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Wealth and Investment Management

December 2013 / January 2014

The consideration of new possibilities

The economic landscape in 2014: Certainly less uncertain

Looking back to see forward

Key 2014 investment themes

Compass


COMPASS December 2013 / January 2014 1

Contents

The consideration of new possibilities 2

The economic landscape in 2014: Certainly less uncertain 3

A return to synchronicity in global GDP ....................................................................... 3

United States: strong enough to withstand tapering ................................................ 4

Economic growth .................................................................................................... 4

The beginning of the end of Quantitative Easing (QE) ..................................... 5

Waiting in the wings: business investment ......................................................... 6

Non-US developed markets: stimulating their way to growth ................................. 6

Eurozone and the UK .............................................................................................. 7

Japan .......................................................................................................................... 8

Emerging Asia: set to accelerate ................................................................................... 8

Economic growth .................................................................................................... 9

Looking back to see forward 11

All about developed markets stocks ........................................................................... 11

2013 performance in a historical context .................................................................. 12

2014: More volatile? ...................................................................................................... 13

Equities .................................................................................................................... 13

Fixed Income .......................................................................................................... 13

Alternatives ............................................................................................................. 14

Cash ......................................................................................................................... 14

Key 2014 investment themes 16

Favor stocks over bonds in the US ............................................................................. 16

In Developed Markets Equities, opt for Europe and Japan ...................................... 18

Reasons to prefer Europe over the US ............................................................... 18

Reasons to have faith in Japan............................................................................. 19

Within Emerging Markets Equities, be highly selective ........................................... 20

Consider alternative strategies as volatility rises ...................................................... 24

Tactical Asset Allocation Review 27

Interest rates, bond yields, and commodity and equity prices in context 29

Barclays’ key macroeconomic projections 31

Global Investment Strategy Team 32



The consideration of new possibilities Dear clients and colleagues,

As those of us who’ve been around the block a few times know, the future is a foreign country. It is commonly thought of as a singular place when, in reality, many futures are possible. Yet in a display of either the enduring optimism or the stubborn faith of humanity, this is the season of prognostication.

Despite the ubiquity and fallibility of such endeavors, assembling a view of what 2014 may bring is a useful exercise, forcing both a re-examination of currently held beliefs and a consideration of new possibilities. Markets combine historic and contemporaneous beliefs with forward-looking assumptions, creating a view of how the future might look. Our goal in this exercise is to outline the most probable future, given the state of play in which investors now find themselves.

Our consideration of 2014 begins with an examination of the global economy’s fundamentals in ‘Certainly less uncertain.’ Expectations are high, and uncertainty seems to have waned from previous years; however, there is no shortage of risks to faster growth.

Next, we examine markets. In ‘Looking back to see forward,’ we review 2013 performance and place it in a broader, historical context in order to outline the asset class returns expected in the coming year.

Finally, we examine potential investment opportunities through the lens of four ‘Key 2014 investment themes.’

We hope the contents herein provide food for thought and fodder for discussion around the holiday table and with your Barclays representative.

We wish you a happy, healthy and prosperous 2014.

Hans F. Olsen, CFA Chief Investment Officer, Americas

Hans Olsen, CFA

+1 212 526 4695

[email protected]

mailto:[email protected]?subject=November%20Compass%20-%20comments�



The economic landscape in 2014: Certainly less uncertain The world economy has struggled to sustain momentum in the

post-recession recovery amid political and fiscal uncertainty. In the year ahead, it is poised to expand. Better yet, in most regions the economy looks set to accelerate. This could be a year of harmonized growth amid less uncertainty.

A return to synchronicity in global GDP1 Since the end of the recession, the global economy has enjoyed only one year of coordinated, accelerating growth: 2010. In the years that followed, one developed region or another contracted, while emerging markets endured slowing growth.

A more synchronized growth story is set to unfold in 2014, with each of the major regions logging positive GDP and most seeing a pick-up over 2013 (Figure 1). If this story plays out, it could go a long way in driving an increase in confidence around the globe for both consumers and businesses alike.

In short, expectations for the New Year are high. The US economy looks strong enough to withstand tapering. Europe and Japan continue to stimulate their way to growth. And emerging markets are expected to accelerate, though performance will be highly differentiated in the face of higher US interest rates.

Coordinated global growth for the first time in four years could drive a pick-up in confidence across regions

Figure 1: From 2011-2013, at least one major region was in recession and emerging markets growth was slowing. 2014 is set to buck the trend.

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1 Throughout this outlook, the views expressed are what the Americas Investment Strategy team believe to be the most probable outcomes in 2014.

Hans F. Olsen, CFA

+1 212 526 4695

[email protected]

Kristen Scarpa

+1 212 526 4317

[email protected]

Laura Kane, CFA

+1 212 526 2589

[email protected]

David Motsonelidze

+1 212 412 3895

[email protected]

Justin Ho

+1 212 526 1956

[email protected]

mailto:[email protected]�







United States: strong enough to withstand tapering

Economic growth

The United States has made significant strides in stimulating growth, and the trajectory is positive. While headline GDP has expanded at a tepid 2.3% since 2009, far short of the historical average, private sector growth, which strips out government spending and net exports, has been meaningfully stronger at 2.7%.2 This suggests a more robust economy. Add in the fact that 2013’s large-scale government spending declines are unlikely to repeat, and the elements exist for an even stronger economy in 2014. In Figure 2, we examine the drivers of GDP and what we expect in the coming year.

Figure 2: Components of US GDP — the drivers of growth

Component What we expect in 2014

Consumer Consumer spending has remained resilient despite a sluggish labor market and higher taxes. Although recently exhibiting some weakness, confidence has rebounded to post-recession highs. Consumers will likely continue to increase spending by 2.2% or more. 3

Business Investment

In the face of post-recession political, fiscal and economic uncertainty, capital spending has been inconsistent, and 2013 was no exception.4 Capital expenditures by businesses currently account for 9.5% of GDP, well below its 11.4% peak since 2000.5 As uncertainty recedes, capex should pick up, especially given sizeable cash positions on corporate balance sheets.

Housing Slow to recover, housing has only contributed meaningfully to growth in the past two years. Helped in part by falling inventories, home prices have continued to rise, even in the face of higher mortgage rates. Further, homebuilder confidence is at post-recession highs. Housing will likely remain a bright spot – unless interest rates overshoot, which could limit financing and sap demand.

Net Exports Net exports should be a drag on growth in 2014 as the trade gap widens. The dollar is likely to strengthen as the Fed tapers and yields rise. A stronger dollar will make US exports less attractive and imports from other countries more attractive.

Government Lower government spending in 2013 reduced GDP by approximately 1.3%.6 The 2014 budget deal relaxes some of the sequestration spending cuts, reducing fiscal drag to roughly 0.4% of GDP – or a third of what it was in 2013.

Source: Barclays Wealth and Investment Management, Americas Investment Strategy team

Although the outlook for 2014 is positive, potential headwinds include questions about the impact of the Affordable Care Act and, more significantly, the end of the Federal Reserve’s extraordinary largesse.

2 Source: Bloomberg, as of December 2013. 3 Source: Bloomberg, as of December 2013; 2.2% is the average growth rate in consumer spending since the end of the Great Recession in July 2009. 4 The following have helped stoke uncertainty: strength/weakness of the US recovery; the shape of taxes and regulation; chronic public policy dysfunction; the Eurozone debt crisis; slowing Emerging Markets’ growth; and periodic geopolitical tensions. 5 Source: Bloomberg, as of December 2013. 6 Source for both figures in Government: Strategas Research Partners, December 2013.

The US outlook for 2014 is positive. Potential headwinds include the Affordable Care Act and more tapering



Figure 3: Total nonfarm payrolls are near pre-crisis levels…

Figure 4: … but US inflation has recently trended below the Fed’s 2% target

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Source: Bloomberg, as of November 2013. Consumer Price Index (CPI)

The beginning of the end of Quantitative Easing (QE)7

The welcome likelihood of faster economic growth in 2014 brings with it a reduced need for stimulus, as the Fed confirmed with its mid-December decision to lower its monthly asset purchases to $75 billion from $85 billion.8

The Fed’s unwind of QE has not only been inevitable but indeed hoped for by those concerned about the distortive effects that excess liquidity has had on capital markets.9 We had argued in favor of tapering sooner than March, especially with job creation moving in the right direction: 6.2 million new jobs have been created since the end of the recession (Figure 3), a figure that returns employment to September 2008 levels. Unemployment has fallen to 7.0%, reasonably near the Fed’s target of 6.5%.10

As the Fed slows and ultimately ends its asset purchase program, it will no longer essentially determine bond yields. Housing and, to some extent, the consumer may suffer shorter-term negative repercussions as borrowing costs move higher. But the US economy should now be robust enough to withstand the withdrawal of QE. Moreover, the taper will take time. As the outgoing Fed Chairman noted, even after this initial slow down in asset purchases, the US central bank will still be expanding its balance sheet rapidly, particularly at the long end of the yield curve.11 Finally, the Fed will watch the inflation trend closely (Figure 4) and react accordingly; the central bank “is determined to avoid inflation that is too low” as Chairman Bernanke underscored in his opening statement to the December 18 press conference.

7 For QE definition, see end of document. 8 Source: Dec 18, 2013 FOMC Statement on www.federalreserve.gov/newsevents 9 In Focus notes:“The semiotics of price when money (supply) is unbounded” November 22, 2013, and “Digesting the Fed’s byproducts” November 8, 2013 10 Source: Bloomberg, as of December 2013. Unemployment has fallen from 7.8% in Dec 2012, partly due to a falling labor force participation rate. While a concern, this is primarily a structural issue not a cyclical one; 9,100 baby boomers turn 65 each day and move towards retirement, according to the US Government Accountability Office (GAO). 11 Source: Federal Reserve Dec 18, 2013 FOMC press conference Opening Statement, p.3

Job creation has returned employment to September 2008 levels

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Waiting in the wings: business investment

Consumer spending drives 70%12 of the US economy, and the avidly acquisitive US consumer has maintained his/her buying throughout the recovery (see ‘Consumer’ in Figure 2) thanks to rising employment and wages as well as higher stock and home prices. But in order for consumers to have the wherewithal to spend more, greater business investment is necessary.

Employment and capital spending have historically trended together. Adding more workers to an enterprise increases its need for plant and equipment in order to productively employ them. It’s hard to imagine new office workers being hired without the corollary investment in adequate numbers of computers, desks and chairs to support them. Yet since 2011, the relationship between employment and capital spending has broken down (Figure 5). Businesses have hired without investing equivalently in equipment. While an uptick has occurred recently, capital spending is still depressed even as cash and short-term investments as a percent of total corporate assets are at multi-year highs. Companies have hoarded cash in the face of uncertainty as CEOs have had trouble maintaining confidence in the business and economic outlook. A less uncertain environment in 2014 may finally give them leave to invest consistently (Figure 6) and adequately. Increased (and steadier) business spending could be a big driver of the next phase of economic growth. Capital spending tends to drive more durable GDP growth, igniting a virtuous cycle of job creation, wage growth and increased consumer demand.

