oct. 6, 2011 research bulletin
global investment committee
Global Investment Committee Tactical Asset Allocation Change analysis
authors
Risk Off: Overweight Safe Havens and Underweight Risk Assets The risk of recession in the US and the rest of the developed world has grown significantly in recent weeks, so we are adopting an overweight position in safe havens and an underweight position in risk assets. This is the most significant change to our tactical asset allocation in more than two years, as we are decisively moving to bearish from bullish. Continued on page 4
jeff applegate
Chief Investment Officer
david m. darst, cfa
Chief Investment Strategist
kevin flanagan
Chief Fixed Income Strategist
jonathan mackay
Senior Fixed Income Strategist
charles reinhard
Deputy Chief Investment Officer
douglas schindewolf Director of Asset Allocation
Our Tactical Changes Asset Class
Underweight
Follow us on Twitter @MSSB_GIC Market Weight
Global Cash Global Bonds Global Equities Commodities REITs Managed Futures Source: Global Investment Committee as of Oct. 6, 2011
Overweight
research bulletin / global investment committee
Summary of Strategic & Tactical Allocations for Global Investment Committee Asset Allocation Models
The table below summarizes our best thinking on the construction of strategic portfolios and tactical asset allocation. These three portfolios are a sampling of our guidance for investors with more than $20 million of investable assets, which are a subset of the GIC asset allocation models that are shown starting on page 7. The strategic equity allocations in these portfolios are in proportion to their share of global market capitalization. The latest changes are marked by arrows.
effective oct. 7, 2011 Moderate Balanced Model Strategic Weight Global Cash 5% Global Bonds 37 Global Equities 32 Global Alternative/Absolute Return Investments 26
Global Cash Global Bonds
5
Tactical Relative Weight 2% 0 -2 0
2
Equity & Alternative Investments Strategic Weight 0% 0 70 30
0
Tactical Relative Weight 0% 0 -4 4
Bond & Alternative Investment Strategic Weight 25% 65 0 10
Tactical Relative Weight 2% -1 0 -1
0
25
2
Investment Grade Short Duration Government/Government-Related Corporate & Securitized High Yield Emerging Markets Total Bonds Total Cash & Short Duration Bonds
30 5 16 9 4 3 37 10
1 2 -6 5 -1 0 0 4
-
-
65 10 33 22 65 35
-1 2 -6 3 -1 4
US Large Growth Value US Mid Growth Value Canada Europe Europe ex UK UK Developed Asia Japan Asia Pacific ex Japan US Small Growth Value World ex US Small Cap Emerging Markets Total Equities US Equity Developed World ex US Developed Market Equity Emerging Market Equity
10 5 5 2 1 1 1 7 5 2 4 3 1 2 1 1 2 4 32 14 14 28 4
2 2 0 0 0 0 0 -5 -5 0 -3 -3 0 0 0 0 0 4 -2 2 -8 -6 4
22 11 11 4 2 2 3 16 11 5 9 6 3 4 2 2 4 8 70 30 32 62 8
3 4 -1 0 0 0 0 -9 -8 -1 -6 -6 0 0 0 0 0 8 -4 3 -15 -12 8
-
-
REITs Commodities Inflation-Linked Securities Managed Futures Funds Hedge Funds Private Real Estate Private Equity Total Alternative/Absolute Return Investments
3 2 3 4 11 3
-1 -1 -1 3 0 0
2 5 5 10 3 5
0 -1 5 0 0 0
10 -
-1 -
26
0
30
4
10
-1
Global Equities
Global Alternative/Absolute Return Investments
Source: Global Investment Committee as of Oct. 7, 2011
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morgan stanley smith barney | oct. 6, 2011
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
Tactical Asset Allocation Reasoning
Global Bonds
Relative Weight Within Bonds
Short Duration
Overweight
Government
Investment-Grade Corporates High Yield
Underweight
Yields are near historical lows in the perceived safe havens of the US and Germany and very elevated in markets where there is perceived risk of default. We are not compelled by either of these options.
Overweight
These bonds offer relative safety and quality. In the US, yield spreads versus Treasuries are above average.
Underweight
Emerging Markets
Market Weight
Global Equities
Relative Weight Within Equities
US
Overweight
Developed Markets ex US Emerging Markets
Global Alternative/ Absolute Return Investments
Given a recessionary backdrop, we favor this safe-haven asset class.
Underweight Overweight
In a recessionary environment, yield spreads are likely to further widen. Attractive yield spreads are offset by a desire to lower risk.
