C IO REPORTS

The Monthly Letter Office of the CIO • JUNE 2014

M&A: Easier to Buy Growth Than Build It As we move toward the second half of the year, one of the more positive trends we see in capital markets is an increase in corporate mergers and acquisitions (M&A). This year has brought a notable rebound in transaction volume and corporations have indicated they are allocating more cash to M&A. Through the end of May, we have seen over $1 trillion of spending on global acquisitions, more than three times the levels seen during the same period last year. Recent activity has led investors to again exclaim that the M&A cycle has returned, especially for deals greater than $10 billion, which remain at a record pace this year (see Table 1). Table 1: T  he Five Largest Global M&A Deals in 2014 Target

Deal Size, Billion

Announcement Date

Acquirer 1 month performance*

Comcast

Time Warner Cable

$68.4

February 13

-4.6%

AT&T

DIRECTV

$66.0

May 18

-1.6%

Valeant Pharmaceuticals

Allergan

$54.2

April 22

11.8%

Medtronic

Covidien

$46.2

June 15

N/A

Holcim

Lafarge

$37.5

April 7

15.0%

Actavis

Forest Laboratories

$20.8

February 18

21.3%

Facebook

WhatsApp

$18.0

February 19

14.1%

Acquirer

*From 2 weeks prior to announcement Source: Bloomberg and ML GWM Investment Management & Guidance. Data as of June 16, 2014. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company.

Why M&A now? One reason is corporations have accumulated more than $1.4 trillion of cash on their balance sheets. Until recently, they have preferred to return cash to shareholders through dividends and share buybacks, doing so to the tune of $311.7 billion for dividends and $475.6 billion for share buybacks in 2013.1 Recently, investors have pressed companies to prioritize earnings growth, and corporations have increasingly turned to buying growth instead of building it, a more immediate solution. M&A typically corresponds with improvement in CEO confidence, a reduction in policy uncertainty and buoyant equity markets. We expect further growth in M&A given the relative calm in Washington and improving economic growth in the U.S. and globally. 1

Ashvin B. Chhabra Chief Investment Officer, Merrill Lynch Wealth Management Head of Investment Management & Guidance

This month we examine the current surge in mergers & acquisitions (M&A). We expect further growth in M&A given the relative calm in Washington and better-than-expected economic growth in the U.S. and globally. We don’t advocate focusing on potential or ongoing M&A targets, but suggest overweighting sectors with significant potential for M&A due to factors like favorable valuations, structural growth opportunities and strong levels of free cash flow. We also feature a conversation with Professor Jeremy Siegel of the University of Pennsylvania’s Wharton School, author of Stocks for the Long Run, now in its fifth edition. Sincerely,

S&P Dow Jones Indices, S&P 500 Stock Buybacks Jump 59%; $30 billion First Quarter Increase Pushes Cash Holdings Down. Data as of June 18, 2014.

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May Lose Value

Corporate capital allocation is a cyclical decision

Confidence returning as macro uncertainty declines

As noted by our colleagues on the BofA Merrill Lynch (BofAML) Global Research Equity Strategy team, the ways in which companies spend their capital changes substantially over the course of the business cycle (see Exhibit 1). When the macroeconomic environment is challenging, they focus on hoarding cash and if necessary balance sheet repair. As the macroeconomic outlook improves and confidence returns, there is an increased opportunity cost of holding excess cash earning low returns. Corporations begin putting that cash to work via capital expenditures, acquisitions, share buybacks and dividends. Since 2009 we have seen the “return of corporate cash” in the form of share buybacks and dividends. Now we see a focus on earnings growth, which shifts the capital allocation decision in favor of M&A as corporations buy growth and integrate with their onetime competitors to help control costs.

Over the last two years we have seen a significant decline in uncertainty over U.S. economic policy, as measured by Stanford University’s U.S. Policy Uncertainty Index. Economic policy uncertainty hampers M&A by making CEOs more reluctant to spend on acquisitions and instead take a “wait and see approach”. Current low levels of uncertainty support higher levels of M&A (see Exhibit 2) and we believe economic uncertainty in the U.S. will remain low as economic growth improves.

Exhibit 1: C  ompanies have favored share buybacks and dividends as a mechanism to return cash to shareholders since 2009 S&P 500 Ex-Financials: Percentage of Operating Cash Flow

Capex

Dividends

Buybacks

Acquisitions

120%

Exhibit 2: T  he recent decline in U.S. policy uncertainty is consistent with a pickup in M&A North America M&A Deal Value as a % of Market Cap U.S. Policy Uncertainty Index (1 Year Moving Average, Right) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

220 200 180 160 140 120 100 80 60 40 20

Market cap is defined as the MSCI North America Index. Source: Stanford University, FactSet, Bloomberg and ML GWM Investment Management & Guidance. Past performance is not a guarantee of future results.

