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P R I N C I P L E S T H A T E N D U R E

James D. McDonald Chief Investment Strategist

May 2014

Global Investment Strategy: Time for the Economy to Carry the Ball Because The Fed Wants Out

2

An investment strategy with two distinct time horizons

Combining long-term discipline with short-term flexibility aimed to provide “downside protection and upside participation.”

Tactical Outlook

Strategic Outlook

Interest Rate

Strategy Committee

Capital Market Assumptions Group

Tactical Asset Allocation Committee

Credit Strategy

Committee

Time Horizon: Five Years

Frequency: Annual

Output: Long-Term Asset Class Forecasts, Strategic Portfolio

Communication Piece: Capital Market Assumptions White

Paper (released annually in July)

Time Horizon: 12 Months

Frequency: Weekly/Monthly (TAA)

Output: Tactical Interest Rate, Credit Spread and Asset Class

Forecasts, Tactical Portfolio Recommendations

Communication Piece: Monthly Perspective Newsletter and

Annual Outlook (released in December)

Northern Trust AssetsUnder Management:

$915 billion as of 3/31/2014

Equity$457

Fixed Income$386

Multi-manager$53

Other$19

3

2014 Outlook

Higher Volatility with Lower Returns

– But Insurance is Expensive

4

What Is Worrying the Market?

Source: Northern Trust, Standard & Poor’s, Bloomberg. Panel 1: S&P 500 as reported EPS used to calculate growth in last four quarters’ earnings from 1950 through 2013; panel 2: Global Purchasing Managers Index (PMI) data through April 2014.

-18

-12

-6

0

6

12

18

20

30

40

50

60

70

80

1950 1960 1970 1980 1990 2000 2010

Ea

rnin

gs G

row

th (

%)

PM

I le

ve

l

U.S. ECONOMIC & EARNINGS MOMENTUM

U.S. PMI (Left) U.S. Earnings Growth (Right)

46

48

50

52

54

56

58

60

Sep-13 Nov-13 Jan-14 Mar-14 May-14

PM

I le

vel

ECONOMIC ACTIVITY

U.S. E.U.

U.K. Japan

China Global

5

Geopolitical Worries

Source: Crandall, Pierce & Company, Northern Trust. Note: Data based on Dow Jones Industrial Average; market reaction duration defined by Crandall, Pierce & Company. *In most crises during bear markets, the market did not return until its pre-event level until the next bull market.

The Events Year

During the initial

market reaction

it declined for

And

lost

Market returned to pre-

crisis level in

Bull market

continued

for

And

gained

Hunt Brothers silver crisis 1980 43 days -16% 152 days 14 months 13%

Asian currency crisis 1997 6 days -11% 45 days 27 months 45%

President Eisenhower - heart attack 1955 18 days -10% 76 days 75 months 51%

Iraq invades Iran - war 1980 7 days -5% 52 days 7 months 5%

Japan earthquake and tsunami 2011 5 days -4% 12 days Ongoing -

John F. Kennedy assassinated 1963 1 day -3% 5 days 27 months 36%

Watergate 1972 8 days -3% 44 days 7 months 11%

8 days -4% 37 days 27 months 45%

The Events Year

During the initial

market reaction

it declined for

And

lost

Market Returned to Pre-

Crisis Level In

Bear market

continued

for

And

lost

Arab oil embargo 1973 40 days -20% Following bull market 13 months -42%

Iraq invades kuwait 1990 22 days -14% Following bull market 2 months -18%

Terrorist attack on WTC & Pentagon 2001 11 days -14% 60 days 13 months -24%

Six-Day War 1967 3 days -2% 5 days 36 months -27%

15 days -10% N/A* 14 months -25%

CRISES IN BULL MARKETS

CRISES IN BEAR MARKETS

Average (of 21 post 1940 bull market crises)

Average (of 13 post 1940 bear market crises)

6

Market Corrections: A Long Time Coming

Source: Ned Davis Research, Inc., Northern Trust. Data through 3/31/2014. Averages date back to 1928.

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Tra

din

g d

ays

LENGTHS OF TIME BETWEEN MARKET CORRECTIONS

Trading days before 20% correction

Trading days before 10% correction

Trading days before 5% correction

Avg. days to 20% - (635 days)

Avg. days to 10% - (161 days)

3,109 days

7

The Perils of Prognosticating

Source: Northern Trust, Bloomberg. 88 years examined up to and including 2013. Red bar indicates where average estimate falls.

27%

6%

10%

7%

13%

10%

27%

0%

5%

10%

15%

20%

25%

30%

0% orless

0%to 5%

5%to 10%

10%to 15%

15%to 20%

20%to 25%

25% orgreater

Fre

qu

en

cy (

Pe

rce

nt o

f h

isto

ry)

S&P 500 TOTAL RETURN DISTRIBUTION

Average Return: 12%

8

Earnings Growth Should Supports Stocks

Source: Northern Trust, Bloomberg. Data through 3/31/2014.