We have a defensive stance that favors large-cap stocks at the capitalization level and growth stocks at the style level. Relative-valuation readings also support this positioning. At the regional level, we are market weight to Canada and the Asia Pacific ex Japan region (predominantly Australia) and underweight to Europe and Japan. Fundamental factors such as economic and earnings growth, government balance sheets and indebtedness remain relatively favorable. Policymakers have latitude to ease their stances.
Relative Weight Within Alternative Investments
REITs
Underweight
Given a recessionary backdrop and only mid-range relative valuation, we are inclined to limit exposure to this asset class.
Commodities
Underweight
Demand for many commodities will be negatively affected in a recessionary environment.
Inflation-Linked Securities
Underweight
With the peak in inflation expectations likely behind us for this cycle, we see better value elsewhere.
Managed Futures
3
Overweight
morgan stanley smith barney | oct. 6, 2011
This asset class often performs well during extended periods of adverse equity market conditions.
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
Continued from page 1
The primary source of the recent financial market distress—with, we think, more to come—has been a combination of policy inaction and ineptness in the US and Europe. In August, the Morgan Stanley Global Economics team issued a report that stated developed economies were moving “dangerously close” to recession but maintained a base case that a recession was not yet probable (see Morgan Stanley Global Economics: Dangerously Close to Recession, Aug. 17, 2011). More recently, the Economic Cycle Research Institute (ECRI), an independent research institution, warned that the US economy is on track for a recession. The ECRI has successfully called each of the last four US recessions with no false alarms. To summarize the evidence pointing to a US recession, the ECRI US Leading Diffusion Index shows the proportion of components in all of its leading indexes that have weakened over a six-month span (see Chart 1). As the chart shows, in more than six decades this index has declined to current levels only once without a recession transpiring. Even that exception involved a near recession in 1966 and 1967, and it included a 22% price decline in the Standard & Poor’s 500 Index in 1966. Historically, the average decline
during recession-related bear markets is about 30%. As of Oct. 5, the S&P 500 is 16% below its three-year closingprice high, reached on April 29. The index is also 61% above its March 2009 bottom closing price. As for Europe, the GDP growth outlook was not robust before the latest round of sovereign debt deliberations. With further fiscal policy tightening in the offing and policy missteps by the European Central Bank, we expect Europe will soon be in recession.
Equities
If history is any guide, a recession will pose significant challenges to equity market performance until investors start to anticipate the end of the economic downturn. Still, performance would likely vary, to some degree, across regions. For instance, we would expect growth to continue in the emerging market (EM) economies as EM monetary policy tightening runs its course; indeed, central banks in Russia, Brazil and Turkey have recently eased. Thus, we continue to overweight EM equities, for which valuations remain attractive. Moreover, our risk-of-recession call is largely confined to the big developedmarket (DM) economies—the US and
Chart 1: ECRI’s Leading Indicators Point to a US Recession
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Europe. At the global level, we still would expect GDP growth to be positive. Within DM equities, we favor the US over Europe and Japan where headwinds appear structural as well as cyclical. Within US equities, we continue to favor large-cap stocks. Large-cap stocks typically outperform during adverse market conditions and still have a relativevaluation advantage as compared with history (see Chart 2, page 5). At the style level, we continue to favor growth stocks over value stocks. During the periods of decelerating corporate earnings that accompany recessionary episodes, growth stocks—companies that have the ability to deliver relatively stable earnings growth regardless of the economic backdrop or those expected to post above-average earnings growth—typically hold up better. In addition, value stocks continue to appear somewhat expensive relative to growth stocks on an historical basis.
Commodities
As part of our effort to scale back exposure to risk assets, we are adopting a slight underweight tactical allocation to commodities. We believe it is prudent to reduce exposure to this economically sensitive asset class in light of the increased risk of recession.
The Economic Cycle Research Institute’s US Leading Diffusion Index shows that a high proportion of components in all of its leading indexes have weakened over a six-month span. Only once since 1949 has this index reached the current level without a recession taking place.
US Leading Diffusion Index Shaded areas indicate periods of recession.
’48
’51
’54 ’57 ’60 ’63 ’66 ’69 ’72
’75
’78
’81 ’84 ’87 ’90 ’93 ’96 ’99 ’02 ’05 ’08 ’11
Source: Economic Cycle Research Institute, FactSet as of Sept. 21, 2011
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morgan stanley smith barney | oct. 6, 2011
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
Chart 2: US Large-Cap Stocks Are Inexpensive Relative to Small-Cap Stocks
Within US equities, we continue to favor large-cap stocks. They typically outperform small caps during adverse market conditions and still have a relative-valuation advantage compared with history.