100% 80% 60% 40%

M&A Unusually Earnings Enhancing

20% 0%

89 90 91 92 93 94 95 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Year Source: Compustat, BofA Merrill Lynch U.S. Equity & U.S. Quant Strategy. Past performance is not a guarantee of future results.

Corporate Inversions Recently cross-border M&A activity has attracted a lot of attention to “corporate inversions”, whereby a U.S. domiciled company restructures to claim a lower tax rate in a foreign country. Over the last few decades taxes have fallen as a percentage of gross domestic product and profit margins have improved from a falling corporate tax burden. This decline is unlikely to continue. The recent activity in corporate inversions has drawn a lot attention in the press and in Congress as a potential catalyst for corporate tax reform. While there has been a lot of rhetoric, the political polarization in Congress makes it unlikely that there will be any significant corporate tax reform in the short term.

CIO REPORTS • The Monthly Letter

Another factor making the current environment attractive for M&A is the reasonable level of valuations, which can help make deals immediately accretive to earnings (in other words, increase earnings per share immediately). There’s opportunity to enhance earnings through M&A using either cash on the balance sheet or borrowing, since the earnings yield is higher than usual compared to the corporate bond yield (see Exhibit 3). Despite the positive backdrop, there has been much debate recently over the extent of corporate leverage. Using one of our preferred measures, Net Debt to Earnings Before Interest, Debt & Amortizations (EBITDA), leverage remains low relative to history (see Exhibit 4). In addition, most corporations have taken advantage of low interest rates to restructure their debt, driving short-term borrowing to one of the lowest levels ever as a share of credit market debt—19.8% (see Exhibit 5). The low proportion should leave them less susceptible to short-term shocks from macroeconomic surprises and changes in interest rates.

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Exhibit 3: The potential for earnings improvement from M&A is at a level not seen since the 1980s Earnings Yield Minus Corp Bond Yield

Average

4.0 2.0

M&A Earnings Enhancing

0.0 -2.0 -4.0 -6.0 -8.0

-10.0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Earnings yield is the inverse of the S&P 500 last twelve month price-to-earnings yield. Corporate bond yield is defined as the Moody’s Baa bond yield. Source: Haver Analytics, Standard & Poor’s and ML GWM Investment Management & Guidance. Past performance is not a guarantee of future results.

and use their balance sheets more efficiently to minimize financing costs.

Equity market strength and the M&A cycle Historically there has been a positive relationship between higher equity markets and greater M&A activity, and recently U.S. stock markets have achieved new highs. In the past 17 years, the most M&A deals came in 1998 and 2006, closely corresponding with equity market highs (see Exhibit 6). In contrast to those two years, however, we do not believe markets are close to a peak since they are not overbought, valuations are not at extreme levels, earnings are still improving and profit margins continue to be stable. Additionally, the amount of leverage used for financing remains low relative to history and does not show signs of a peak.

Exhibit 4: Companies have capacity to increase leverage S&P 500 Ex-Financials: Net Debt / EBITDA

Average

3.0

Dollar Amount Of M&A Transactions (in billions)

2.5 Average = 1.9x

2.0 1.5

1.0 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

Source: BofAML U.S. Equity & Quant Strategy, Compustat. Past performance is not a guarantee of future results.

Exhibit 5: C  orporate sector short-term debt distribution remains at all-time lows Short-term debt % of Credit Market Debt Outstanding

Exhibit 6: M  &A deal values usually rise when the equity market is strengthening

Long-term debt

100 90 80 70 60 50 40 30 20 10 0 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Source: Federal Reserve, Haver Analytics and ML GWM Investment Management & Guidance. Past performance is not a guarantee of future results.

In the wake of the financial crisis most corporations remain reluctant to increase their debt. Leverage isn’t likely to return to pre-2008 levels, and there is room for corporations to boost their borrowing, reallocate balances in low-returning cash assets

CIO REPORTS • The Monthly Letter

$900 $800 $700 $600 $500 $400 $300 $200 $100 $0 1997

S&P 500 Index (Right) 2,000 1,800 1,600 1,400 1,200 1,000 800

1999

2001

2003

2005

2007

2009

2011

2013

600

Source: Mergerstat, Russell Investment Group, BofA Merrill Lynch Small Cap Research, Bloomberg, and ML GWM Investment Management & Guidance. Annual data as of December 2013. Past performance is not a guarantee of future results.