0

4

8

12

16

20

24

28

32

0

240

480

720

960

1200

1440

1680

1920

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Ea

rnin

gs p

er

sh

are

(U

SD

)

Pri

ce

(U

SD

)

S&P 500 PRICE & EARNINGS

Price (Left)

Earnings (Right)

9

2014 Growth Has Less of a Drag

Source: Northern Trust, DB Global Markets Research, IMF, Bloomberg. Fiscal impact forecasts as of October 2013, CPI through March 2014 (April Europe).

1.7

0.7

1.7

-2.5-3.0

-1.5

0.0

1.5

3.0

UnitedStates

EuropeanUnion

UnitedKingdom

Japan

Ch

an

ge

in

fis

ca

l im

pact o

n G

DP

(%

)

FISCAL POLICY IMPACT

-2

0

2

4

6

Apr-11 Apr-12 Apr-13 Apr-14C

on

su

me

r P

rice

In

de

x (

Yo

Y %

)

DEVELOPED ECONOMY INFLATION

United Kingdom

United States

European Union

Japan

10

US Housing: The Rebound is Slowing, Rates and Jobs Key

Source: Northern Trust, Bloomberg. Median sales price through January 2014, housing inventory through February 2014, investment as a % of GDP and formations through March 2014.

-12-9-6-30369

12

0

1

2

3

4

5

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

Med

ian p

rice

(Y

oY

%)

Ho

me

s (

mill

ions)

UNITED STATES HOUSING

Total housing inventory (RHS)

Median sales price (LHS)

1

2

3

4

5

6

7

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

% o

f G

DP

Residential investment as a % of GDP

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13

Ho

me

s (

mill

ion

s)Monthly net change in occupied housing (formations)

11

Labor Market Keeps Trudging Ahead

Source: Northern Trust, Bloomberg. Data through 4/30/2014.

130

133

136

139

0

125

250

375

Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14

Tota

l non-f

arm

payro

lls (

mill

ions)

Month

ly jobs a

dded (

thousands)

TOTAL EMPLOYMENT & MONTHLY JOBS ADDED

Monthly jobs added (thousands, LHS)

Total non-farm payrolls (millions, RHS)

12

Eurozone Finally Growing

Source: Northern Trust, IMF April 2014 Database. *2013 forecasts used for 2013 growth rate.

0.50.3

1.8

-1.9

-1.2

-0.8

0.2

-0.3

0.2

1.7

1.0

2.9

0.60.9 0.8

1.2

1.7 1.6

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Germany France UnitedKingdom

Italy* Spain Netherlands Belgium Ireland* EuropeanUnion

GD

P G

row

th (

YoY

%)

REAL GDP GROWTH IN EUROPE

2013

2014E

13

Japan: More Work to Do

Source: Northern Trust, Bloomberg. Data through 5/9/2014.

300

400

500

600

700

800

900

1000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

16,000

17,000

Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15

Nik

ke

i E

arn

ing

s

Nik

ke

i p

rice

NIKKEI PRICE & EARNINGS ESTIMATES

Nikkei Index (RHS)

Estimated 12-month earnings (LHS)

14

EM: (Usually) a Beneficiary of Global Growth

Source: Northern Trust, Bloomberg. Six month moving average through April 2014.

0

400

800

1200

1600

2000

May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13

Busin

ess &

Consum

er

Cre

dit

Outs

tandin

g (

Bill

ion C

NY

)

CHINESE BUSINESS & CONSUMER FINANCING

Total social financing

15

Raising Rates: Slow and Steady

Source: Northern Trust, Bloomberg.

90

100

110

120

130

0.5

1.5

2.5

3.5

4.5

Dec-03 Jun-04 Dec-04 Jun-05 Dec-05

Cum

ula

tive r

etu

rn (

sta

rt d

ate

= 1

00)

Centr

al bank r

ate

(%

)

STEADY INCREASES

Fed Funds Rate (LHS)

S&P 500

10-year UST

90

100

110

120

130

2.5

3.5

4.5

5.5

6.5

Aug-93 Feb-94 Aug-94 Feb-95 Aug-95

Cum

ula

tive r

etu

rn (

sta

rt d

ate

=100)

Centr

al bank r

ate

(%

)

HEAVY HANDED

16

What’s Most Sensitive to Interest Rates?

Source: Northern Trust, Bloomberg. Data from 12/31/1990 through 8/31/2013. Exposure equals the beta between the asset class return and the return from global sovereign debt.