Ratio of the 12-Month Price/Earnings Ratios of the Russell 2000 Index to the Russell Top 200 Index
�.� �.� �.�
+1 Standard Deviation
�.�
Average
�.� �.�
-1 Standard Deviation
�.� �.� ’79
’81
’83
’85
’87
’89
’91
’93
’95
’97
’99
’01
’03
’05
’07
’09
’11
Source: Russell Investments, Thomson Financial, FactSet as of Sept. 30, 2011
REITs
Another asset class with close ties to the economic cycle is real estate investment trusts (REITs). From the equity market bottom in March 2009 through September 2011, the FTSE EPRA/NAREIT Global Index, our benchmark, increased by some 120%, making it among the top-performing asset classes over this period. However, in light of coming GDP growth challenges, we believe it is judicious
to reduce exposure. Moreover, from a valuation perspective, REIT yields are not, by historical standards, particularly compelling relative to investment-grade corporate bond yields (see Chart 3).
Managed Futures
As an asset class, managed futures have low historical correlations to other asset classes, providing a considerable degree of portfolio diversification (see Table 1, page 6). We believe good risk management
Chart 3: REITs Lose Some Relative Value
5.2% 4.2 3.2 2.2 1.2 0.2 -0.8 -1.8
begins with portfolio diversification, but it doesn’t have to end there. Because managed futures have historically performed well during periods of adverse equity markets, we are adopting a tactical overweight allocation.
Cash and Fixed Income
Given a recessionary backdrop, the attributes we prioritize have shifted. It remains hard to make a compelling valuation case for cash, short-duration
The line in the chart below represents the yield spread between real estate investment trusts (REITs) and BBB-rated corporate bonds during the last 15 years. The current spread is 1.1%. It has been tighter 56% of the time, which indicates that REIT yields are not especially attractive relative to their history.
REIT Spread to BBB Corporate Bonds
Sept. 30, 2011
0
20
40 60 Cumulative Percent
80
100
Note: REITs AFFO (adjusted funds from operations) is a measure of a REIT’s residual cash flow after expenses and expenditures. The benchmark index is the Citi Investment Research Hunter Express. We determine the period under review based on data availability for the benchmark index. In this case, the inception date of the Citi Investment Research Hunter Express Index is March 1996. Source: Morgan Stanley Smith Barney Global Investment Committee, Citi Investment Research & Analysis, FactSet as of Sept. 30, 2011
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morgan stanley smith barney | oct. 6, 2011
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
fixed income and DM sovereign debt at a time when most of these yields fall short of inflation and appear expensive relative to equities and other risk assets. However, the rate of inflation is likely to decline in a recessionary environment; moreover, defensive properties of these asset classes should provide ballast to a diversified portfolio during a turbulent period, so we have increased
our exposure. Accordingly, we are now overweight cash and short-duration debt and less underweight to DM sovereign debt. We are also prioritizing safety and quality over wide spreads by reducing our exposure to high yield corporate bonds and emerging market debt, while increasing our already overweight exposure to investment-grade bonds.
Table 1: Asset Class Correlation Matrix (1990 to 2010)
Conclusion
In aggregate, we are now underweight risk assets—equities, REITs, commodities, high yield bonds and emerging market debt. Conversely, we are overweight safe havens—cash, short-duration debt, investment-grade bonds and managed futures. In sum, the economic cycle has turned against maintaining a “risk on” position. We are now risk off.
To improve diversification, investors seek asset classes with little or no correlation to the asset classes they already hold. For instance, managed futures have a very low correlation or even a slight negative correlation with most asset classes. That makes managed futures potential diversifiers for multiasset portfolios.