Non-US developed markets: stimulating their way to growth Contrary to the US, central banks in the rest of the developed world should remain as, or become more, accommodative in 2014. After two years of contraction, Europe appears to be emerging from recession. In Japan, the stimulative policies of Abenomics have only begun to take effect.

Figure 5: Job creation and business capital spending often trend together, as one necessitates the other…

Figure 6: … but US business spending has been very inconsistent in this recovery

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Source: Bloomberg, Strategas Research as of November 2013. *SA = Seasonally Adjusted, Note: Nondefense Capital Goods orders ex. Aircraft & Parts is used as a proxy for Capital Expenditure Growth.

Source: Bloomberg, as of September 2013. *SAAR = Seasonally Adjusted Annual Rate

12 Source: Bloomberg, December 2013.

For US consumers to have the wherewithal to spend more, greater business investment is necessary



Figure 7: Eurozone manufacturing is finally expanding again in many core and peripheral countries …

Figure 8: …and the peripheral countries’ current accounts are positive again, indicating firmer financial footing

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data for following countries: Portugal, Ireland, Italy, Greece and Spain (PIIGS). Source: Bloomberg, Credit Suisse, as of June 2013

Eurozone and the UK

Private sector resilience, reduced fiscal drag and some upturn in exports underpin our outlook for European growth in 2014, led by Germany and, to a lesser extent, the UK.

The Bank of England and its new governor remain committed to stimulus. The European Central Bank (ECB), which has the sole mandate of price stability, has been slower to act than its counterparts in the developed world. However, with inflation well below its 2% target for nearly a year and trending lower, the bank acted twice in 2013 to lower overnight interest rates. Still, there is more the ECB can do to stimulate as liquidity is shrinking since European banks are repaying LTRO loans13 early. Options for the ECB’s consideration include: (1) cutting overnight rates further to 0.0%; (2) instituting a negative deposit rate for reserves held at central banks; (3) another LTRO program with restrictions on repaying funds early; and (4) outright unsterilized purchases of government bonds or QE.14

Even with help from the ECB, the outlook for the Eurozone’s periphery could still be a concern. High unemployment plagues these countries, depressing growth, while the euro’s strength, especially recently, exacerbates the problem. On the bright side, manufacturing is expanding in Germany, the Netherlands, Italy, Ireland and Spain and is close to it in Greece (Figure 7). Current account balances are now positive for Portugal, Italy, Ireland, Greece and Spain (Figure 8). Granted, this is in part driven by the collapse in imports and labor costs caused by high unemployment, but there are also signs of life

13 Long Term Refinancing Operation: An ECB loan program for Eurozone banks. It aims to help banks that hold illiquid assets to maintain a cushion of liquidity, and thus prevent interbank lending and other loan origination from seizing up as they did in 2008. 14 Source: GaveKal. Options 1-3 are readily available; option 4 may require additional political approvals (sterilized purchases are already approved, though not yet employed, through the Outright Monetary Transactions (OMT) program).

There is more the ECB can do to stimulate the Eurozone as liquidity is shrinking



in the export sectors. If inflation continues to trend lower, a weaker euro (transmitted through easier monetary policy) could further stimulate the periphery’s exports, putting the bloc on a sustainable path of GDP growth.

Japan

Japan has broken out of its two-decade stagnation, thanks to Prime Minister Abe’s “three arrows” of monetary easing, fiscal stimulus, and structural reforms.

The first arrow’s primary aim is to stimulate inflation. In a deflationary environment, consumers defer spending because goods and services are likely to cost less tomorrow than they do today. But if consumers believe that prices are going to increase steadily, they are likely to spend now rather than postpone purchases. The Bank of Japan’s QE program relative to the Japanese economy dwarfs that of the US program relative to its economy. So far, the first arrow seems to have hit its mark. In October, Japanese inflation rose 1.1% versus a year ago, the highest in almost five years (Figure 9). On the heels of rising inflation, retail sales most recently grew at 2.4%, one of the healthiest paces of the past decade outside of the post-tsunami rebound (Figure 10). GDP is slower to respond, having grown only 1.1% in the third quarter of 2013 lower than in the prior two quarters.15

However, it is still unclear whether the second and third arrows will yield the desired results. Abe pushed through a fiscal stimulus package to offset a 2014 consumption tax increase. He has also pledged structural reforms, ranging from liberalizing trade to labor market changes. We eagerly await the details – and their ultimate impact.

Emerging Asia: set to accelerate After three years of slowing growth, emerging Asia’s GDP is set to accelerate in 2014. Adding to the sunnier outlook, inflation is under control in much of the region. This gives several local central banks the ability to keep overnight rates steady, or even stimulate economies further if necessary, provided they are not running sizeable current account

15 Source: Bloomberg, as of Dec 18, 2013. Real GDP QoQ% Seasonally Adjusted Annual Rate (SAAR).

Figure 9: Japanese inflation is on the upswing… Figure 10: … which has boosted retail sales (trade)

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Source: Bloomberg, as of October 2013 *NSA= Non Seasonally Adjusted

Abe’s ‘first arrow’ seems to be hitting its mark: Inflation is on the upswing



deficits. Indeed, rising US interest rates will contribute to differentiated economic performance across emerging markets as countries whose trade imbalances have been supported by yield-seeking investment flows contend with the impact of declines in those flows, and inevitable tightening of liquidity.

Economic growth

With the exception of China and the Philippines, whose economies are forecast to expand at roughly their 2013 rate, growth in Asia should pick up in 2014 (Figure 11). China’s growth rate has declined significantly from the 10%+ pace prior to 2011. However, 7.6% GDP growth of a much larger economy is still impressive.

Expanding GDP does not reveal the whole picture. India, for example, is battling high inflation (CPI rose to 11.2% in November from 10.1% in October16) and has a sizeable current account deficit (see ‘Key 2014 investment themes’). Its inflation is partly structural as weak infrastructure causes supply shortages in the face of rising demand. The Reserve Bank of India has managed to keep the rupee on comparatively solid ground, but the central bank can’t do it all. Moreover, higher interest rates slow growth. Reforms designed to remove headwinds to growth are required to put India’s economy on firmer footing; however, the political will to enact meaningful policies has proven elusive.

Once the darling of investors, Indonesia has seen growth slow to below 7%.17 Like India, it is struggling with higher inflation than much of the region (above 8%), a current account deficit and a weak currency – all challenges that may act as a drag on 2014 growth (see ‘Key 2014 investment themes’). Policy makers recognize the urgency of stabilizing the current account deficit and the currency; but as with India, however, higher interests rates curb consumption and, by extension, growth.

Two of the export-driven “Asian Tigers” – Korea and Taiwan – should see growth pick up. These countries have struggled as divergent growth in various regions dampened global

Figure 11: In most of Emerging Asia growth is expected to accelerate again in 2014

Figure 12: Higher inflation plagues India and Indonesia

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Source: International Monetary Fund, as of October 2013 Source: International Monetary Fund, as of October 2013

16 Source: Financial Times, beyondbrics, Dec 12, 2013, “India inflation and IP: bin the optimism” 17 Source: IMF and Barclays Economic Research “Need to build a credibility buffer” 13 Dec 2013

Rising US interest rates will contribute to differentiated economic performance across emerging markets

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demand for their products. US consumption increases should buoy demand, particularly for technology created in Taiwan and South Korea. In addition, Taiwan’s exports should benefit from its close ties to China. The one negative: Korea and Taiwan’s currencies are now less competitive than the Japanese yen.

Other ASEAN countries, like the Philippines, Malaysia and Thailand, have varied outlooks. The Philippines will likely see its solid growth and low inflation affected by Super Typhoon Haiyan in the near-term, but the effects should be manageable.18 Malaysia’s growth, supported by strong domestic demand and manufacturing exports, is expected to rise. Challenges to more rapid growth will come from inflation, higher interest rates and deficit reduction.19 Thailand, though well positioned in the global trade recovery, is beset by political uncertainties, and it is imperative that these be resolved to prevent erosion of investment and tourism activities, a major revenue source.

18 Barclays Economics Research, “Typhoon impact appears manageable,” 22 Nov 2013. 19 Barclays Economics Research, “A growth inflation trade off” 10 Dec 2013.

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Looking back to see forward In 2013, market performance was one for the record books.

Developed stock volatility was low and returns robust, while bond and commodity returns were largely negative. Though past performance does not guarantee future results, it can help frame one’s investing outlook, especially when considered in a broader historical context. To this end, we look back over the year in order to set the stage for 2014.

All about developed markets stocks This past year was one in which investing success could be attributed to just having money in developed markets rather than any perspicacious observation about value in relation to the price of companies, as Figure 1 illustrates. From New York to Frankfurt to Tokyo, bourses posted double-digit returns, with US stocks, particularly of small and mid-sized companies, setting the pace.20 In contrast, emerging markets, most fixed income instruments, and many yield-oriented investments struggled as investors anticipated tapering of the Federal Reserve’s extraordinary liquidity program, Quantitative Easing21.

Figure 1: 2013 year-to-date performance of sub-asset class indices

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Source: Bloomberg, Morgan Markets, as of December 18, 2013. Past performance does not guarantee future results. An investment cannot be made directly in a market index. Indices: US Smid Cap –Russell 2500; US Large Cap – Russell 1000; Non-US DM equities – MSCI EAFE Net Return; High yield – Barclays US Corporate High Yield; Developed Public Real Estate – FTSE-Nareit All US Equity REIT; SM (Short maturity) bonds – Barclays 1-3 Year US Treasury; Cash -Barclays 3-6 month T-bills; US IG (Investment Grade) Bonds – by Barclays US Agg Corporate; US Gov Bonds – by Barclays US Treasury; EM ( Emerging Markets) Equities – MSCI Emerging Markets Net Return; EM Bonds – JP Morgan GBI-EM; Commodities – Dow Jones UBS Commodity.

20 Source: Bloomberg. As of Dec 13, 2013, US dollar returns ranged from mid-teens for the EuroStoxx 50 Index (+15%) to the mid-20s in Germany and Japan (DAX Index +23%; Nikkei 225 Index +25%) and higher in the US. 21 See end of document for definition of Quantitative Easing.



Investors pulled money from emerging markets as rising yields on US investments made them relatively more attractive. In the case of high yield bonds, investors were fortunate to receive the coupon return. In the total return calculus, the income on Emerging Market Bonds was dwarfed by the almost double-digit price decline. Similarly, US REITs struggled as price declines offset some of your income return.22

2013 performance in a historical context Reviewing returns in 2013 is helpful to create context for how 2014 might look. US large cap equities rose around 30%,23 almost greater than three times its average annual return,24 placing it amongst the index’s top 20 best years since 1930.25 More remarkable is the low volatility experienced in achieving this return. In terms of monthly ups and downs, the S&P 500’s variability was among the lowest of its top 20 return years.26 Consequently, the risk-adjusted return was exceptional.