0.02

0.21

0.65 0.64

0.35

-0.01

0.25

0.730.79

0.25

0.06

-0.01

0.59

0.35 0.38

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Global Equities Global UpstreamNatural Resources

Global Real Estate Global ListedInfrastructure

Global Dividend Payers

Exp

osu

re t

o in

tere

st ra

tes

SELECT RISK ASSET EXPOSURES TO INTEREST RATE MOVEMENTS

Universe

High interest rates

Low interest rates

17

Valuations Drove Stock Returns in 2013

-5

5

15

25

35

To

tal re

turn

(%

)

2012 TOTAL RETURN

U.S. Dev. ex-U.S. Emerging

Return 16.3 17.2 18.7

Earnings 7.5 -21.9 -9.5

Valuation 6.7 35.3 25.2

Dividend 2.2 3.8 3.0

To

tal re

turn

(%

)

2013 TOTAL RETURN

U.S. Dev. ex-U.S. Emerging

32.6 21.8 -2.4

6.2 3.0 -0.4

24.1 15.5 -4.7

2.3 3.4 2.7

Source: Northern Trust, Bloomberg, MSCI.

18

Expansive US Valuations

Source: Northern Trust, Bloomberg. Data through 4/30/2014.

10

12

14

16

18

20

22

24

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

P/E

Ratio

U.S. EQUITY VALUATIONS

S&P 500 P/E ratio

Historic median (16.5)

0

2

4

6

8

10

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Yie

ld (

%)

S&P 500 Earnings Yield

U.S. Treasury 10 year yield

19

Tactical Asset Allocation: Favoring Developed Markets

-2

-11

0

5

8

3

-3

0 0 0

-15

-10

-5

0

5

10C

ash

(2%

)

Inve

stm

ent

Gra

de

(32%

)

TIP

S(4

%)

Hig

h Y

ield

&E

M D

ebt

(8%

)

U.S

. E

qu

itie

s(2

0%

)

Dev E

x-U

.S.

(17%

)

E.M

. E

quitie

s(9

%)

Nat.

Re

s.

(2%

)

Glo

ba

l R

E &

Infr

a.

(6%

)

Go

ld(0

%)

Fixed Income Equities Real Assets

O/U

(P

erc

ent)

GLOBAL TACTICAL ASSET ALLOCATION - OVER/UNDER WEIGHTS

Risk Control Asset

Risk Asset

Allocations above reflect Northern Trust’s Global Model; the proxy account for IPC. Strategic allocations are listed across the bottom; tactical recommendations (in the form of over/under/equal weights) are displayed in the bar chart. Tactical allocations as of 4/10/2014.

20

Expect Little From Congress Until at Least 2017

Source: Cook Political Report, May 2014.

160 16 14 14 16 20 195

HOUSE OF REPRESENTATIVES VOTING DYNAMICS

Solid Democrat Likely Democrat Lean Democrat Toss Up Lean Republican Likely Republican Solid Republican

218

Democrats need to win ALL Toss Up races and 14 of 16 Lean Republican districts to take the House.

21

Near-Term Risk Cases

Negative global impacts from emerging market

weakness

Disappointing U.S. growth calls in to question

quantitative easing in Japan and Europe

22

Volatility Happens

Source: Northern Trust, Bloomberg. 60/40 portfolio comprised of S&P 500 index and Barclays Capital U.S. Aggregate Bond index, respectively. Study utilized put options that were 5% out-of the money at purchase, 3 months prior to expiration.

-20

-15

-10

-5

0

5

10

15

20

May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14

Tota

l re

turn

(%

)

DOWNSIDE RISK PROTECTION WITH PUT OPTIONS

3 month S&P 500 return 3 month return with put overlay strategy

Cumulative relative return of put strategy Cumulative relative return of 60/40 strategy

23

Bonds Help In Falling, and Rising, Rate Environments

Source: Northern Trust, Ibbotson, Bloomberg. 60/40 portfolio represented by 60% S&P 500 and 40% Ibbotson Intermediate Term Bond index.

-18

-12

-6

0

6

12

18

-45

-30

-15

0

15

30

45

1994 1997 2000 2003 2006 2009 2012

Inte

rest

rate

(%

)

Tota

l re

turn

(%

)

FIXED INCOME PROTECTION IN BEAR & BULL BOND MARKETS

BOND BULL MARKET (1994-2012)

-18

-12

-6

0

6

12

18

-45

-30

-15

0

15

30

45

1963 1966 1969 1972 1975 1978 1981

Inte

rest

rate

(%

)

Tota

l re

turn

(%

)

BOND BEAR MARKET (1963-1981)

All equity excess return

60/40 return

10-year UST yield

24

Shuffling Your Risk Assets

Source: Northern Trust Capital Market Assumptions. *Downside risk is the standard deviation of the negative monthly returns. Private Equity standard deviation and downside risk are synthetic estimates.

60/40HedgeFunds

High Yield E.M. Debt Global L.I.Commodi-

tiesDeveloped

EquitiesGlobal R.E.