US$ DevelopedCommodInvestment US$ High Non-Us Country Emerging Ities (Dow CommodGrade Yield Bonds (US$ US Large- Non-US Market Managed Hedge Jones-UBS Ities (S&P Cash Bonds Bonds Hedged) Cap Stocks Stocks Stocks Futures Funds Index) GSCI Index) Cash
1.00
0.08
-0.07
0.13
0.06
-0.06
-0.09
0.05
0.15
0.02
0.06
0.08
1.00
0.24
0.67
0.15
0.11
0.01
0.22
0.09
0.04
0.00
-0.07
0.24
1.00
0.05
0.60
0.54
0.59
-0.14
0.46
0.29
0.14
0.13
0.67
0.05
1.00
0.07
0.04
-0.04
0.19
0.03
-0.11
-0.17
0.06
0.15
0.60
0.07
1.00
0.73
0.69
-0.13
0.49
0.29
0.14
-0.06
0.11
0.54
0.04
0.73
1.00
0.73
-0.05
0.52
0.44
0.24
-0.09
0.01
0.59
-0.04
0.69
0.73
1.00
-0.08
0.65
0.39
0.22
Managed Futures
0.05
0.22
-0.14
0.19
-0.13
-0.05
-0.08
1.00
0.21
0.16
0.14
Hedge Funds
0.15
0.09
0.46
0.03
0.49
0.52
0.65
0.21
1.00
0.38
0.31
0.02
0.04
0.29
-0.11
0.29
0.44
0.39
0.16
0.38
1.00
0.90
0.06
0.00
0.14
-0.17
0.14
0.24
0.22
0.14
0.31
0.90
1.00
US$ InvestmentGrade Bonds US$ High Yield Bonds Non-US Bonds (US$ hedged) US Large-Cap Stocks DevelopedCountry Non-US Stocks Emerging Market Stocks
Commodities (Dow Jones-UBS Index) Commodities (S&P GSCI Index)
Source: MSSB Investment Strategy, Citi Investment Research & Analysis, Bloomberg, Barclays, Hedge Fund Research as of Dec. 31, 2010
6
morgan stanley smith barney | oct. 6, 2011
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
Global Investment Committee Asset Allocation Models The Global Investment Committee (GIC) is made up of senior professionals from Morgan Stanley & Co. LLC Research, Morgan Stanley Smith Barney, Citi Investment Research & Analysis and outside financial market experts. The committee provides guidance on investment allocation decisions through the creation and maintenance of various model portfolios. The GIC’s Asset Allocation Models shown on the following pages represent its best thinking on strategic and tactical asset allocation. In these portfolios, the strategic equity allocations are in proportion to their share of global market capitalization based on the MSCI All Country World Investable Market Index. As such, the strategic allocation to non-US stocks is more than 50% of the total equity allocation. There are three sets of models designed to provide guidance for investors with less than $1 million (Level 1), between $1 million and $20 million (Level 2) and more than $20 million in investable assets (Level 3). Accordingly, the portfolio sets have varying levels of allocations to traditional asset classes, liquid alternative investments and illiquid investments. The GIC constructs each set of portfolios on a scale
7
morgan stanley smith barney | oct. 6, 2011
of increasing risk—that is, expected volatility—and expected return. Each set consists of eight risk-tolerance levels. In each case, model 1 is the least risky and is composed mostly of bonds. As the model numbers increase, the models introduce higher allocations to equities and, thus, become riskier. Alternative/absolute return investments are present in all models and provide increased asset-class diversification. The GIC has also created and maintains strategic and tactical allocations for several other model portfolios used in various advisory programs. Most of these model portfolios incorporate a home-country bias toward the US. Under this subjective constraint, the strategic equity allocations have a 70%/30% split between US and non-US markets, and the strategic fixed income allocations have an 80%/20% split.