Viewed through a wider lens, 2013 was a year in which volatility was materially lower than 20-year averages across most asset classes, as Figure 2 shows. Equities experienced 40%-50% less variability in price movement relative to long-term averages. Even fixed income asset classes experienced anywhere from 10% to 75% lower volatility than average (the April-July spike notwithstanding).27 EM bonds were the lone exception, with 2013 volatility just 1.6% higher than its long term average.

Figure 2: Volatility in 2013 (blue bar) was often below – even well below – the long term average (black triangle)

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2013 YTD Volatility Annualized Volatility (1992 to 2012) Source: Bloomberg, Morgan Markets, as of November 2013. See Figure 1 for indices. Note: GBI-EM: Morgan Markets data only available as of December 31, 2002. Past performance does not guarantee future results. An investment cannot be made directly in a market index.

22 Source: Bloomberg, as of Dec 13, 2013. See indices listed under Fig1 for EM Bonds and Real Estate. 23 Source: Bloomberg, as of December 18, as measured by the S&P 500 24 Source, Bloomberg, as of Dec 2013. S&P 500 average annual total return (1930-2012): 11.5%. 25 Source: Bloomberg, as of Dec 11, 2013. 26 Source: Bloomberg, as of Dec. 13, 2013. The S&P 500’s average annual volatility since 1930 is 16.9% vs. 11.7% in 2013. In only four of the top 20 return years has the S&P 500 had lower volatility: 1995, 1961, 1954 and1985. 27 Source: Bloomberg, as of Dec 13, 2013. Note Treasury volatility measured on a daily basis is up, based on the MOVE Index which averaged 72 in 2013 vs. 69 in 2012.

In 2013, S&P 500 returned almost three times its average annual return…

…volatility, by contrast, was exceptionally low



In contrast to equities, much of the fixed income complex endured one of the worst return years in the past four decades as the Federal Reserve considered tapering its QE program. When the central bank mused about slowing asset purchases, it prompted interest rates to rise, beginning the reversal of a 30-year trend of rising bond prices. To wit, since 1973, the Barclays US Treasury Index has posted negative returns in only four years: 2009, 1994, 1999 and 2013.28 Small wonder investors are hard pressed to believe they can lose money on bonds.

Like fixed income, commodities suffered as prices declined, albeit on lower volatility, as the so-called ‘supercycle’ seems to be winding down. Growth in China, the biggest consumer of raw materials, slowed, while commodity supply generally rose, driven by higher prices over the last decade.

Notably, a subset of hedge funds, such as Event Driven and Relative Value, fulfilled their promise, delivering equity-like returns with fixed income-like volatility.

2014: More volatile? As we discuss in ‘Certainly less uncertain’, the economic landscape seems both more certain and positive. However, risks continue to lurk for markets.

A few of our prominent concerns for 2014:

1. Volatility should rise from 2013’s historic lows.

2. Fixed income prices should continue to retreat as QE is unwound and interest rates begin to normalize.

3. Developed Markets Equities’ buoyancy is likely to give way, for a time, to normal correction(s). The trigger? Possibilities include continued QE tapering, increased geopolitical tension, a resurgence in US Congress-/Eurozone-related political risk, or periodic concerns about earnings growth.

Equities

The prospect of greater volatility and lower returns aside, developed equity markets will likely offer a compensatory return for investors. We begin 2014 with a ‘neutral’ range weighting to the asset class. Within the developed markets we continue to prefer small and mid-sized US stocks, as well as Non-US stocks. We remain neutral on Emerging Markets as a whole, but see opportunities in certain markets.

Fixed Income

Within the fixed income complex, total returns in publicly traded fixed-rate debt will likely struggle. We remain ‘underweight’ investment grade, short-maturity and emerging markets bonds and ‘neutral’ developed government bonds (with a very low allocation) and high yield.

28 Source: Bloomberg, as of Dec 11, 2013. Barclays US Treasury Index.

Naturally, 2014 offers the prospect of both greater volatility and lower returns



Alternatives

We continue to maintain a ‘neutral’ weighting to hedge funds as the asset class should be able to take advantage of anticipated higher volatility. Within this space, we prefer Event Driven, Relative Value, and Global Macro strategies. We continue to hold a ‘neutral’ weight to Real Estate and an ‘underweight’ to Commodities.

Cash

Cash remains an ‘overweight’ in portfolios, offsetting corresponding underweights in fixed income and commodities, where we believe returns may be negative in the coming 3-6 months. We expect to deploy this cash opportunistically.

Figure 3: In a nut shell, our views on key asset and sub-asset classes

Asset/ Sub-asset class Weight Our view in brief

Cash OW Cash offers negative real yields, but given an expected pick up in volatility, and negative expected returns for other asset classes, we prefer to hold liquidity in order to deploy funds opportunistically.

Short-maturity Bonds UW Similar to Cash, short Maturity Bonds offer negative real yields. Given low interest rates and the desire to deploy funds quickly, we prefer to hold Cash.

Developed Government Bonds

N With interest rates still at exceptionally low levels, Developed Government Bonds are not attractive from a valuation or yield perspective. Diversify municipal portfolios geographically and between revenue and general obligation bonds. Take advantage of active management.

Investment Grade Bonds

UW Investment Grade Bonds are expensive on both a spread and yield basis. Though corporate fundamentals remain strong, we hold an underweight given low coupons and interest rate risk.

US High Yield Bonds N Yield and spread compression, driven primarily by tapering concerns, have put pressure on high yield prices. Corporate fundamentals remain strong and higher yields cushion against interest rate risk and price declines. Seek opportunities in private markets.

Emerging Markets Bonds

UW Emerging Markets Bonds are beginning to look attractive from a yield, spread and valuation basis. But, concerns remain around dollar strengthening and resulting currency risk for emerging markets as the end of Quantitative Easing takes hold.

US Large Cap Equities

UW Large cap stocks are susceptible to volatility at the start of the year, given strong multiple expansion in 2013 driving premium valuations relative to history. Accelerating US and global economic growth will likely prompt a slight uptick in the earnings growth rate to 6%, driving earnings of $115.50 per share. Capitalizing those earnings at a16.5x price-to-earnings multiple, results in a target of 1,905 for the S&P 500 in 2014. Dividends should provide an additional 2%.

US SMID Cap Equities

OW Small and medium sized US businesses continue to grow sales and earnings at a faster pace than their larger counterparts. Furthermore, cash-rich large corporations that are having trouble generating organic growth may seek to buy growth directly, increasing mergers and acquisitions and pushing the prices of smid-cap companies higher in 2014.

Non-US Developed Markets Equities

OW While developed equity market returns outside the US have been robust this year, they’ve lagged those of the US over the past several years. Valuations are more compelling, and monetary policy in Europe and Japan is likely to be more accommodative, driving stocks higher.

Emerging Markets Equities

N Emerging Markets offer a compelling growth story, but have underperformed in recent years. With growth set to pick up and inflation under control in most cases, there are pockets of opportunity. We stress the importance of active management given the potential for alpha in choosing the right countries or sectors.

REITs N REITs offer a compelling yield in a low interest rate environment. Recent underperformance has valuations looking more attractive. Look for opportunities in the private real estate debt and equity markets.

Commodities UW Slowing global growth has taken its toll on Commodities as new supply has entered the market. This unfavorable supply/demand dynamic should continue to put pressure on the asset class.

Event Driven* OW Event Driven hedge funds are poised to take advantage of increased corporate actions activity. With large cash balances and more confidence, an increase in M&A activity is likely to ensue. Furthermore, a rise in buybacks, recapitalizations, and divestitures is possible.



Asset/ Sub-asset class (cont.)

Weight (cont.) Our view in brief (cont.)

Relative Value* OW We maintain an allocation to Relative Value despite muted expected performance. Credit-focused managers are generally cautiously positioned. A dislocation in credit markets is required for them to generate outsize returns. We expect funds to generate some alpha through single credit selection with decreasing single name correlations/increasing event related volatility.

Global Macro* OW Against a backdrop of easy monetary policy in Europe and Japan, Global Macro funds will likely benefit from attractive risk/reward opportunities in interest rates, foreign exchange, and credit and equity markets. Global economic gauges are improving broadly but with noteworthy divergences which should provide plenty of trading opportunities for macro managers.

Managed Futures* UW We expect Managed Futures markets to remain range-bound in 2014 which is not conducive to medium term trend-following strategies. Over the past year, very few funds were profitable. While most benefitted from the rising trend in equities; positioning in bonds, energy, metals, crops and foreign exchange detracted.

* See definitions and notes below. Source: Barclays Wealth and Investment Management, Americas Diversification does not guarantee a profit or protect against a loss.

There can be no assurance that the year-end target for the S&P 500 will be achieved.

The investments listed may not be suitable for all investors. Barclays recommends that investors independently evaluate particular investments, and encourages investors to seek the advice of a Investment Advisor. The appropriateness of a particular investment will depend upon an investor's individual circumstances and objectives.

Barclays does not guarantee favorable investment outcomes. Nor does it provide any guarantee against investment losses.

Alternative Trading Strategies (ATS) definitions and notes:

Event Driven managers take positions on corporate transactions such as mergers, acquisitions, reorganizations, spin-offs and liquidations.

Relative Value strategies seek mispricing in financial markets, seeking to profit as the relative relationship between securities normalizes. Funds operate across a wide range of markets and are dependent upon dispersion between traditional asset classes.

Note: We view Event Driven and Relative Value strategies as a more “opportunistic.” When correlation among risk assets declines, as it has this year and as we expect it will remain low in 2014, the opportunity set for these strategies tends to grow. (Conversely, they tend to perform less well when correlation among risk assets rises.)

Global Macro funds invest across markets and geographies based on manager specific macro-economic views with respect to GDP growth, trade deficits, unemployment and political outcomes in elections etc. Based on their conclusions, these managers take long and short positions in regional equity, fixed income, currency markets, credit and commodities.

Managed Futures strategies actively trade futures and forward contracts on commodities, equities, fixed income, interest rates and currencies. Funds are mostly driven by quantitative models that identify price- and momentum- driven trends in multiple underlying markets.

Note: We regard allocations to Global Macro and Managed Futures strategies as more “defensive” as they’ve historically tended to thrive when investors shun equities and other risk assets and, consequently, correlation among them rises.



Key 2014 investment themes In the pages that follow, we knit our economic and market views

together to draw out potential opportunities for the coming year.

1. Favor stocks over bonds in the US

2. In Developed Markets Equities, opt for Europe and Japan

3. Within Emerging Markets Equities, be highly selective

4. Consider Alternative Trading Strategies as volatility rises

Favor stocks over bonds in the US Stocks over bonds might seem an obvious theme after 2013’s negative fixed income performance and the prospect of further rises in rates in the coming year. But after a three-decade long bull market in bonds, it is sometimes tough for investors to grasp that the ‘low’ risk part of their portfolio now has a notably greater likelihood of losses.