Market rewarding M&A Perhaps the most important impetus behind growth in M&A this year is the way the market has been rewarding deals. BofAML Global Equity Strategy found that in the U.S. in 2013 shares of companies that were acquired brought returns of 64.0%, well above the Russell 1000 Index return of 33.1%. Surprisingly, shares of the acquirers in 2013 also outperformed the market at 48.3%, a less common occurrence. We believe investors are rewarding companies that are moving from cash accumulation and seeking to grow earnings—even inorganically—where in the past they often saw deals as value destroyers for the acquirer.

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Portfolio Strategy: We do not advocate an investment strategy solely focusing on companies that are potential or ongoing targets of M&A activity given the degree of idiosyncratic risk in individual stocks and the difficulty in identifying targets. We prefer to focus on sectors with fundamental sources of improvement that favor M&A such as favorable valuations, structural growth opportunities and strong levels of free cash flow. Last year, among companies in the Russell 1000 Index, the sectors with the greatest numbers of deals were Technology, Healthcare and Financials. Since the start of 2014, U.S. sectors with the largest deals in terms of value have been Healthcare and Technology. BofAML Global Research believes M&A activity is likely to remain concentrated in those areas. Leverage for large-cap non-financials remains generally quite reasonable, particularly in Technology, Healthcare and Energy. Technology remains the only sector with more cash than debt, while in Healthcare net debt is less than 5% of market cap. Within the large-cap space, Technology, Healthcare and parts of Industrials and Consumer Discretionary hold many potential M&A targets.

2 3

Among small caps, targets are clustered within Information Technology and Financial Services, according to BofAML Global Research. Capturing alternative investment strategies focusing on M&A: Several alternative investment strategies focus on opportunities and trends in the M&A marketplace. The most common hedge fund style that focuses on this marketplace is event-driven. Event-driven managers typically maintain positions in companies involved in corporate transactions or expected to be involved in them. Following strong M&A activity this year, event-driven has been one of the top performing hedge fund styles in 2014, up 3.7% vs. 1.5% for the hedge fund index.2 Within the event-driven style is Merger Arbitrage, which focuses on opportunities in equity and equity-related instruments of companies engaged in a corporate transaction. Private equity buyout firms also focus on the M&A landscape. According to data from Preqin and the Financial Times, they have $1.07 trillion in unspent cash.3 That high level combined with strong equity markets should put pressure on the firms to do more deals.

Event driven hedge fund sub-style = HFRX Event Driven Index. Hedge Fund Index = HFRX Global Hedge Fund Index. Data as of June 11, 2014. Financial Times, Should you buy in to the private equity buyout kings? May 16, 2014.

CIO REPORTS • The Monthly Letter

4

CIO Insights

A conversation with Jeremy J. Siegel*

Insights and the best thinking from distinguished investors around the world.

Continuing our interviews with distinguished investors we spoke with Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, frequent commentator on CNBC and a contributor to publications like The Wall Street Journal, Barron’s, The New York Times and the Financial Times. His book Stocks for the Long Run was published in 1994, appeared in a fifth edition earlier this year and was named one of the 10 best investment books of all time by The Washington Post. We spoke about historic asset returns, market indexes, the Fed’s policies and current opportunities in the markets. Ashvin Chhabra: Your book Stocks for the Long Run makes the basic point that for the long run investors should load up on stocks. Is that right? Jeremy J. Siegel: I spent more than 2-1/2 years collecting data to measure total real returns on major asset classes. When I looked at it I noticed something very striking. Stocks are the most volatile asset class in the short run but the most stable one in the long run,4 returning 6.5% to 7% a year in dividends and capital gains after inflation. Later I found that between 1802 and 2013 the average real return has been 6.7%, exactly the same as I found in the first edition of Stocks for the Long Run published in 1994. All the volatility of the last two decades has had no impact on average returns. Historically the volatility of real returns for stocks has been less than for U.S. Treasury bonds for investors with a time horizon of 20 years or more. This is because inflation makes bonds riskier than stocks for investors with longer horizons. Ashvin B. Chhabra Chief Investment Officer, Merrill Lynch Wealth Management