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
Global Investment Committee Asset Allocation Models for Investors With Less Than $1 Million in Investable Assets (Level 1) Global Bonds and Inflationlinked Securities Model Portfolios
Tactical Changes Effective Oct. 7, 2011
Global Bonds, Global Equities and Alternative/Absolute Return Investments
Model 1
Model 2
Model 3
Model 4
Model 5
Model 6
Model 7
Model 8
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Global Cash
30%
32%
15%
17%
10%
12%
Investment Grade Short Duration Government/ Government-Related Corporate & Securitized High Yield Emerging Markets Total Bonds Total Cash & Short Duration Bonds
60 15
59 18
55 15
59 18
42 10
46 13
30 7
34 10
21 5
25 8
6 2
29
24
25
20
21
16
15
10
10
5
16
17
15
21
11
17
8
14
6
60
59
2 57
1 60
3 2 47
2 2 50
5 4 39
4 4 42
6 5 32
45
50
30
35
20
25
15
20
US Large Growth Value US Mid Growth Value Canada Europe Europe ex UK UK Developed Asia Japan Asia Pacific ex Japan US Small Growth Value World ex US Small Emerging Markets Total Equity Total US Equity Total Developed ex US Equity Total Developed Market Equity Total Emerging Market Equity
-
-
6 3 3 2 1 1 1 4 3 1 3 2 1 2 1 1 1 2 21 10
8 5 3 2 1 1 1 1 0 1 1 0 1 2 1 1 1 3 19 12
12 6 6 2 1 1 1 9 6 3 4 3 1 2 1 1 2 4 36 16
14 8 6 2 1 1 1 3 0 3 1 0 1 2 1 1 2 9 34 18
16 8 8 2 1 1 2 10 7 3 6 4 2 2 1 1 2 5 45 20
-
-
9
4
16
7
-
-
19
16
32
-
-
2
3
REITs Commodities Inflation-Linked Securities Managed Futures Hedge Funds Private Real Estate Private Equity Total Alternative/ Absolute Return Investments
-
-
2 2
10
9
10
Global Bonds
Global Equities
-
5%
-
5%
10 2
-
-
-
-
2
0
-
-
-
-
12
2
8
-
-
-
-
5 5 35
8 6 20
7 6 23
-
-
-
-
10
15
5
7
-
5
-
5
18 11 7 2 1 1 2 4 1 3 2 0 2 2 1 1 2 11 43 22
18 9 9 4 2 2 2 12 8 4 7 5 2 2 1 1 3 6 54 24
21 13 8 4 2 2 2 5 1 4 2 0 2 2 1 1 3 13 52 27
22 11 11 4 2 2 2 15 10 5 9 6 3 4 2 2 4 8 68 30
26 16 10 4 2 2 2 7 3 4 3 0 3 4 2 2 4 16 66 34
30 15 15 4 2 2 3 21 14 7 12 8 4 4 2 2 5 11 90 38
34 20 14 4 2 2 3 12 6 6 4 0 4 4 2 2 5 20 86 42
24 12 12 4 2 2 3 18 12 6 11 7 4 6 3 3 8 16 90 34
28 17 11 4 2 2 3 8 4 4 4 0 4 6 4 2 8 25 86 38
20
10
24
12
30
16
41
24
40
23
25
40
32
48
39
60
50
79
66
74
61
4
9
5
11
6
13
8
16
11
20
16
25
1 1
2 2
1 1
3 2
2 1
4 2
3 1
4 3
3 2
5 5
5 4
5 5
5 4
3
2
3
2
3
2
3
2
2
1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
9
7
4
7
4
8
5
9
6
9
6
10
9
10
9
Global Alternative/Absolute Return Investments
8
Global Equities and Alternative/Absolute Return Investments
morgan stanley smith barney | oct. 6, 2011
8%
10%
5%
7%
3%
5%
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
Global Investment Committee Asset Allocation Models for Investors With $1 Million to $20 Million in Investable Assets (Level 2) Global Bonds and Inflationlinked Securities Model Portfolios
Tactical Changes Effective Oct. 7, 2011
Global Equities and Alternative/Absolute Return Investments
Global Bonds, Global Equities and Alternative/Absolute Return Investments
Model 1
Model 2
Model 3
Model 4
Model 5
Model 6
Model 7
Model 8
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Global Cash
25%
27%
13%
15%
Investment Grade Short Duration Government/ Government-Related Corporate & Securitized High Yield Emerging Markets Total Bonds Total Cash & Short Duration Bonds
65 15
64 17
55 12
56 14
40 7
41 9
30 5
31 7
20 2
32
26
28
22
21
15
16
10
18
21
15
20
12
17
9
65
64
2 57
1 57
3 2 45
2 2 45
4 3 37
40
44
25
29
15
19
US Large Growth Value US Mid Growth Value Canada Europe Europe ex UK UK Developed Asia Japan Asia Pacific ex Japan US Small Growth Value World ex US Small Emerging Markets Total Equity Total US Equity Total Developed ex US Equity Total Developed Market Equity Total Emerging Market Equity
-
-
6 3 3 1 4 3 1 2 1 1 1 2 16 6
7 4 3 1 1 0 1 1 0 1 1 3 14 7
8 4 4 2 1 1 1 6 4 2 4 3 1 2 1 1 2 3 28 12
-
-
8
4
-
-
14
-
-
2
REITs Commodities Inflation-Linked Securities Managed Futures Hedge Funds Private Real Estate Private Equity Total Alternative/ Absolute Return Investments
-
-
10
9
3
2
3
2
3
2
3
2
2
1
-
-
-
-
-
-
2 5 -
5 5 -
4 8 -
7 8 -
4 11 -
7 11 -
4 11 -
7 11 -
5 10 -
8 10
5 10 -
10 10 -
5 10 -
10 10 -
10
9
14
14
19
19
23
23
24
24
24
24
25
29
25
29
Global Bonds
Global Equities
2%
4%
-
-
-
-
21 4
6 3
7 1
-
-
-
-
12
6
2
0
-
-
-
-
14
6
11
1
6
-
-
-
-
3 3 37
5 4 29
4 4 29
6 4 16
5 4 16
-
-
-
-
10
14
5
9
5
5
-
-
-
-
9 5 4 2 1 1 1 2 0 2 1 0 1 2 1 1 1 8 26 13
12 6 6 2 1 1 1 8 5 3 4 3 1 2 1 1 2 4 35 16
15 9 6 2 1 1 1 2 0 2 1 0 1 2 1 1 1 9 33 19
14 7 7 4 2 2 1 10 7 3 6 4 2 2 1 1 2 5 44 20
16 10 6 4 2 2 1 4 1 3 2 0 2 2 1 1 2 11 42 22
18 9 9 4 2 2 2 13 9 4 7 5 2 4 2 2 3 7 58 26
22 13 9 4 2 2 2 6 2 4 2 0 2 4 2 2 2 14 56 30
24 12 12 4 2 2 3 17 11 6 10 7 3 4 2 2 4 9 75 32