Since 1973, US equities have returned an average of 11.6% per year, and bonds, an average of 7.8%.29 Over this period, stocks bested bonds in 27 years, or 68% of the time. The coming year should add to the trend. Not only do we think equities will outperform bonds in 2014, we also think there is a high likelihood that bonds will have negative returns for a second consecutive year.

Fixed income prices are inversely correlated with interest rates, which means bond investors will suffer principal losses if, as we expect, rates continue to rise. While the Federal Reserve is unlikely to raise overnight rates in 2014, the reduction of its QE asset

Since 1970, there have been nine instances of three or more consecutive federal funds rate increases

Figure 1: In nine periods when the Federal Reserve raised overnight rates three times or more …

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29 Source: Bloomberg, as of Dec 2013. US equities = S&P 500 Index, Bonds = Barclays US Treasury Index. See end of document for definitions.11.6% and 8.0% are arithmetic averages – total return divided by number of years – rather than annualized return, to highlight the average return an investor received in any given calendar year. Past performance does not guarantee future results. An investment cannot be made directly in a market index.



Figure 2: … the S&P 500 Index outperformed the US Treasury Index six times (see Total Return Differential column)

Period of 3 or more Overnight Rate Increases by Fed

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January 1973 - August 1973 8 7 5.5% 6.5% 0.7% -7.2% 1.0% -8.2%

December 1976 - November 1979 36 19 10.8% 6.8% 3.6% 3.7% 10.0% -6.3%

August 1980 - November 1980 5 4 8.5% 11.6% 1.2% 19.6% -1.8% 21.3%

March 1984 - September 1984 7 3 2.3% 12.5% 0.0% 9.0% 6.3% 2.7%

December 1986 - October 1987 11 4 1.4% 7.2% 1.7% 6.9% 0.4% 6.6%

March 1988 - May 1989 15 8 3.3% 8.5% 0.1% 29.3% 9.5% 19.8%

February 1994 - June 1995 17 7 3.0% 6.1% 0.1% 21.0% 8.3% 12.7%

June 1999 - December 2000 19 6 1.8% 5.8% -0.7% -2.1% 13.5% -15.6%

June 2004 - August 2007 39 17 4.3% 4.6% -0.1% 37.0% 14.6% 22.4%

*Total return for periods prior 1988 has been calculated by adding S&P 500 price return to the index’s average dividend yield for the respective time period. Source: Bloomberg, Barclays, as of December 2013. Please see the risks and definitions at the back of this document. Past performance is no guarantee of future returns. An investment cannot be made directly in an index.

purchase program is now underway. As tapering begins, rates on the longer end of the yield curve should rise further. For a long term buy-and-hold bond strategy, this may not be a problem.30 However, for a tactical allocation with a three- to six -month investing horizon, the risks in bonds outweigh the potential rewards.

But what about equities?

We’re in uncharted territory with QE and tapering; however, an examination of previous periods of outright tightening suggests that equities can perform well in a rising rate environment. Figure 1 depicts the nine periods since 1970 when the Fed raised overnight rates three consecutive times or more. Figure 2 shows the magnitude of the rate rise during those periods and the corresponding returns of the S&P 500 and the Barclays US Treasury Index. Although past performance does not guarantee future results, in six out of nine times equities outperformed bonds on a total return basis. Making matters worse, bond yields are far lower today (2.9% on the 10-year Treasury31) than they were in the rising rate periods listed in the table above (4.6%-12.5%). This provides little cushion against inevitable price declines.

The results are not surprising: Rising rates are most often paired with a strengthening economy, a positive for stocks. Indeed, our 2014 expectation for US equities, based on our S&P 500 target of 1,905, is a high single-digit return.32

While this is far more modest than what 2013 offered, stocks are still attractive relative to bonds, where investors will be lucky if their coupon return is sufficient to counterbalance price declines.

30 “Why selling municipal bonds right now might not make sense” p7 of September 2013 Compass 31 Source: Bloomberg, as of Dec 17, 2013. There can be no assurance that the year-end target for the S&P 500 will be achieved. 32 This includes the benefit of a 2% dividend. See assumptions for target in our Dec 13, 2013 In Focus.

http://f.chtah.com/s/6/2075691688/USSep2013Compass-WEB.pdf�

http://f.chtah.com/s/6/2075691688/InFocusUS_13Dec2013.pdf�

http://f.chtah.com/s/6/2075691688/InFocusUS_13Dec2013.pdf�



In Developed Markets Equities, opt for Europe and Japan Though we like US equities, other Developed Markets Equities are likely to perform better in 2014. The past year’s strong US equity market gains likely borrowed some from the future, given that much of the S&P 500’s gain stemmed from the expansion of price-to-earnings multiple (from about 14x to well over 16x). In 2014, by contrast, the modest single-digit return is likely to be driven primarily by earnings growth.

The economies and equity markets of the Eurozone and Japan are at earlier points in the business cycle, providing better potential returns than the US.

Reasons to prefer Europe over the US

Easier monetary policy. The European Central Bank is more likely to increase monetary stimulus in 2014 as inflation remains well below the bank’s roughly 2% target. The ECB cut rates twice in 2013 due to falling inflation. Yet, in spite of these cuts, liquidity across the Eurozone has been shrinking as Figure 3 indicates, since banks have been repaying their LTRO loans early. This makes the Eurozone the only major developed region to have a central bank whose balance sheet is shrinking relative to its GDP. While the Bank of Japan and the Federal Reserve have steadily grown their balance sheets relative to their country’s economic output, and the Bank of England’s financial footing has stayed roughly constant, the ECB’s balance sheet has contracted in the past 12 months. The ECB can (and should) do more.

Emerging signs of growth. As highlighted earlier in ‘Certainly less uncertain’, Eurozone manufacturing is picking up in Italy and Spain as well as Germany. Also positive, the periphery’s competitiveness relative to that of Germany has increased as labor costs have fallen.

A lower euro. The euro has remained remarkably resilient. But as the Federal Reserve begins to mop up QE-related liquidity and ultimately shrinks its balance sheet, and the ECB considers expanding liquidity for the region, the interest rate differential that

Previous periods of outright tightening suggests that equities can perform well in a rising rate environment

The ECB can (and should) do more

Figure 3: Despite the ECB’s two rate cuts in 2013, liquidity across the Eurozone is shrinking

Figure 4: Among the developed economies, only the ECB’s balance sheet relative to GDP is declining

0100200300400500600700800900

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Source: Gavekal Research, Bloomberg, as of December 2013 Source: Bloomberg, Capital IQ, as of September 30, 2013



currently favors a strong euro should begin to shift towards the US dollar, putting downward pressure on the euro. This would be a boon for European corporate profits and stocks.

Discount to US equities. Large European equities have underperformed US stocks since the recovery began and are selling at a greater-than-average discount to their American counterparts, as Figure 5 depicting the relative price-to-book value of the Euro-Stoxx 50 and S&P 100 indicates.

The coming year could very well be the one in which the valuation discount to the US returns to its longer-term average through a eurozone stock rally. Conditions are set for a very good year in European equity markets.

Figure 5: European large cap stocks are cheap compared to US large cap, relative to history

40%

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Source: Bloomberg, as of December 2013. An investment cannot be made directly in an index.

Reasons to have faith in Japan

Easiest monetary policy. The Japanese market has been characterized by some as the trade of a career. Hyperbole aside, Abenomics represents a major shift in policy intended to snap Japan out of a generation-long sclerosis through extraordinarily loose monetary policy, targeted fiscal stimulus, and structural reforms. The goals? Raised expectations for inflation, which in turn should translate into increased domestic consumption and, ultimately, higher GDP. The Bank of Japan’s Quantitative Easing also depreciates the yen, which helps to stimulate exports.

‘First arrow’ successes. So far, the impact to inflation, inflation expectations and retail sales are relatively promising (see ‘Certainly less uncertain’). Economic growth is still slow, however. But investors appear to believe in the durability of the Prime Minister’s vision, based on the Nikkei 225’s 52% local currency gain and 27% dollar increase in 2013 (through December 18). There are good reasons for that faith.

A matter of national security. Japan needs Abenomics to succeed for foreign policy reasons. An ascendant China is making territorial claims in the East China Sea. It is dangerous for Japan to be perceived as weak. A reinvigorated Japanese economy will help fuel higher defense spending and provide a deterrent signal.



The Nikkei index had risen 52% (27% in US dollars) for the year as of December 18, 2013.

Figure 6: The Nikkei’s 2013 gain suggest investors believe in Abe’s vision

707580859095100105110115120

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Nikkei Index

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Source: Bloomberg, as of December 2013. Past performance does not guarantee future results. An investment cannot be made directly in a market index.

Investments in Japan should be thought of as strategic since the problems facing the country have been more than a generation in the making and will therefore not be solved quickly. This is one of the more interesting developed markets in which to invest as we expect the yen to continue declining against the dollar as the Bank of Japan and the Federal Reserve pursue divergent policies. Further currency depreciation should, as Figure 6 suggests, only fuel Japanese equity market gains.

Within Emerging Markets Equities, be highly selective Emerging markets investing as viewed from the popular BRIC (Brazil, Russia, India, China) perspective was difficult in 2013. Three out of four of these equity markets declined.33 Disappointing returns were not confined to the BRIC countries. Indeed, of the 15 MSCI EM Latin American and Eastern European country and region indices, all were negative for the year in both local currency and US dollar terms.34 In Asia, only three MSCI EM country indices netted gains.35 EM bonds fared no better, with various indices down mid-single digits in USD dollar terms.36

Concerned about the specter of higher US interest rates and slowing growth in 2013, investors viewed these markets more cautiously. However, the news is not uniformly negative as we turn to 2014. First, growth is set to accelerate – provided that tapering in the US doesn’t force dramatically higher rates in countries with high current account deficits. Second, there are marked differences in economic, financial and political fundamentals, which provide potentially attractive opportunities. The key is to avoid markets with many Achilles heels; the stressors of 2013 are likely repeat in the coming year as US interest rates increasingly normalize, drawing capital away from emerging

33 Source for all index performance in this paragraph: MSCI EM Large and Mid Cap Country indices, returns in USD as of Dec 18, 2013. 34 Source: See above footnote. 35 Source: See above footnote. Indices for Korea, Malaysia and Taiwan 36 Sources, as of Dec 19, 2013: JP Morgan Global Bond Index – Emerging Markets (-5.6%); Barclays EM USD indices: Aggregate (-4.13%); Sovereign -10% Country Cap (-6.18%). An investment cannot be made directly in a market index.

http://www.msci.com/products/indices/country_and_regional/em/performance.html�



Figure 7: Checklist of key investment parameters for Emerging Markets

Parameter What to look for

GDP Growth Forecast The higher, the better.

Consumer (Domestic Demand) A strong domestic consumer base lessens the need for global demand.

Foreign Direct Investment Prefer countries with high levels of foreign direct investment (vs. primarily portfolio flows) which should stimulate growth.

Debt Levels Avoid countries with high debt levels relative to GDP and a high portion of sovereign debt held by foreigners.

