How to Stay Invested in Volatile Times Quarterly Webinar APRIL - PowerPoint PPT Presentation

WELCOME How to Stay Invested in Volatile Times Quarterly Webinar APRIL 26, 2018

GUEST SPEAKERS FOR TODAY’S WEBINAR David Baskin , President and Founder, Baskin Wealth Management (BWM) Chris Moore , Chief Investment Officer, Summit Strategies Group

AGENDA Opening Remarks Market Update RPB Plan Performance How Portfolios are Constructed Q&A

OPENING REMARKS

MARKET & PLAN UPDATE

2018 Q1 Key Themes Return of volatility to markets — equity market was choppy but ended relatively unchanged Tariffs and trade war concerns were a source for market volatility Recent market trends continued with Emerging Markets and Growth/Technology stocks outperforming on a more muted basis Inflation concerns caused rising yields and negative returns for fixed income Central banks continued policy interest rate hikes and exit of QE (quantitative easing)

The Return of (Normal) Market Volatility Following a year of consistent gains and no monthly declines, markets have been relatively volatile in 2018. The main catalysts have been inflation fears and concerns surrounding trade. Global Equities: Percentage of Trading Days with Price Swings >1% 90% 80% 70% 60% 50% 40% 40% Median, 36% 30% 20% 10% 4% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Trade War Fears President Trump started to address trade by announcing tariffs on steel and aluminum and broad-based tariffs against China. With upcoming mid-term elections, these actions are politically- motivated. Participation Rate of US Workers Most Impacted By Trade vs. Global Trade Volume 66% 130 125.3 65% Increased global 120 64% trade has come at 110 63% the expense of U.S. 62% Labor Force Participation Rate 100 manufacturing jobs. Age 25+, No College Education 61% 90 60% 59% 80 58% 70 57% Global Trade Volume Index 57% 56% 60 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Source:Bureau of Labor Statistics for participation rate, CPB for trade volume.

Asset Quilt – Diversification Matters QTD Description 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Best Performing Core Core US MLP MLP EM REITs EM REITs EM EM MLP MLP EM REITs REITs MLP EM EM Emerging Market Stock Index Bonds Bonds Equities 45.7% 43.7% 55.8% 31.5% 34.0% 35.9% 39.4% 78.5% 35.9% 13.9% 18.2% 30.4% 2.5% 18.3% 37.3% 1.4% 10.3% 5.2% 33.6% High US Core High US REITs REITs REITs MLP EM EAFE EM MLP MLP REITs REITs REITs MLP EAFE US Large and Small Stock Index Yield Equities Bonds Yield Equities 26.8% 12.8% 3.7% 44.5% 25.6% 13.5% 32.2% 12.7% 76.4% 28.5% 8.7% 17.8% 27.6% 25.0% -26.2% 12.6% 0.6% 17.1% -0.6% Core Core High High Core Core US US US High EAFE EAFE REITs EAFE EAFE MLP EM EAFE EAFE High Yield Bonds (Non-Investment Grade Bonds) Index Bonds Bonds Yield Yield Bonds Bonds Equities Equities Equities Yield 38.6% 20.3% 12.1% 26.3% 11.2% -36.9% 18.9% 17.3% 22.8% 11.6% 8.4% -1.4% 58.2% 7.8% 6.0% 0.5% 12.7% 21.1% -0.9% High High Core US US High US High High Core MLP REITs MLP MLP MLP EAFE MLP EAFE EM Diversified US Investment Grade Bond Index Yield Yield Bonds Equities Equities Yield Equities Yield Yield Bonds -3.4% 36.8% 16.7% 6.3% 26.1% 31.8% 4.8% -0.8% 11.2% -5.9% 5.3% 7.0% -37.3% 16.9% 5.0% 16.4% 7.4% 7.5% -1.5% US US US US US US High US High High High EM EM REITs REITs REITs REITs REITs EAFE Developed Market International Stock Index Equities Equities Equities Equities Equities Equities Yield Equities Yield Yield Yield -2.6% -6.2% -38.0% 28.6% 2.5% 8.6% 5.1% -1.5% -7.5% 31.1% 12.0% 6.1% 15.7% 5.1% 15.1% 1.0% 15.8% 2.5% -4.5% Worst Performing US High High High US Core Core Core EAFE EAFE High Yield High Yield EAFE EAFE EAFE MLP EM EM REITs Real Estate Investment Trust Index Equities Yield Yield Yield Equities Bonds Bonds Bonds -14.2% -15.9% 29.0% 11.1% -43.4% 7.8% -12.1% 4.8% -2.2% -14.9% -8.1% -11.5% 2.7% 11.9% 1.9% 28.3% -2.0% 2.7% 3.5% US Core Core Core Core Core Core Core EM EAFE REITs EM EM EM EAFE MLP EAFE MLP MLP Master Limited Partnerships (Pipelines) Index Equities Bonds Bonds Bonds Bonds Bonds Bonds Bonds -30.8% -21.4% -16.8% -53.3% -18.4% -2.6% -4.9% -32.6% 1.0% -6.5% -11.1% -21.5% 4.1% 4.3% 2.4% 4.3% 5.9% 6.5% 4.2%