NaturalResources

PrivateEquity

E.M.Equities

Standarddeviation (%)

9.7 7.0 9.2 9.7 14.5 15.3 15.5 18.8 18.9 20.4 23.9

Downsiderisk* (%)

-6.5 -3.9 -6.1 -6.2 -9.5 -10.2 -10.8 -12.9 -12.3 -9.5 -16.4

-20

-10

0

10

20

30

Ris

k m

ea

su

re v

alu

e (

%)

RISK MEASURES OF SELECT RISK ASSETS

Standarddeviation (%)

Downsiderisk* (%)

25

Shuffling Your Equity Approach

Source: Northern Trust, MSCI Barra. Quality factor is Northern Trust’s proprietary quality measure. Data from 1997-2014.

Growth

Quality

Size (small)

Size (large)

Value

Low volatility

Low betaMSCI World Index

0

2

4

6

8

10

12

10 12 14 16 18 20 22 24

Retu

rn (

annualiz

ed %

)

Risk (standard deviation, annualized %)

RETURN & RISK PROFILES OF SELECT EQUITY STRATEGIES

26

Strategic Asset Allocation

Five-Year Outlook:

Forward Looking,

Historically Aware

27

Five-Year CMA Themes

Returns: Modest; lower in equities given last year’s run, higher in fixed income given steep forward curves

Volatility: High, given elevated risks (Fed exit strategy) & disruption in market functioning

Central banks still on hold, but Fed is beginning its

exit strategy, potentially heightening volatility

Growth continues to deal with deleveraging

Inflation protection “prudent” given low market

expectations

Emerging markets “course correcting” but valuations

still attractive

Hedge funds dependent upon manager selection

Private Equity remains compelling from risk/reward

perspective

2.83.5 3.0

0.8

6.17.0 7.4 7.1

7.88.4

5.8

10.1

8.07.2

3.0

9.6

4.4

0

5

10

15

U.S

.

U.K

.

Euro

pe

Ja

pa

n

Hig

h Y

ield

Em

erg

ing

Ma

rke

ts

Develo

ped

Mark

ets

U.S

.

Eu

rop

e

U.K

.

Ja

pa

n

Em

erg

ing

Ma

rke

ts

Glo

ba

lR

eal E

sta

te

Na

tura

lR

esou

rce

s

Co

mm

od

-itie

s

Priva

teE

quity

He

dg

eF

unds

Fixed Income Equities Real Assets Alternatives

FIVE YEAR ASSET CLASS TOTAL RETURN FORECASTS - %

Source: Northern Trust Capital Market Assumptions Working Group.

28

Long-Term Returns – High Returns Borrow From The Future

Source: Northern Trust Capital Market Assumptions Working Group.

Asset Class

5-Year Return

Expectation:

2013 Outlook (%)

5-Year Return

Expectation:

2012 Outlook (%)

5-Year Return

Expectation:

2011 Outlook (%)

Expected Risk

(Standard Dev.)

Cash 0.5 0.5 1.5 0.6

Fixed Income

Investment Grade 2.8 2.0 3.3 3.7

TIPS 2.7 1.4 2.7 5.6

High Yield 6.1 6.1 5.6 9.2

Emerging Markets 7.0 6.1 6.9 9.7

Equities

Developed Markets 7.4 7.8 7.3 15.5

Emerging Markets 10.1 11.1 10.7 23.9

Real Assets

Equity-Based NR 7.2 7.9 NA 18.9

Global Infrastructure 7.5 8.9 NA 14.5

Global Real Estate 8.0 8.4 9.4 18.8

Alternatives

Hedge Funds 4.4 5.5 8.4 7.0

Private Equity 9.6 11.0 11.0 20.4

Total Portfolio 6.3% 6.7% 6.5% 8.6%

29

Biography

James D. McDonald

Chief Investment Strategist

Jim McDonald is an Executive Vice President and the Chief Investment Strategist for

Northern Trust. In addition, he chairs the Northern Trust Tactical Asset Allocation

Committee, is a member of the Investment Policy and Private Equity Investment

Committees, and is trustee of the Northern Trust Alpha Strategies and Equity Long/Short

Strategies Hedge Funds.

Prior to joining Northern Trust in 2001 as the Director of Equity Research, Jim was Director

of Equity Research at ABN AMRO in New York and Chicago (1994-2000) and Equity

Research Analyst at ABN AMRO following the Environmental Services Industry (1990-

1994). He started his professional career in 1981 with Arthur Andersen & Co. in Detroit.

McDonald received a BBA from the University of Michigan and an MBA degree with high

distinction from Babson College. He is a member of the CFA® Society of Chicago and a

registered CPA in the State of Michigan.

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Global Investment Strategy Time for the Economy to Carry the Ball Because The Fed Wants Out