27 16 11 4 2 2 3 9 5 4 3 0 3 4 2 2 4 17 71 35
20 10 10 4 2 2 2 15 10 5 7 5 2 6 3 3 7 14 75 30
23 14 9 4 2 2 2 5 2 3 2 0 2 6 4 2 7 22 71 33
13
5
15
5
19
9
25
12
34
19
31
16
11
25
18
31
24
39
31
51
42
66
54
61
49
3
3
8
4
9
5
11
7
14
9
17
14
22
2 2
1 1
3 2
2 1
4 2
3 1
4 3
3 2
5 5
5 4
5 5
5 4
Global Alternative/Absolute Return Investments
9
2 2
1 1
morgan stanley smith barney | oct. 6, 2011
8%
10%
5%
7%
3%
5%
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
Global Investment Committee Asset Allocation Models for Investors With $20 Million or More in Investable Assets (Level 3) Global Bonds and Inflationlinked Securities Model Portfolios
Tactical Changes Effective Oct. 7, 2011
Global Bonds, Global Equities and Alternative/Absolute Return Investments
Model 1
Model 2
Model 3
Model 4
Model 5
Model 6
Model 7
Model 8
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Strategic Tactical
Global Cash
25%
27%
13%
15%
Investment Grade Short Duration Government/ Government-Related Corporate & Securitized High Yield Emerging Markets Total Bonds Total Cash & Short Duration Bonds
65 10
64 12
55 7
56 9
40 7
41 9
30 5
31 7
20 2
33
27
30
24
21
15
16
10
22
25
18
23
12
17
9
65
64
2 57
1 57
3 2 45
2 2 45
4 3 37
35
39
20
24
15
19
US Large Growth Value US Mid Growth Value Canada Europe Europe ex UK UK Developed Asia Japan Asia Pacific ex Japan US Small Growth Value World ex US Small Emerging Markets Total Equity Total US Equity Total Developed ex US Equity Total Developed Market Equity Total Emerging Market Equity
-
-
6 3 3 1 4 3 1 2 1 1 1 2 16 6
7 4 3 1 1 0 1 1 0 1 1 3 14 7
8 4 4 2 1 1 1 6 4 2 3 2 1 2 1 1 1 3 26 12
-
-
8
4
-
-
14
-
-
2
REITs Commodities Inflation-Linked Securities Managed Futures Hedge Funds Private Real Estate Private Equity Total Alternative/ Absolute Return Investments
-
-
2 2
10
9
10
Global Bonds
Global Equities
2%
4%
21 4
6 3
7 1
-
-
-
-
12
6
2
0
-
-
-
-
14
6
11
1
6
-
-
-
-
3 3 37
5 4 29
4 4 29
6 4 16
5 4 16
-
-
-
-
10
14
5
9
5
5
-
-
-
-
10 6 4 2 1 1 1 2 0 2 1 0 1 2 1 1 1 5 24 14
10 5 5 2 1 1 1 7 5 2 4 3 1 2 1 1 2 4 32 14
12 7 5 2 1 1 1 2 0 2 1 0 1 2 1 1 2 8 30 16
14 7 7 2 1 1 1 9 6 3 5 3 2 2 1 1 2 5 40 18
16 10 6 2 1 1 1 3 0 3 2 0 2 2 1 1 2 10 38 20
18 9 9 4 2 2 2 12 8 4 7 5 2 2 1 1 3 6 54 24
22 13 9 4 2 2 2 5 1 4 2 0 2 2 1 1 3 12 52 28
22 11 11 4 2 2 3 16 11 5 9 6 3 4 2 2 4 8 70 30
25 15 10 4 2 2 3 7 3 4 3 0 3 4 2 2 4 16 66 33
18 9 9 4 2 2 2 13 9 4 7 5 2 6 3 3 7 13 70 28
21 13 8 4 2 2 2 3 1 2 2 0 2 6 4 2 7 21 66 31
11
5
14
6
17
8
24
12
32
17
29
14
11
23
19
28
22
35
28
48
40
62
50
57
45
3
3
5
4
8
5
10
6
12
8
16
13
21
1 1
2 2
1 1
3 2
2 1
2 2
1 1
2 3
1 2
2 5
2 4
2 5
2 4
3
2
3
2
3
2
3
2
2
1
-
-
-
-
-
2 5 -
5 5 -
4 8 2
7 8 2
4 11 3
7 11 3
4 11 2 4
7 11 2 4
5 10 2 4
8 10 2 4
5 10 3 5
10 10 3 5
5 10 3 5
10 10 3 5
9
14
14
21
21
26
26
28
28
28
28
30
34
30
34
Global Alternative/Absolute Return Investments
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Global Equities and Alternative/Absolute Return Investments
morgan stanley smith barney | oct. 6, 2011
8%
10%
5%
7%
3%
5%
-
-
-
-
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
Index Definitions standard & poor’s 500 index Widely
regarded as the best single gauge of the US equities market, this capitalizationweighted index includes a representative sample of 500 leading companies in leading industries of the US economy.
ftse epra/nareit global real estate index This index is
designed to represent general trends in eligible real estate equities worldwide. Relevant real estate activities are defined as the ownership, disposure and development of incomeproducing real estate. The index contains nearly 400 constituents.
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russell top 200 index
This index measures the performance of the largest-cap segment of the US equity universe. It represents approximately 63% of the total market capitalization of the Russell 1000 companies.
russell 200o index
This index measures the performance of the small-cap segment of the US equity universe. The companies in this index represent approximately 8% of the total market capitalization of that index.
s&p gsci index This index is a tradable index of 24 commodities from all sectors—energy, industrial metals, agricultural products, livestock products and precious metals. Commodities are weighted in the index in proportion to the amount of that commodity flowing through the global economy.
dow jones-ubs commodity index This
index comprises futures contracts on 19 physical commodities. These include energy, industrial metals, precious metals and agricultural commodities.
morgan stanley smith barney | oct. 6, 2011