And the difference in returns between stocks and bonds is huge. Over the past 80 years real returns on government bonds have been less than 2%, not even a third of what it has been for stocks. Looking forward, real returns on bonds are likely to be substantially less than 1% and could easily turn negative. Today the excess return of equities over bonds, what we call the equity premium, is higher than average, so stocks are now more attractive than they have been historically. Chhabra: Do you still advise clients to allocate the long-term portion of portfolios in stocks? Siegel: Yes, with a 90%-95% chance of outperforming for horizons of 20 years or more. There have been a few scenarios where bonds might outperform—deflationary, crisis-ridden periods like the 1930s, but the Fed is taking steps to make sure the economic events of that period do not repeat themselves and I believe they will succeed. Chhabra: Some people believe the Fed’s policies raise the specter of inflation rather than deflation. Siegel: Stocks do better than bonds under inflation because stocks are claims on real assets. It’s only with very high inflation, say double-digit levels, that real estate or commodities, such as gold, will likely outperform stocks.

Jeremy J. Siegel

Chhabra: As investors grow older and their time horizon approaches 20 years or less, should they start substituting bonds for equities?

Russell E. Palmer Professor of Finance at the Wharton School of the University of Pennsylvania

Siegel: It depends on the investor and the individual’s liquidity and retirement needs. It also depends on whether the investor has other sources of income, such as annuities or Social Security. Remember that even at retirement, many individuals will be looking forward to 20, 30, and even more years of healthy lives.

Chhabra: What do you think is a reasonable equity risk premium for the next 20 years? Siegel: I’m looking at a 6.5% real rate of return for stocks and I believe bond returns will be at most 1%, so that the equity risk premium will be at least 5.5%. Chhabra: Fed policy seems to have made the risky assets less risky and “riskless” assets more risky. Are you supportive of the Fed’s actions? Siegel: Yes. I like to emphasize that the level of interest rates, especially on long-term bonds, reflects factors far beyond the Fed’s control, such as slow economic growth, an aging population that is investing more conservatively, corporations “de-risking “ their pension funds by buying bonds, and a large international demand for dollars. These fundamental factors account for the major reasons why long-term interest rates are so low.

4

Long run is defined as 20 years or more.

* The views and opinions expressed are those of the speaker, are subject to change without notice at any time, and may differ from views expressed by Bank of America Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, or any affiliates. This interview is presented for informational purposes only and should not be used or construed as a recommendation of any service, security or sector. Before acting on the information provided, you should consider suitability for your circumstances and, if necessary, seek professional advice. CIO REPORTS • The Monthly Letter

5

CIO Insights

A conversation with Jeremy J. Siegel* (cont’d)

Insights and the best thinking from distinguished investors around the world.

Chhabra: Some people might disagree with the outlook for moderate inflation. Siegel: There is a lot of money sitting on the sidelines that the Fed will have to absorb when it begins reducing its portfolio. This money is now held as excess bank reserves that are not reflected in the money supply. Loan growth has so far been moderate. The Fed needs to prevent these excess reserves from flowing into the economy and it has plans to do that. I believe that the Fed will raise reserve requirements as the economy picks up. Chhabra: Other respected economists like Robert Shiller and Jeremy Grantham are not so bullish. Siegel: Bob Shiller is a friend of 47 years and I’m familiar with his work that shows equities are overvalued. I have written a paper showing some of the problems with his valuation yardstick (called the CAPE ratio), measures such as the inconsistency of earnings over time. If you correct for these inconsistencies, the overvaluation largely disappears. Bob has also made some changes to his model that lowers overvaluation. Jeremy Grantham points to high profit margins of the S&P 500 for his bearish forecasts. I’ve found that profit margins are high due to fundamental factors not likely to reverse, such as higher foreign sales, lower leverage and higher corporate cash balances. Chhabra: How do the valuations of foreign markets look? Siegel: Stocks in Europe have gone from a 10 Price/Earnings (P/E) ratio to a 15 P/E ratio over the past two years. They are now slightly less expensive than US stocks but the major risk for US-based investors is a fall in the euro. I believe a euro-hedged position is best in European stocks. Emerging markets I find very attractively valued and I believe they are likely to do well over the next few years. Japanese equities are also very reasonably valued at the present time. Chhabra: What about Frontier Markets? Siegel: Some of these markets have had huge runs recently. I see frontier markets as a speculative sector and I would not recommend any major allocation to these stocks. I do not view frontier markets as more attractive than the more mature Emerging Markets. Chhabra: Let’s switch to indexation and the debates on persistent outperformance of predefined indexes. Siegel: Intelligent indexing came from the research of the 1980s and 1990s which showed the out-performance of value-based stocks. This outperformance results because investors are hard-wired to overvalue growth stocks and undervalue profitable, but less-exciting companies. Our analysis also showed that over long periods value outperforms growth on any risk-adjusted basis. Dividend weighted and earnings-weighted indexes (forms of fundamental indexing) are the most efficient ways to take advantage of the better returns offered by value stocks. Keep in mind that over shorter periods, growth will outperform value, but eventually growth stocks will fall behind the returns on value stocks. Chhabra: How should investors choose among indices? What methodology should they look for? Siegel: As noted above, we prefer fundamental indexation that weights stocks in a portfolio by their dividends or earnings instead of market value. This is the best way to take advantage of the value premium. Chhabra: What do you love to do outside of investing? Siegel: I enjoy travel, playing bridge and reading. I love trying to figure out how the world works and keeping my mind sharp analytically. Chhabra: Is there anything else you’d like to point out? Siegel: Dividend-paying stocks had a tough time in 2013. Everyone feared a sharp rise in interest rates and investors avoided value stocks. But 2014 has been completely different—long-term interest rates have fallen about 50 basis points. That’s why there was a rotation from high-flying growth stocks to dividend payers early this year. Since I believe interest rates are not going to rise as much as many fear, I believe that dividend stocks will continue to outperform.

