Growth Portfolio: may be appropriate for investors with long-term time horizons who are not sensitive to short-term losses and want to participate in the long-term growth of the financial markets. This portfolio, which has a higher weighting in stocks seeks to keep investors well ahead of the effects of inflation with principal stability as a secondary consideration. The portfolio has return and short-term loss characteristics that may deliver returns slightly lower than that of the broader equity market with slightly lower levels of risk and volatility.

Growth Portfolio: may be appropriate for investors with long-term time horizons who are not sensitive to short-term losses and want to participate in the long-term growth of the financial markets. This portfolio, which has 100% in stocks, seeks to keep investors well ahead of the effects of inflation with little regard for maintaining principal stability. The portfolio has return and short-term loss characteristics that may deliver returns comparable to those of the broader equity market with similar levels of risk and volatility.

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