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
Disclosures This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This is not a research report and was not prepared by the Research Departments of Morgan Stanley & Co. LLC or Citigroup Global Markets Inc. The views and opinions contained in this material are those of the author(s) and may differ materially from the views and opinions of others at Morgan Stanley Smith Barney LLC or any of its affiliate companies. Past performance is not necessarily a guide to future performance. Please refer to important information, disclosures and qualifications at the end of this material. 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Any such offer would be made only after a prospective investor had completed its own independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material. Morgan Stanley Smith Barney has no obligation to provide updated information on the securities/instruments mentioned herein. The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Morgan Stanley Smith Barney recommends that investors independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. Estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Morgan Stanley Smith Barney does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Smith Barney is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue Code of 1986 as amended in providing this material. Morgan Stanley Smith Barney and its affiliates do not render advice on tax and tax accounting matters to clients. This material was not intended or written to be used, and it cannot be used or relied upon by any recipient, for any purpose, including the purpose of avoiding penalties that may be imposed on the taxpayer under US federal tax laws. Each client should consult his/her personal tax and/or legal advisor to learn about any potential tax or other implications that may result from acting on a particular recommendation. Global Investment Committee Asset Allocation Models. The Global Investment Committee Asset Allocation Models (the “GIC Asset Allocation Models”) are created by Morgan Stanley Smith Barney’s (“MSSB’s”) Global Investment Committee. The Global Investment Committee is made up of senior professionals from MSSB, Morgan Stanley & Co. LLC Research, Citi Investment Research & Analysis and outside financial market experts. The Global Investment Committee provides guidance on asset allocation decisions through the creation and maintenance of the GIC Asset Allocation Models. The GIC Asset Allocation Models represent strategic and tactical asset allocation recommendations made by the Global Investment Committee based on general client characteristics such as investable assets and risk tolerance. The GIC Asset Allocation Models are not representations of actual trading or any type of account or any type of investment strategies and none of the fees or other expenses (e.g., commissions, mark-ups, mark-downs, advisory fees) associated with actual trading or accounts are reflected in the GIC Asset Allocation Models. The GIC Asset Allocation Models are not intended to represent a client-specific suitability analysis or recommendation. The suitability of an asset allocation for a particular client must be based on the client’s existing portfolio, investment objectives, risk profile and liquidity needs. Any such suitability determination could lead to asset allocation results that may differ materially from those presented herein. Each client should consult with his or her Financial Advisor to determine whether the GIC Asset Allocation Models are relevant to the client’s investment objectives. The GIC Asset Allocation Models are composed of three sets of portfolios meant to provide asset allocation guidance for investors with less than $1 million, between $1 million and $20 million, and more than $20 million. The portfolios accomplish this by varying the allocations to traditional asset classes, liquid and illiquid alternative/ absolute return investments. Each set of GIC Asset Allocation Models is broken down into eight model portfolios conforming to various risk-tolerance levels. In each case, Model 1 is the least risky portfolio and is composed mostly of bonds. As the model numbers increase, the models introduce higher allocations to equities and become riskier. Alternative/absolute return investments are present in all models and provide increased asset class diversification. The GIC Asset Allocation Models are available to MSSB’s brokerage and advisory clients. The Global Investment Committee has also created and maintains strategic and tactical allocations for other model portfolios which are