Current Account Balance Avoid countries that have a high deficit relative to GDP; these countries are spending more than they earn and are reliant on foreign capital flows for funding.

Political Risk Avoid countries with elevated levels of internal unrest: riots, protests, violence, political uprising. Prefer countries with governments open to structural reform.

Source: Barclays Wealth and Investment Management, Americas Investment Strategy team.

markets. It may prove challenging to tap opportunities through broad index investing in light of widely divergent performance from market to market.

We recommend evaluating opportunities on a country-specific basis, avoiding markets with lower growth potential, higher current account deficits and debt loads, and heightened political uncertainty, as they are more likely to underperform. By contrast, those with higher foreign direct investment, lower current account deficits and debt loads, and stronger GDP growth offer a better investment opportunity.

Looking across a series of key economic, financial and political metrics (Figures 8 – 14), we find one Latin American and four Asian emerging markets that seem most likely to outperform. We incorporated four metrics in the following way as an initial screen:

A current account deficit of no more than 4%

Debt to GDP ratios of 60% or lower

Real GDP growth of 3% or higher

Above average foreign direct investment

Countries that met at least three of the four criteria above were then subjected to a political risk and market valuation overlay to narrow the list of potential candidates for investment. The result of this exercise produced five countries with attractive growth, fiscal, valuation metrics: Chile, China, Korea, Malaysia and Taiwan.

Chile

Chile misses having a perfect score on our metrics by 0.1%: Its current account deficit is 4.1% versus our cut-off of 4.0%. GDP is expected to grow at 4.4%, foreign direct investment is the highest among any emerging country, and debt loads are the second lowest. Political risk is also the second lowest, and a market valuation discount of 8.4% relative to its longer-term average rounds out the investment case.

China

The largest emerging market looks attractive on all of the measures we evaluated. With consensus expectations for 2014 GDP growth at 7.5%, no other emerging economy is



growing as quickly.37 Debt-to-GDP is low and both current account balances and foreign direct investment remain healthy. Furthermore, valuations are compelling with equities trading at a 21.9% discount to the market’s 10-year average P/E. China does score reasonably high in terms of political concerns; however, reform efforts by the new administration ameliorate these worries.

Korea

Attractive on three metrics, Korea boasts 4% GDP growth, the second-best current account surplus of all emerging nations, and very low debt levels. Korea’s negative by our criteria is having lower-than-average foreign direct investment. Political risk, as measured by the Economist Intelligence Unit (EIU), is on the higher side, but the market is trading at a 6.4% discount to its historic average.

Malaysia

Malaysia earned passing marks on all four screening criteria. It sports the fifth-highest GDP growth rate of the emerging markets, third-highest current account balance, sixth-highest level of foreign direct investment, and a reasonable debt-to-GDP ratio. However, these attributes come with a higher valuation affixed to the market: The MSCI Malaysia Index price-to-earnings ratio is approximately 7.5% higher than its long-term average. Given the positive economic trends and low political risk, a slight valuation premium is reasonable.

Taiwan

Taiwan mirrors Korea in many ways as its sole miss is below-average foreign direct investment. Extremely low political risk, the highest current account surplus of the emerging markets, and slightly lower debt than Korea with similar GDP growth ranks Taiwan very favorably in our analysis. Valuations are slightly higher than 10-year averages by about 4%.

Figure 8: Valuations across emerging markets are widely divergent.

2468

1012141618202224

Forward P/E

± one standard deviation Current 10-year average Source: Factset, as of November 2013. Past performance does not guarantee future results. An investment cannot be made directly in a market index. MSCI Indices have been used, please refer to definitions page.

37 Source: Bloomberg, as of Dec 18, 2013.



Figure 9: Current account surplus or deficit vs. GDP Figure 10: Country debt load vs. GDP

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Figure 11: Domestic consumption portion of GDP Figure 12: Political risk: The lower, the better

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Figure 13: Forecast 2014 GDP growth Figure 14: Foreign direct investment portion of GDP

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Malaysia, Peru, South Africa (data as of December 2011); Data for Taiwan is as of September 2013.



Consider Alternative Trading Strategies as volatility rises Since it seems unlikely that the low volatility of 2013 will carry into 2014, it is wise to focus on areas of the portfolio that can potentially produce better risk-adjusted returns.

In higher volatility environments, when stocks have lower returns, hedge funds have historically performed better. Although past performance does not guarantee future results, since 1990, the HFRI Fund Weighted Composite Index has outperformed the S&P 500 in every year in which the US equity benchmark returned 5%-10%, and in seven of the eight years in which the benchmark returned less than 5%.38 (The reverse is also true: In the years when the S&P 500’s return exceeded 15%, the HFRI index lagged it over 80% of the time.39)

On a risk-adjusted return basis – the amount of return per unit of volatility– these alternative investments have the potential to be attractive. As Figure 15 illustrates, the HFRI Composite Index has ranked nicely between equities and bonds in terms of return and risk with an attractive Sharpe Ratio.

Figure 15: Over the past decade, hedge funds offered higher returns with lower volatility

7.69%

14.68%

4.71%3.37%

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Annualized Return Annualized Volatility

S&P 500 Barclays US Aggregate Bond Index HFRI Composite

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Sharpe Ratio

Source: Bloomberg, HFRI, as of November 2013, annualized returns/ volatilities on monthly basis over a decade (Dec 2003 – Nov 2013), Hedge Funds measured by the HFRI Composite Index. For index definitions see end of document. Past performance does not guarantee future returns. An investment cannot be made directly in a market index.

Even in 2013, a year with relatively low volatility, three out of five hedge funds style indices posted very attractive returns on a risk-adjusted basis: HFRI Equity Hedge, HFRI Event Driven and HFRI Relative Value indices (Figure 16). Each of these indices performed better than or in line with the S&P 500’s 10-year annualized return, but with volatility that approximated the Barclays US Aggregate Bond Index’s 10-year volatility. Global Macro funds struggled as volatility, the main driver of returns in the space, remained low throughout the year while Managed Futures underperformed as it was tough to take advantage of trends in markets.

38 Source: HFRI, Barclays Equity Research. 39 Source: HFRI, Barclays Equity Research. The S&P 500’s annual return has exceeded 15% in 12 years since 1990.



Another benefit of owning hedge funds is their low correlation with other, more traditional, asset classes. In some cases hedge funds move in the opposite direction than traditional asset classes. For example, as bond prices are falling, hedge fund prices tend to rise, and vice versa. Lower correlations to equities means sell-offs tend to affect hedge funds in lower magnitudes.

Owning hedge funds can help reduce overall portfolio volatility with relatively little sacrifice of return potential, but it is important to keep in mind two things. (1) Historically mid-to-low long-term correlations with other asset classes over the long-term does not mean hedge funds will protect in every environment. (2) Hedge fund performance is diverse. The successful inclusion of hedge funds in a portfolio depends on rigorous manager selection and continuous monitoring.

Figure 16: 2013 hedge fund performance: Certain styles offered equity like returns with fixed income-like volatility

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Diamonds in orange show annualized returns/ volatilities on monthly basis over a decade (Dec 2003 – Nov 2013). Source: Bloomberg, as of November 2013 latest available data. Past performance is no guarantee of future returns. An investment cannot be made directly in an index.

Figure 17: Correlation with asset classes 2003 – 2013

Hedge Fund Strategy

Cash and Short-Maturity

Bonds

Developed Government

Bonds Investment

Grade Bonds High Yield

Bonds Developed

Markets Equities Emerging

Market Equities Commodities

Equity Long/Short -0.35 -0.35 0.37 0.74 0.92 0.92 0.66

Global Macro 0.13 -0.01 0.18 0.16 0.36 0.49 0.54

Event Driven -0.41 -0.38 0.36 0.76 0.86 0.83 0.59

Relative Value -0.38 -0.28 0.53 0.85 0.76 0.78 0.59

Managed Futures 0.15 0.04 0.03 -0.04 0.15 0.26 0.29

Correlations based on past 10 years of data (2003 – 2013). Source: Bloomberg, HFRI, as of November 2013. Hedge fund styles are represented by the following indices: Equity Long/Short - HFRI Equity Hedge (Total) Index; Global Macro - HFRI Macro (Total) Index; Relative Value - HFRI Relative Value Index; Managed Futures - HFRI Macro Systematic Diversified. Asset classes are represented by the following indices: Cash & Short-maturity bonds - Barclays Global Treasury 1-3 Yr; Developed Govt. Bonds -Barclays US Treasury 7–10 Yr; Investment Grade bonds - Barclays US Corp Investment Grade; High yield bonds – a custom blend of 83% Barclays US Corporate High Yield and 17% Barclays EM USD Aggregate; Developed Market Equities - MSCI World; Emerging Market Equities: MSCI Emerging Markel Commodities: DJ UBS Commodity Total Return Index. Past performance does not guarantee future results. An investment cannot be made directly in a market index.



Important Considerations

Bonds are subject to market, interest rate and credit risk; and are subject to availability and market

conditions. Generally, the higher the interest rate the greater the risk. Bond values will decline as

interest rates rise. Government bonds are subject to federal taxes. Municipal bond interest may be

subject to the alternative minimum tax; other state and local taxes may apply. High yield bonds,

also known as “junk bonds” are subject to additional risks such as the increased risk of default.

Portfolios that emphasize large and established US companies may involve price fluctuations as

stock market conditions. Stocks of small- and mid-capitalization companies tend to involve more

risk than stocks of larger companies. Investments in small- and mid-sized corporations are more

vulnerable to financial risks and other risks than larger corporations and may involve a higher degree

of price volatility than investments in the general equity markets.

International investing may not be suitable for every investor and is subject to additional risks,

including currency fluctuations, political factors, withholding, lack of liquidity, the absence of

adequate financial information, and exchange control restrictions impacting foreign issuers. These

risks may be magnified in emerging markets.

Funds of hedge funds and hedge funds may invest in highly illiquid securities that may be difficult to

value. Moreover, many hedge funds give themselves significant discretion in valuing securities. You

should understand a fund's valuation process and know the extent to which a fund's securities are

valued by independent sources.

Hedge funds typically charge an asset management fee of 1-2% of assets, plus a performance fee

of 20% of a hedge fund's profits. Funds of hedge funds typically charge a fee for managing your

assets, and some may also include a performance fee based on profits. These fees are charged in

addition to any fees paid to the underlying hedge funds.

Hedge funds typically limit opportunities to redeem, or cash in, your shares (e.g., to four times a

year), and often impose a "lock-up" period of one year or more, during which you cannot cash in

your shares.

If you invest in hedge funds through a fund of hedge funds, you will pay two layers of fees: the fees

of the fund of hedge funds and the fees charged by the underlying hedge funds.

Barclays does not guarantee favorable investment outcomes. Nor does it provide any guarantee

against investment losses.