Trailing 12-Months Tier 1 Investment Returns April 1, 2017 through March 31, 2018 * Net of investment management fees. ** 50/50 MSCI ACWI (IMI)/Bloomberg Barclays Global Agg through March 31, 2015; 60/40 MSCI ACWI (IMI)/Bloomberg Barclays Global Agg through September 30, 2016; 60/40 MSCI ACWI (IMI)/Bloomberg Barclays U.S. Agg through September 30, 2017; 55/45 MSCI ACWI (IMI)/Bloomberg Barclays U.S. Agg thereafter. *** Barclays Global Aggregate January 1, 2013 through September 30, 2016, Barclays US Aggregate thereafter. .

Since Inception Volatility – Lower is Less Risky January 1, 2013 through March 31, 2018 * 50/50 MSCI ACWI (IMI)/Bloomberg Barclays Global Agg through March 31, 2015; 60/40 MSCI ACWI (IMI)/Bloomberg Barclays Global Agg through September 30, 2016; 60/40 MSCI ACWI (IMI)/Bloomberg Barclays U.S. Agg through September 30, 2017; 55/45 MSCI ACWI (IMI)/Bloomberg Barclays U.S. Agg thereafter. ** Barclays Global Aggregate January 1, 2013 through September 30, 2016, Barclays US Aggregate thereafter. .

Trailing 12-Months Tier 2 Investment Returns April 1, 2017 through March 31, 2018 25.00% 21.00% 20.95% 20.00% 15.95% 15.93% 13.97%13.99% 15.00% 11.82% 11.80% 10.00% 5.00% 1.39% 1.64% 1.11% 1.20% 0.30% 0.14% 0.17% 0.19% 0.00% -5.00% -4.45% -4.35% *Net of investment management fees.

Looking Forward: Key Themes Rising Interest Rates - Repricing of inflation risk Trade War rhetoric (negotiation tactics versus actual implementation) Valuations remain high suggesting lower long term returns

PORTFOLIO CONSTRUCTION

Current Valuations: Equities Driven by increased valuations, current equity return expectations are relatively muted. Equity Valuations and Returns 9% 25% 8% Starting Valuation (Earnings Yield) 20% 7% Return Over Next 10 Years 6% 15% 5% 10% 4% 3% 5% 2% 0% Yield (Earnings/Price) 1% Return Over Next 10 Years 0% -5% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Equity Valuations and Returns shown are for S&P 500 and Cyclically Adjusted Price – to-Earnings Ratio (CAPE) .

Current Valuations: Fixed Income Despite a recent pickup in yields, current fixed income return expectations are much lower than historical norms. Fixed Income Valuations and Returns 12% 12% Starting Valuation (Yield to Worst) 10% 10% Return Over Next 10 Years 8% 8% 6% 6% 4% 4% 2% 2% Yield to Worst Return Over Next 10 Years 0% 0% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Fixed Income benchmark is Bloomberg Barclays Aggregate.

Value Investing Over the long term, valuation matters a lot: Almost 90% of long-term return (10 years) is the price initially paid Over the short term, valuation is just noise: Short-term return driven by sentiment Source: Bloomberg and GSAM. Valuation refers to Cyclically Adjusted Price – to-Earnings Ratio (CAPE) and Strength of Valuation refers to the R-squared statistic.

Portfolio Diversification The efficient frontier* shows returns and risk for various combinations of stock and bonds The curve of the efficient frontier highlights the benefits of diversifying allocations Efficient Frontier Efficient Frontier Diversified 6% Portfolio 100% US Stocks 5% Expected Return 4% 3% 100% Bonds 2% 0% 5% 10% 15% 20% Risk (Standard Deviation) *The efficient frontier is the set of optimal portfolios that offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

Business Cycle Early Cycle Mid Cycle Late/End of Cycle ▪ Moderate growth ▪ Fast growth off low base ▪ Accelerating growth and inflation, ▪ Monetary policy neutral Economy defaults from speculative lending ▪ Accommodative monetary policy and cause monetary tightening significant slack ▪ Lending standards ease ▪ Capacity fully utilized and prices ▪ Inflation increases but not enough to ▪ Significant slack in the economy Inflation increase; often causes central bank cause monetary tightening to raise interest rates ▪ Valuations and profit margins ▪ Elevated valuations and margins ▪ Low valuations and profit margins near average weigh on prices Stocks ▪ Earnings beat very low expectations ▪ Earnings more mixed ▪ Expectations become too high at the versus expectations same time central bank is tightening ▪ Mostly stable yields ▪ Flat or inverted yield curve ▪ Steep yield curve Fixed Income ▪ Moderate and compressing ▪ Tight and widening credit spreads ▪ Wide credit spreads credit spreads from rising defaults ▪ Risk taking rewarded ▪ Risk taking rewarded ▪ Cash outperforms financial assets as Traditional Portfolio sentiment declines due to recession ▪ Positive contributions across ▪ Positive but smaller contributions or unforeseen event most assets across most assets