* The views and opinions expressed are those of the speaker, are subject to change without notice at any time, and may differ from views expressed by Bank of America Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, or any affiliates. This interview is presented for informational purposes only and should not be used or construed as a recommendation of any service, security or sector. Before acting on the information provided, you should consider suitability for your circumstances and, if necessary, seek professional advice. CIO REPORTS • The Monthly Letter

6

10 PORTFOLIO THEMES FOR 2014 1 Equities again outshine bonds

 ccommodative monetary policy, lower fiscal drag, strong A corporate fundamentals and low interest rates should enable equities to outperform bonds once again.

2 Invest in ‘Team USA’ – Tech, Energy,

Autos and Manufacturing

In the U.S., drivers of the next leg of growth should include secular factors such as energy independence and the resurgence of domestic manufacturing as well as cyclical ones such as the business investment cycle and pent-up household demand.

3 International equities prove resilient

 espite strong performance recently, these markets D should continue to benefit from recovering economies and earnings growth along with further central bank easing.

4 The equity rotation within the Great

Rotation continues

 ithin equities, there should be more of the rotation that W began in April 2013, which supports select cyclicals over defensives. In the U.S. we also favor large cap over small cap and multinationals.

6 “Bigger bang for your buck” as the dollar

strengthens

 tronger growth and a less dovish Fed (relative to S other developed market central banks) should support a stronger U.S. dollar. The unsynchronized withdrawal of central bank liquidity likely will cause greater foreign exchange market (FX) volatility. Investors should benefit from hedging foreign currency exposure.

7 Be selective in Emerging Markets

We favor EM equities over EM bonds on more supportive valuations. Lower central bank liquidity could hurt countries with the greatest dependence on external creditors. Weaker currency would present headwinds for EM bond returns.

8 An expanded investment toolkit offers

downside protection and diversification  s sentiment and consensus forecasts are bullish, A investors should consider protecting against adverse events with option strategies, market-linked investments and non-traditional mutual funds.

9 Hedge funds and private equity beat

commodities

a. Equity Long/Short is poised to benefit in an environment of reduced correlation. Relative value and Global Macro enhance diversification and are less correlated with traditional asset classes. b. While the bank lending environment will be restrained, private lending may fill that gap. Investors should be sufficiently compensated for lack of liquidity.

5 Fixed income is challenged by greater

interest rate volatility

 riven by tapering from the Fed, bond volatility is likely D to increase, favoring asset classes that can absorb higher rates, specifically high yield and municipals.

CIO REPORTS • The Monthly Letter

10 Tax awareness pays off

A combination of moderate returns and higher tax rates increases the value of tax-aware investing.

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When assessing your portfolio in light of our current guidance, consider the tactical positioning around asset allocation in reference to your own individual risk tolerance, time horizon, objectives and liquidity needs. Certain investments may not be appropriate given your specific circumstances and investment plan. Certain security types, like hedged strategies and private equity investments, are subject to eligibility and suitability criteria. Your Financial Advisor can help you customize your portfolio in light of your specific circumstances.

OFFICE OF THE CIO VIEW

ASSET CLASS

Negative

Global Equities

Neutral

COMMENTS

Positive

Further upside expected in 2014, based on improving economic and earnings growth and valuations, which remain close to fair value. However, return expectations for 2014 should be lower than 2013.