Tactical Asset Allocation Review The global economic backdrop, particularly in developed markets, has shown signs of improvement throughout 2013. US GDP growth has been rising and unemployment falling; Europe is slowly crawling out of recession; and Abenomics reforms are making headway in Japan. Emerging economies are mixed, with attractive growth prospects in some markets. The outlook for 2014 seems bright with synchronized global growth expected and set to accelerate in some cases.

Market performance in the past year was remarkable – both negatively and positively. Developed equity markets enjoyed robust returns with minimal volatility, whereas bonds and commodities experienced largely negative returns. Fixed income assets stumbled and yields rose as investors speculated about the beginning of the end of Quantitative Easing.

In anticipation of greater volatility, we recommended locking in some US equity gains and reducing risk ahead of the New Year. Specifically, we reduced our exposure to US equities, taking large caps from ‘overweight’ to ‘underweight', and increased our exposure to cheaper non-US markets and to Cash. We plan to redeploy cash as uncertainty abates, preferring stocks, particularly in non-US developed markets, over bonds. We continue to hold an ‘overweight’ to US Smid caps and look for pockets of opportunity in Emerging Markets Equities, where we are ‘neutral’, as valuations are becoming attractive in some markets.

With US equity markets ending the year on such a high-note, we have more conservative expectations for 2014, anticipating single-digit growth. While economic growth should provide a lift to earnings, we expect price-to-earnings multiples to remain approximately flat. We anticipate US equities to grow along a more circuitous path this year, making our ‘overweight’ to most Alternative Trading Strategies an attractive hedge to the volatility we may experience.

We remain ‘underweight’ most fixed income assets in light of rising yields and unattractive valuations. We also hold an ‘underweight’ to Commodities, where excess supply in the market has pressured prices for these assets.

Figure 1: Our nine Asset Classes and their benchmarks

Asset Class Definition Benchmarks

Cash and Short-maturity Bonds Fixed-income investment with a final maturity of less than three years and credit ratings of AA- or better

Barclays U.S. Treasury Bills

Developed Government Bonds Fixed-income instruments with maturities of three years and above, issued by: Sovereigns with credit ratings of AA- or better

Barclays Global Treasury

Investment Grade Bonds Fixed-income securities with maturities greater than one year issued by: - corporations with credit ratings of BBB- or higher, - governments with credit ratings between BBB- and A+

Barclays Global Aggregate – Corporate

High Yield and Emerging Markets Bonds

High yield: Debt issued by companies with low credit ratings (BB+ or lower); Emerging markets: Bonds issued by Sovereigns, government-related agencies and corporations with a rating of BB+ and lower, denominated in major currencies and local currencies

40% Barclays High Yield / 20% Barclays Global EM/ 40% Barclays EM Local Currency Governments

Developed Markets Equities Equities within the MSCI World (developed) benchmark MSCI World (Net)

Emerging Markets Equities Equities within the MSCI Emerging Markets benchmark MSCI EM (Net)

Commodities Commodities held as a diversified investment within a fund or other investment vehicle

Dow Jones UBS Commodity

Real Estate Both direct real estate and REITs FTSE EPRA/NAREIT Developed

Alternative Trading Strategies ATS aims to generate profits by actively taking long and short positions in a wide range of markets. Strategies include Global Macro, Relative Value, Event Driven, some long/short equity, and other.

HFRX Global Hedge Fund

An investment cannot be made directly in a market index. See end of document for definitions.



Figure 2: Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) by risk profile: asset class40

Low Medium Low Moderate Medium High High

Asset class SAA TAA SAA TAA SAA TAA SAA TAA SAA TAA

Cash and Short-maturity Bonds 46.0% 52.0% 17.0% 21.0% 7.0% 13.0% 3.0% 10.0% 2.0% 10.0%

Developed Government Bonds 8.0% 8.0% 7.0% 7.0% 4.0% 4.0% 2.0% 2.0% 1.0% 1.0%

Investment Grade Bonds 6.0% 4.0% 9.0% 7.0% 7.0% 5.0% 4.0% 2.0% 2.0% 0.0%

High Yield and Emerging Markets Bonds 6.0% 4.0% 10.0% 8.0% 11.0% 8.0% 10.0% 8.0% 8.0% 6.0%

Developed Markets Equities 16.0% 15.0% 28.0% 30.0% 38.0% 40.0% 45.0% 46.0% 50.0% 49.0%

Emerging Markets Equities 3.0% 3.0% 6.0% 6.0% 10.0% 10.0% 14.0% 14.0% 18.0% 18.0%

Commodities 2.0% 1.0% 4.0% 2.0% 5.0% 2.0% 6.0% 2.0% 5.0% 2.0%

Real Estate 2.0% 2.0% 3.0% 3.0% 4.0% 4.0% 6.0% 6.0% 7.0% 7.0%

Alternative Trading Strategies 11.0% 11.0% 16.0% 16.0% 14.0% 14.0% 10.0% 10.0% 7.0% 7.0%

Figure 3: SAA, TAA and tilts with key regional sub asset classes (Moderate Risk Profile)

Asset Class (including key regional sub asset classes)

Recommended Allocation Tilt

SAA TAA SAA vs. TAA

Cash & Short-maturity Bonds 7% 13% +6%

Cash 0% 10% +10%

Short-maturity Bonds 7% 3% -4%

Developed Government Bonds 4% 4% 0%

US Government Bonds 4% 4% 0%

Investment Grade Bonds 7% 5% -2%

US Investment Grade Bonds 7% 5% -2%

High Yield & Emerging Markets Bonds 11% 8% -3%

US High Yield Bonds 5% 5% 0%

Emerging Markets Bonds 6% 3% -3%

Developed Markets Equities* 38% 40% +2%

US Large Cap Equities 12% 9% -3%

US Smid Cap Equities 5% 7% +2%

Non-US Developed Markets Equities 16% 19% +3%

Developed Private Equity 5% 5% 0%

Emerging Markets Equities 10% 10% 0%

Emerging Markets Equities 10% 10% 0%

Commodities 5% 2% -3%

Real Estate 4% 4% 0%

US Developed Public Real Estate 4% 4% 0%

Alternative Trading Strategies 14% 14% 0%

Global Macro Strategies 3.5% 3.85% +0.35%

Relative Value Strategies 3.5% 4.2% +0.70%

Event Driven Strategies 3.5% 4.2% +0.70%

Managed Futures 3.5% 1.75% -1.75%

Figures 2 and 3: Red = TAA is slightly underweight the SAA. Green = TAA is slightly overweight the SAA. Black = TAA is neutral weight the SAA. Source: Barclays Wealth and Investment Management, Americas Investment Committee. As first published on 18 November 2013.

40 The recommendations made for your actual portfolio will differ from any asset allocation or strategies outlined in this document. The model portfolios are not available to investors since they represent investment ideas, which are general in nature and do not include fees. Your asset allocation will be customized to your preferences and risk tolerance and you will be charged fees. You should ensure that your portfolio is updated or redefined when your investment objectives or personal circumstances change. Our Strategic Asset Allocation (SAA) models offer a baseline mix of assets that, if held on average over a five-year period, will in our view provide the most desirable combination of risk and return for an investor’s degree of Risk Tolerance. They are updated annually. Our Tactical Asset Allocation (TAA) tilts our SAA views, incorporating small tactical shifts from one asset class to another, to account for the prevailing environment and our shorter-term outlook. For more information, please see our Asset Allocation at Barclays white paper.

http://www.barclayswealth.com/Images/asset-allocation-us-march2013.pdf�



Interest rates, bond yields, and commodity and equity prices in context*

Figure 1: Short-term interest rates (global) Figure 2: Government bond yields (global)

0

1

2

3

4

5

6

7

8

9

Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10

Global Government10-year moving average± one standard deviation

Nominal Yield Level 3 Months (%)

1

2

3

4

5

6

7

8

9

10

Jan-87 Jan-92 Jan-97 Jan-02 Jan-07 Jan-12

Global Treasury10-year moving average± one standard deviation

Nominal Yield Level (%)

Source: FactSet, Barclays Source: FactSet, Barclays

Figure 3: Inflation-linked real bond yields (global) Figure 4: Inflation-adjusted spot commodity prices

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11

Inflation Linked10-year moving average± one standard deviation

Real Yield Level (%)

70

100

130

160

190

220

250

280

310

340

Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11

DJ UBS Commodity

10-year moving average

± one standard deviation

Real Prices (1991=100)

Source: Bank of America Merrill Lynch, Datastream, FactSet, Barclays Source: Datastream, Barclays

Figure 5: Government bond yields: selected markets Figure 6: Global credit and emerging market yields

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Global US UK Germany Japan

± one standard deviationCurrent10-year average


2

4

6

8

10

12

Investment Grade

High Yield Hard Currency EM

Local Currency EM


Current

10-year average


Source: FactSet, Barclays *Monthly data with final data point as of COB 16 December 2013.

Source: FactSet, Barclays



Figure 7: Developed stock market, forward PE ratio Figure 8: Emerging stock market, forward PE ratio

8

10

12

14

16

18

20

22

24

26

Dec-87 Dec-93 Dec-99 Dec-05 Dec-11

MSCI The World Index



PE (x)

6

8

10

12

14

16

18

20

22

24

26

28

Dec-87 Dec-93 Dec-99 Dec-05 Dec-11

MSCI Emerging Markets



PE (x)

Figure 9: Developed world dividend and credit yields Figure 10: Regional quoted-sector profitability

0

1

2

3

4

5

6

7

8

Jan-01 Jan-04 Jan-07 Jan-10 Jan-13

Global Investment Grade Corporates Yield

Developed Markets Equity Dividend Yield

Yield (%)

3

5

7

9

11

13

15

17

19

World USA UK Eu x UK Japan Pac x JP EM


Current

10-year average

Return on Equity (%)

Figure 11: Global stock markets: forward PE ratios Figure 12: Global stock markets: price/book value ratios

9

11

13

15

17

19

21

23



Current

10-year average

PE (x)

0.8

1.2

1.6

2.0

2.4

2.8


± one standard deviationCurrent10-year average

PB (x)

All sources on this page: MSCI, IBES, FactSet, Datastream, Barclays



Barclays’ key macroeconomic projections

Figure 1: Real GDP and Consumer Prices (% YoY)

Real GDP Consumer prices

2013E

2014F

2015F

2013E

2014F

2015F

Global 2.9

3.4

3.8

2.6

3.0

3.0

Advanced 1.1

1.9

2.1

1.3

1.7

1.8

Emerging 4.7

5.0

5.4

4.8

5.2

4.9

United States 1.7

2.4

2.6

1.5

1.8

2.3

Euro area -0.4

1.2

1.4

1.3

0.9

1.1

Japan 1.7

1.6

1.4

0.4

2.7

1.9

United Kingdom 1.4

2.3

2.5

2.6

2.2

1.9

China 7.7

7.2

7.4

2.7

3.1

3.5

Brazil 2.2

1.9

2.6

6.2

5.9

5.5

India 4.7

5.4

5.9

6.3

6.3

5.6

Russia 1.5

2.6

2.1

6.7

5.4

4.8

Source: Barclays Research, Global Economics Weekly, 13 December 2013 Note: Arrows appear next to numbers if current forecasts differ from previous week by 0.2pp or more. Weights used for real GDP are based on IMF PPP-based GDP (5yr centred moving averages). Weights used for consumer prices are based on IMF nominal GDP (5yr centred moving averages).

