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Forecasts That Drive Our Models

Rebalancing Period: 09/30/2014 to 12/31/2014

Primary Investment Themes

Equities
U.S. Value Stocks
U.S. Microcap Stocks

Fixed Income
Emerging Mkt & High-Yield Corporate Credit


Visibility / Confidence

Cautious
How We Arrive at our Investment Biases

The investment biases built into our model portfolios are driven by our forecasts of 10-year annualized returns and risk characteristics for the 30 asset classes that make up the Kivalia investment framework. While it sounds confusing, ours is a very systematic approach that attempts to capture today’s relative valuation disparities coming back into alignment over extended periods of time. Let’s walk through how we arrive at our specific forecasts.

For fixed income sectors, our 10-year annualized forecast returns are simply the current yield of the index that represents the sector. For the high-yield corporate bond sector, we make a small downward adjustment to capture the probable effects of defaults over the longer term. For mortgage backed securities we make a small upward adjustment to capture expected higher compounding of returns due to lower expected price fluctuations than other fixed income sectors.

For equity markets (including REITs), we compare valuation measures (such as price-earnings and price-to-cashflow ratios) relative to expected 10-year growth across sectors, and normalized versus our expectations for the overall market. Thus, at all times we’re biased towards sectors that are relatively “cheap” when both valuation and growth expectations are considered.

Generally, our equity sector biases can be described as a “mean reversion strategy” - one where differences in sector valuation per unit growth will revert back to (and perhaps through) the cross-sectional average over time. From a practical perspective our methods allow us to de-emphasize market timing and instead focus on longer-term valuation discrepancies.

Return expectations for Gold, Silver & Commodities are tricky, as these asset classes have no inherent return characteristics, such as yield or earnings. We currently derive our estimates for these sectors qualitatively based on the tenor of the economic landscape at any point in time. In periods where dis-inflationary/deflationary themes prevail, expected returns will be low relative to other sectors. During increasingly inflationary times, expected returns will be high relative to stocks and bonds.




Latest 1 yr. Return (as of 09/30/2014)
Negative
Positive

Negative
Positive

Forecast 10 yrs Annual Return
Latest 1 yr Return Forecast 10 yrs Annual Return
U.S. Equities - Growth

Large Cap Growth
22.68%
0.78%
Mid Cap Growth
11.75%
-0.63%
Small Cap Growth
2.61%
0.71%
U.S. Equities - Core

Large Cap Core
18.65%
0.53%
Mid Cap Core
18.6%
-0.3%
Small Cap Core
9.5%
1.31%
Micro Cap
2.78%
5.39%
U.S. Equities - Value

Large Cap Value
18.28%
3.88%
Mid Cap Value
17.12%
1.41%
Small Cap Value
11.09%
1.71%
International Equities

Developed Growth
2.11%
1.44%
Developed Value
4.9%
4.01%
Small Cap
4.41%
4.99%
Emerging Markets
6.19%
5.95%
Alternative Assets

U.S. Real Estate
13.21%
0%
Gold
-8.29%
3.75%
Silver
-21.08%
4.01%
Commodities
-7.76%
3.25%
Bonds - U.S. Govt.

Treasury 1-3 yrs
0.5%
0.43%
Treasury 3-7 yrs
1.17%
1.59%
Treasury 7-10 yrs
3.64%
2.32%
Treasury 10-20 yrs
6.54%
2.62%
Treasury 20+ yrs
12.81%
3.1%
Treasury TIPS
1.59%
0.73%
Bonds - Credit & Intl.

U.S. Cash / Money Market
0.04%
0.05%
Mortgages
3.78%
2.09%
Investment Grade Corporate
7.9%
3.15%
High Yield Corporate
5.96%
4.66%
Emerging Market
9.52%
4.46%
U.S. Municipals
7.82%
1.69%