U.S. Large Cap

Fair valuation and improved economic growth to support globally exposed cyclical sectors; preference for energy, tech and industrials.

U.S. Mid & Small Cap

Small cap valuations, both absolute and relative to large cap, are extended. Select opportunities for active managers remain. Prefer mid-caps over small-cap stocks.

International Developed

Positive on Europe as growth improves and profit margins expand from depressed levels; Japan to benefit from continued reflationary “Abenomics”.

Emerging Markets

Structural headwinds remain as global liquidity eases; go beyond index and BRIC exposure to include frontier markets.

Global Fixed Income

Bonds continue to provide diversification, income and stability within total portfolios. However with higher prospective fixed income yields and volatility, our preference is to remain flexible.

U.S. Treasuries

Prefer to be short duration as longer maturity yields rise on better global growth. Current valuations are stretched especially on longer maturities.

U.S. Municipals

Valuations relative to Treasuries remain attractive and tax-exempt status is not likely to be threatened in the near term; advise a nationally diversified approach.

U.S. Investment Grade

Current valuation doesn’t offer much room for spread tightening and leaves investment grade more susceptible to rising rates.

U.S. High Yield

High yield still offers a relatively attractive profile given a low corporate default outlook. One of our preferred segments within fixed income.

U.S. Collateralized

Higher rates and the start of Fed tapering are likely to increase spread volatility. Continued improvement in housing to present select opportunities in non-agency MBS.

Non-U.S. Corporates

Select opportunities in European credit, including financials, however recent strong performance has moved valuations to fair.

Non-U.S. Sovereigns

Yields are unattractive after the current run-up in performance; prefer active management.

Emerging Market Debt

Vulnerable to Fed tapering and lower global liquidity; preference for countries with current account surpluses. Local EM debt likely to remain volatile due to FX component; prefer active management.

Alternatives*

Select alternative investments help broaden the investment toolkit to diversify traditional stock and bond portfolios.

Commodities

Oil prices are likely higher, influenced by geopolitical concerns this year. The balance of risk is to the downside for gold and oil prices.

Hedged Strategies

Equity long/short and event driven and credit strategies should benefit from reduced correlation among equities and an increased trend of corporate deal-making. Relative value and global macro strategies offer enhanced opportunity for diversification and uncorrelated profit-making. Event driven from busy deal making environment.

Real Estate

Prefer direct real estate investments. Within REITs volatility is likely to increase as rates rise, opportunities remain in industrial and office sectors.

Private Equity

The combination of an improving economy and banks still reluctant to lend provides attractive opportunities that compensates for reduced liquidity.

Cash

Monetary policy by developed market central banks reduces the attractiveness of cash, especially on an after-inflation basis.

* Many products that pursue Alternative Investment strategies, specifically private equity and hedge funds, are available only to pre-qualified clients.

CIO REPORTS • The Monthly Letter

8

OFFICE OF THE CIO Ashvin B. Chhabra

Chief Investment Officer, Merrill Lynch Wealth Management Head of Investment Management & Guidance

Mary Ann Bartels

Christopher J. Wolfe

CIO, Portfolio Solutions, U.S. Wealth Management

CIO, Portfolio Solutions, PBIG & Institutional

Hany Boutros

Sarah Bull

Niladri “Neel” Mukherjee

John Veit

Vice President

Vice President

Director

Vice President

GWM Investment Management & Guidance (IMG) provides industry-leading investment solutions, portfolio construction advice and wealth management guidance. This material was prepared by the Investment Management & Guidance Group (IMG) and is not a publication of BofA Merrill Lynch Global Research. The views expressed are those of IMG only and are subject to change. This information should not be construed as investment advice. It is presented for information purposes only and is not intended to be either a specific offer by any Merrill Lynch entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available. This information and any discussion should not be construed as a personalized and individual client recommendation, which should be based on each client’s investment objectives, risk tolerance, and financial situation and needs. This information and any discussion also is not intended as a specific offer by Merrill Lynch, its affiliates, or any related entity to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service. Investments and opinions are subject to change due to market conditions and the opinions and guidance may not be profitable or realized. Any information presented in connection with BofA Merrill Lynch Global Research is general in nature and is not intended to provide personal investment advice. The information does not take into account the specific investment objectives, financial situation and particular needs of any specific person who may receive it. Investors should understand that statements regarding future prospects may not be realized.

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