Figure 2: Central Bank Policy Rates (%)

Official rate % per annum (unless stated)

Forecasts as at end of

Current Q4 13 Q1 14 Q2 14 Q3 14

Fed funds rate 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25

ECB main refinancing rate 0.25 0.25 0.25 0.25 0.25

BoJ overnight rate 0.10 0-0.10 0-0.10 0-0.10 0-0.10

BOE bank rate 0.50 0.50 0.50 0.50 0.50

China: 1y bench. lending rate 6.00 6.00 6.00 6.00 6.00

Brazil: SELIC rate 10.00 10.00 10.25 10.25 10.25

India: Repo rate 7.75 7.75 7.75 7.75 7.50

Russia: Overnight repo rate 5.50 5.50 5.50 5.50 5.50

Source: Barclays Research, Global Economics Weekly, 13 December 2013 Note: Rates as of COB 12 December 2013.

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Global Investment Strategy Team

AMERICAS

Hans Olsen, CFA Chief Investment Officer, Americas [email protected] +1 212 526 4695

Justin Ho Investment Strategy [email protected] +1 212 526 1956

Laura Kane, CFA Investment Strategy [email protected] +1 212 526 2589

David Motsonelidze Investment Strategy [email protected] +1 212 412 3805

Kristen Scarpa Investment Strategy [email protected] +1 212 526 4317

ASIA

Benjamin Yeo Chief Investment Officer, Asia and Middle East [email protected] +65 6308 3599

Brayan Lai Credit Strategy [email protected] +65 6308 3197

Eddy Loh Equity Strategy [email protected] +65 6308 3178

Wellian Wiranto Investment Strategy [email protected] +65 6308 2714

EUROPE

Kevin Gardiner Chief Investment Officer, Europe [email protected] +44 (0)20 3555 8412

Peter Brooks, PhD Behavioural Finance specialist [email protected] +44 (0)20 3555 1261

Greg B Davies, PhD Head of Behavioural and Quantitative Finance [email protected] +44 (0)20 3555 8395

Emily Haisley, PhD Behavioural Finance [email protected] +44 (0)20 3555 8057

Petr Krpata FX Strategy [email protected] +44 (0)20 3555 8398

Antonia Lim Global Head of Quantitative Research [email protected] +44 (0)20 3555 3296

Christian Theis Macro [email protected] +44 (0)20 3555 8409

Asset class risks Alternative Trading Strategy – There are specific concerns related to alternative investment strategies with respect to private wealth clients. These include: investor taxability; suitability of funds that require long lock-up periods for investors with liquidity needs or multiple investment horizons; communicating complex strategies to a non-professional client; greater likelihood of decision risk (changing strategies at the point of maximum loss) and clients whose wealth stems from concentrated positions in closely held companies may not be suited to other illiquid investments. Bonds – Bonds are subject to market, interest rate and credit risk; and are subject to availability and market conditions. Generally, the higher the interest rate the greater the risk. Bond values will decline as interest rates rise. Government bonds are subject to federal taxes. Municipal bond interest may be subject to the alternative minimum tax; other state and local taxes may apply. High yield bonds, also known as “junk bonds” are subject to additional risks such as the increased risk of default. Debt securities may be subject to call features or other redemption features, such as sinking funds, and may be redeemed in whole or in part before maturity. These occurrences may affect yield. Like all bonds, corporate bonds tend to rise in value when interest rates fall, and they fall in value when interest rates rise. The longer the maturity of the bond, the greater the degree of price volatility. If you hold a bond until maturity, you may be less concerned about these price fluctuations (which are known as interest rate risk or market risk), because you will receive the par or face value of your bond at maturity. Distressed Debt – Although distressed debt opportunities are cyclical, in that they multiply during economic slowdowns, the time taken to profit from them depends on how long a firm takes to restructure, which varies from one case to another. The process can be lengthy - for instance, if the negotiations between a firm's management team and its creditors start to drag. Event risk relates to unexpected company-specific or situation-specific events that affect valuation. Market liquidity risk arises because distressed securities are less liquid, and demand runs in cycles. J-factor risk relates to the judge presiding over bankruptcy proceedings. The track record in adjudication and restructuring can play a significant role in both the overall outcome and determining the optimum securities in which to invest. Cash Equivalents – Portfolios that invest in very short-term securities provide taxable or tax-advantaged current income, pose little risk to principal and offer the ability to convert the investment into cash quickly. These investments may result in a lower yield than would be available from investments with a lower quality or longer term. Commodities – Commodities are assets that have tangible properties, such as oil, metals, and agricultural products. An investment in commodities may not be suitable for all investors. Commodities may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes, or political and regulatory developments. Commodities are volatile investments and should only form a small part of a diversified portfolio. Diversification does not ensure against loss. Consult your investment representative to help you determine whether a commodity investment is right for you. Market distortion and disruptions have an impact on commodity performance and may impact the performance and values of products linked to commodities or related commodity indices. The levels, values or prices of commodities can fluctuate widely due to supply and demand disruptions in major producing or consuming regions. Equities – Large Growth and Value Stocks – Portfolios that emphasize large and established US companies may involve price fluctuations as stock market conditions change. Stocks of small- and mid-capitalization companies tend to involve more risk than stocks of larger companies. Investments in small- and mid-sized corporations are more vulnerable to financial risks and other risks than larger corporations and may involve a higher degree of price volatility than investments in the general equity markets. International/Global lnvesting/Emerging Markets – International investing may not be suitable for every investor and is subject to additional risks, including currency fluctuations, political factors, withholding, lack of liquidity, the absence of adequate financial information, and exchange control restrictions impacting foreign issuers. These risks may be magnified in emerging markets. Real Estate Investment Trusts (REITs) – The properties held by REITs could fall in value for a variety of reasons, such as declines in rental income, poor property management, environmental liabilities, uninsured damage, increased competition, or changes in real estate tax laws. There is a risk that REIT stock prices overall will decline over short or even long periods because of rising interest rates. Other risks include: Sensitive to Demand for Other High-Yield Assets. Generally, rising interest rates could make Treasury securities more attractive, drawing funds away from REITs and lowering their share prices. Property Taxes. REITs must pay property taxes, which can make up as much as 25% of total operating expenses. State and municipal authorities could increase property taxes to make up for budget shortfalls, reducing cash flows to shareholders. Tax Rates. One of the downsides to the high yield of REITs is that taxes are due on dividends, and the tax rates are typically higher than the 15% most dividends are currently taxed at. This is because a large chunk of a REIT's dividends (typically about three quarters, though it varies widely by REIT) is considered ordinary income, which is usually taxed at a higher rate. The Sharpe Ratio is a ratio developed to measure risk-adjusted performance. The ratio is calculated by subtracting the risk-free rate from the rate of return for a portfolio, and dividing the result by the standard deviation of the portfolio returns. Index definitions For MSCI Index definitions please see: http://www.msci.com/products/indices/tools/ BofA Merrill Lynch Global Broad Market Corporate Index tracks the performance of investment grade debt publicly issued in the major domestic and eurobond markets, including sovereign, quasi-government, corporate, securitized and collaterized securities. Qualifying securities must have an investment grade rating based on an average of Moody’s, S&P and Fitch. The BofA Merrill Lynch Global High Yield and Emerging Markets Index tracks the performance of the below investment grade global debt markets denominated in the major developed market currencies. The Index is a capitalization-weighted blend of The Global High Yield Index, the Global Emerging Markets Sovereign Index and The Global Emerging Markets Credit Index. Barclays EM Local Currency Governments is a broad-based index that measures the total return of 20 different local currency government debt markets spanning Latin America, Europe, the Middle East, Africa and Asia. Barclays EM USD Aggregate – The Barclays EM USD Aggregate Index is a hard currency Emerging Markets debt benchmark that includes USD denominated debt from sovereign, quasi-sovereign, and corporate EM issuers. The index is broad-based in its coverage by sector and by country, and reflects the evolution of EM benchmarking from traditional sovereign bond indices to Aggregate-style benchmarks that are more representative of the EM investment choice set. Country eligibility and classification as an Emerging Market is rules-based and reviewed on an annual basis using World Bank income group and International Monetary Fund (IMF) country classifications. This index was previously called the Barclays US EM Index and history is available back to 1993. Barclays Global Aggregate – Corporates – The corporates portion of the Barclays Global Aggregate index grouping. Barclays Global Governments 1-3 years – The 1-3 Yr component of the Barclays Global Treasury Index. The Barclays Global Treasury Index tracks fixed-rate local currency government debt of investment grade countries. The index represents the Treasury sector of the Global Aggregate Index and currently contains issues from 38 countries denominated in 23 currencies. The three major components of this index are the U.S. Treasury Index, the Pan-European Treasury Index, and the Asian-Pacific Treasury Index, in addition to Canadian, Chilean, Mexican, and South-African government bonds. The index was created in 1992, with history backfilled to January 1, 1987. Barclays Global Governments 7-10 years – the 7-10 Yr component of the Barclays Global Treasury Index. The Barclays Global Treasury Index tracks fixed-rate local currency government debt of investment grade countries. The index represents the Treasury sector of the Global Aggregate Index and currently contains issues from 38 countries denominated in 23 currencies. The three major components of this index are the US Treasury Index, the Pan-European Treasury Index, and the Asian-Pacific Treasury Index, in addition to Canadian, Chilean, Mexican, and South-African government bonds. The index was created in 1992, with history backfilled to January 1, 1987. The Barclays Global Emerging Markets Index represents the union of the USD-denominated U.S. Emerging Markets Index and the predominately EUR-denominated