used in various programs and products and such models may recommend different asset allocations than those reflected here. General Information You should be aware that there may be additional risks associated with different investment options. For example, risks associated with international investing, include foreign economic, political, monetary and/or legal factors, changing currency exchange rates, foreign taxes and differences in financial and accounting standards. The securities of small capitalization companies may not trade as readily as, and be subject to higher volatility than, those of larger, more established companies. With respect to the fixed income securities, please note that in general, as prevailing interest rates rise, fixed income securities prices will fall. High Yield bonds are subject to additional risks such as increased risk of default and greater volatility because of the lower credit quality of the issues. Alternative investments are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and risks associated with the operations, personnel and processes of the advisor. International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.
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morgan stanley smith barney | oct. 6, 2011
Please refer to important information, disclosures and qualifications at the end of this material.
research bulletin / global investment committee
Alternative investments which may be referenced in this report, including private equity funds, real estate funds, hedge funds, managed futures funds, funds of hedge funds, private equity, and managed futures funds, are speculative and entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds and risks associated with the operations, personnel and processes of the advisor. Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond’s maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate. Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio. Treasury Inflation Protection Securities’ (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is linked to inflation, TIPS may significantly underperform versus conventional US Treasuries in times of low inflation. Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment. Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity. Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets. The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Certain securities referred to in this material may not have been registered under the US Securities Act of 1933, as amended, and, if not, may not be offered or sold absent an exemption therefrom. Recipients are required to comply with any legal or contractual restrictions on their purchase, holding, sale, exercise of rights or performance of obligations under any securities/instruments transaction. Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected. Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations. This material is disseminated in Australia to “retail clients” within the meaning of the Australian Corporations Act by Morgan Stanley Smith Barney Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813). Morgan Stanley Smith Barney is not incorporated under the People’s Republic of China (“PRC”) law and the research in relation to this report is conducted outside the PRC. This report will be distributed only upon request of a specific recipient. This report does not constitute an offer to sell or the solicitation of an offer to buy any securities in the PRC. PRC investors must have the relevant qualifications to invest in such securities and must be responsible for obtaining all relevant approvals, licenses, verifications and or registrations from PRC’s relevant governmental authorities. Morgan Stanley Private Wealth Management Ltd, which is authorized and regulated by the Financial Services Authority, approves for the purpose of section 21 of the Financial Services and Markets Act 2000, content for distribution in the United Kingdom. Morgan Stanley Smith Barney is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This material is disseminated in the United States of America by Morgan Stanley Smith Barney LLC. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. Morgan Stanley Smith Barney material, or any portion thereof, may not be reprinted, sold or redistributed without the written consent of Morgan Stanley Smith Barney. © 2011 Morgan Stanley Smith Barney LLC. Member SIPC.
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morgan stanley smith barney | oct. 6, 2011
6906273 MSSB 10/11
Please refer to important information, disclosures and qualifications at the end of this material.