http://www.msci.com/products/indices/tools/�

Pan Euro Emerging Markets Index, covering emerging markets in the following regions: Americas, Europe, Middle East, Africa, and Asia. As with other fixed income benchmarks provided by Barclays, the index is rules-based, which allows for an unbiased view of the marketplace and easy replicability. Barclays Global High Yield represents the US High Yield Index, Pan-European High Yield Index, High Yield CMBS Index, and non-investment grade portion of the Barclays Global Emerging Markets Index. Barclays Global Treasury Index tracks fixed-rate local currency government debt of investment grade countries. The index represents the Treasury sector of the Global Aggregate Index and currently contains issues from 37 countries denominated in 23 currencies. The three major components of this index are the U.S. Treasury Index, the Pan-European Treasury Index, and the Asian-Pacific Treasury Index, in addition to Canadian, Chilean, Mexican, and South-African government bonds. Barclay Hedge Global Macro – Represents a measure of the average return of the macro geared/strategized hedge funds within the Barclay database whose positions concertedly reflect the direction of the overall market as attributed to major economic trends and events. The portfolios of these funds are comprised of an offering of stocks, bonds, currencies and commodities in the form of cash or derivative instruments. A majority of these index linked funds invest globally in both developed and emerging markets. Barclays Treasury Bill Index includes US Treasury bills with a remaining maturity from 1 month up to (but not including) 12 months. It excludes zero coupon strips. Barclays US 3-6 Mo. Treasury – Comprised of all treasuries with 3-6 month maturities purchased at the beginning of each month and held for a full month. At the end of the month, issues with less than three months to maturity are sold and rolled into newly selected issues. Barclays US Investment Grade Corporate – Barclays U.S. Investment Grade Corporate Index represents publicly issued U.S. corporate and specified foreign debentures and secured notes that meet the specified maturity, liquidity, and quality requirements. To qualify, bonds must be SEC-registered. Barclays US Corporate High Yield – Barclays U.S. Corporate High Yield Index represents the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) 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. The index includes corporate sectors. The corporate sectors are Industrial, Utility, and Finance, encompassing both U.S. and non-U.S. Corporations. The Barclays U.S. Treasury Index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more. Credit Suisse-Dow Jones Event Driven – Represents an aggregate of Event Driven funds. Event driven funds typically invest in various asset classes and seek to profit from potential mispricing of securities related to a specific corporate or market event. Such events can include: mergers, bankruptcies, financial or operational stress, restructurings, asset sales, recapitalizations, spin-offs, litigation, regulatory and legislative changes as well as other types of corporate events. Event driven funds can invest in equities, fixed income instruments (investment grade, high yield, bank debt, convertible debt and distressed), options and various other derivatives. Many event driven fund managers use a combination of strategies and adjust exposures based on the opportunity sets in each subsector. Credit Suisse-Dow Jones Managed Futures Index – Focuses on investing in listed bond, equity, commodity futures and currency markets, globally. Managers tend to employ systematic trading programs that largely rely upon historical price data and market trends. A significant amount of leverage is employed since the strategy involves the use of futures contracts. CTAs do not have a particular bias towards being net long or net short any particular market. The DAX Index (Deutscher Aktien IndeX, formerly Deutscher Aktien-Index (German stock index)) is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Dow Jones UBS Commodity Index measures price movements of the commodities included in the appropriate sub index. It does not account for effects of rolling futures contracts or costs associated with holding the physical commodity. Dow Jones CS Event Driven – The Dow Jones Credit Suisse Event Driven Index is an asset-weighted hedge fund index derived from the TASS database of more than 5000 funds. The Index consists only of Event-Driven funds with a minimum of US $50 million AUM, a 12-month track record, and audited financial statements. Event-Driven funds invest in various asset classes and seek to profit from potential mispricing of securities related to a specific corporate or market event (e.g.,. mergers, bankruptcies, financial or operational stress, restructurings, asset sales, recapitalizations, spin-offs, litigation, regulatory and legislative changes etc.). Event-Driven funds can invest in equities, fixed income instruments, options and other derivatives. Many managers use a combination of strategies and adjust exposures based on the opportunity sets in each sub-sector. Dow Jones CS Managed Futures – The Dow Jones Credit Suisse Managed Futures Index is an asset-weighted hedge fund index derived from the TASS database of more than 5000 funds. The strategy invests in listed financial and commodity futures markets and currency markets around the world. The managers are usually referred to as Commodity Trading Advisors, or CTA's. Trading disciplines are generally systematic or discretionary. Systematic traders tend to use price and market specific information (often technical) to make trading decisions, discretionary managers use a judgmental approach. The EURO STOXX 50 Index, Europe's leading Blue-chip index for the Eurozone, provides a Blue-chip representation of supersector leaders in the Eurozone. The index covers 50 stocks from 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The EURO STOXX 50 Index is licensed to financial institutions to serve as underlying for a wide range of investment products such as Exchange Traded Funds (ETF), Futures and Options, and structured products worldwide. FTSE All Country Local Currency Index – The FTSE All World Index covers 48 different countries and approximately 2700 stocks. The indices aim to capture up to 90%-95% of the investable market capitalization of a country, incorporating both large and medium cap stocks. FTSE EPRA/NAREIT Global Developed Index is designed to track the performance of listed real estate companies and Real Estate Investment Trusts (REITs) worldwide. It incorporates REITs and Real Estate Holding & Development companies. Index constituents are free float-adjusted and screened for liquidity, size and revenue screened. FTSE NAREIT - All Equity REITs – An index that consists of all Real Estate Investment Trusts that currently trade on the New York Stock Exchange, the NASDAQ National Market System and the American Stock Exchange. Equity REITs include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property. HFRI Relative Value TR is comprised of investment managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative or other security types. Fixed income strategies are typically quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment manager. Relative Value is further subdivided into eight sub-strategies: Asset Backed, Convertible Arbitrage, Corporate, Sovereign, Volatility, Yield Alternatives-Energy Infrastructure, Yield Alternatives-Real Estate, and Multi-Strategy. HFRX Global Hedge Fund Index is comprised of all eligible hedge fund strategies including, but not limited to: convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry. JP Morgan GBI-EM Total Return Diversified – The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging Market governments. The Diversified version was launched in January 2006. The MOVE Index measures the implied volatility of U.S. Treasury markets based on 1-month treasury options. MSCI EAFE – The MSCI EAFE Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed equity. As of January 2012 the MSCI EAFE Index consisted of the following 22 developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. MSCI EM Index represents a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of

February 2013, the MSCI Emerging Markets Index includes 23 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. MSCI World Index represents a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. As of February 2013, it includes 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. NAREIT Global RE Hedged – The FTSE EPRA/NAREIT Developed Real Estate Index Series is broken down into eight index families and 141 indices in Asia Pacific, Europe and North America. It is the FTSE EPRA/NAREIT Developed Total Return Index in USD. NCREIF TBI Index – A quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. As such, all properties are held in a fiduciary environment. Nikkei 225 Index - the leading and most-respected index of Japanese stocks. It is a price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange. The Nikkei is equivalent to the Dow Jones Industrial Average Index in the U.S. In fact, it was called the Nikkei Dow Jones Stock Average from 1975 to 1985. Russell 2000 Index – A Frank Russell index which consists of the 2,000 smallest securities in the Russell 3000 Index, representing approximately 8% of the Russell 3000 market capitalization. This index is widely regarded in the industry as the premier measure of small capitalization stocks. Dividends are reinvested. Indices are unmanaged, do not reflect the deduction of fees and expenses and cannot accommodate direct investments. Russell 2500 Index – Measures the performance of the 2,500 smallest companies in the Russell 3000 Index. The index is market cap-weighted and includes only common stocks incorporated in the United States and its territories. The Standard & Poor's (S&P) 100 Index is a capitalization-weighted index based on 100 highly capitalized stocks selected from the S&P 500 index for which options are listed. The Standard & Poor's (S&P) 500 Index represents a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market companies; the NYSE Euronext and the NASDAQ OMX. A selection committee selects the companies in the S&P 500 so they are representative of the industries in the United States economy. Other definitions HFRI Equity Hedge – Investment Managers who maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. EH managers would typically maintain at least 50% exposure to, and may in some cases be entirely invested in, equities, both long and short. HFRI Macro – Investment Managers which trade a broad range of strategies in which the investment process is predicated on movements in underlying economic variables and the impact these have on equity, fixed income, hard currency and commodity markets. Managers employ a variety of techniques, both discretionary and systematic analysis, combinations of top down and bottom up theses, quantitative and fundamental approaches and long and short term holding periods. Although some strategies employ RV techniques, Macro strategies are distinct from RV strategies in that the primary investment thesis is predicated on predicted or future movements in the underlying instruments, rather than realization of a valuation discrepancy between securities. In a similar way, while both Macro and equity hedge managers may hold equity securities, the overriding investment thesis is predicated on the impact movements in underlying macroeconomic variables may have on security prices, as opposes to EH, in which the fundamental characteristics on the company are the most significant are integral to investment thesis. HFRI Event Driven – Investment Managers who maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers, restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Security types can range from most senior in the capital structure to most junior or subordinated, and frequently involve additional derivative securities. Event Driven exposure includes a combination of sensitivities to equity markets, credit markets and idiosyncratic, company specific developments. Investment theses are typically predicated on fundamental characteristics (as opposed to quantitative), with the realization of the thesis predicated on a specific development exogenous to the existing capital structure. HFRI Relative Value – Investment Managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative or other security types. Fixed income strategies are typically quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive positions in which the risk-adjusted spread between these instruments represents an attractive opportunity for the investment manager. RV position may be involved in corporate transactions also, but, unlike ED exposures, the investment thesis is predicated on realization of a pricing discrepancy between related securities, as opposed to the outcome of the corporate transaction. HFRI Macro Systematic Diversified – Diversified strategies have investment processes typically as function of mathematical, algorithmic and technical models, with little or no influence of individuals over the portfolio positioning. Strategies which employ an investment process designed to identify opportunities in markets exhibiting trending or momentum characteristics across individual instruments or asset classes. Strategies typically employ quantitative process which focus on statistically robust or technical patterns in the return series of the asset, and typically focus on highly liquid instruments and maintain shorter holding periods than either discretionary or mean reverting strategies. Although some strategies seek to employ counter trend models, strategies benefit most from an environment characterized by persistent, discernible trending behavior. Systematic: Diversified strategies typically would expect to have no greater than 35% of portfolio in either dedicated currency or commodity exposures over a given market cycle. Price-to-earnings (P/E) multiple – The ratio of a stock’s price to the company’s earnings per share (EPS). It is calculated by dividing the stock’s price by its EPS. It is a measure of how much an investor is paying for earnings. Quantitative Easing (QE) – A monetary policy pursued by a central bank, in this case the Federal Reserve, that increases the bank’s balance sheet through the regular purchase of government and other securities. It increases the money supply by providing financial institutions with capital in an effort to promote increased liquidity. QE is used when central bank interest rates are near zero and cannot be lowered by much. For more information, see www.federalreserve.gov website. Price-to-Book Value (P/B) – A valuation metric that compares a stock's market value to its book value. Book value refers to a company’s total assets minus its total liabilities. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Another way is to divide the current share price by the book value per share.

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An investment cannot be made directly in a market index.

Disclaimer Past performance does not guarantee future returns.

The value of the investments which may be stated in this document, and the income from them, may fall as well as rise. Past performance of investments is no guide to future performance. You may not get back the amount of capital you invest. Any income projections and yields are estimated and are included for indication only.

Barclays does not guarantee favorable investment outcomes. Nor does it provide any guarantee against investment losses.

Benchmarks are shown for illustrative purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different. It is not possible to invest in these indices and the indices are not subject to any fees or expenses. Information is as of the date hereof unless otherwise indicated. Certain information is based on data provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

This document has been prepared by Barclays for information purposes only.

Diversification does not protect a profit or guarantee against losses. Investing in securities involves a certain amount of risk. You are urged to review any prospectuses and other offering information prior to investing.

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