Clearbrook Global Advisors

CLEARBROOK

January 2017

Investment Outlook

2017 Clearbrook Research

Table of Contents

Topics

Strategic Review for 2016 1 Global Economy and Markets Strategic Overview for 2017 2 Global Economy

Asset Class Overview 3 Best Ideas for 2017 4 Outlook by Asset Class 2017 Equities 6 Fixed Income 7 Hedge Funds/Commodities 8 Private Equity/ Real Estate/Direct Lending 9 Appendix Review of Best Ideas From 2016 10 About the Authors 12 Disclaimer 13

Strategic Review for 2016

A Tale of Two Markets

Global Economy and Markets u The year of 2016 can be best described as a “Tale of Two Markets”. The first half of 2016 was dominated by global macro themes such as plunging oil prices, the potential

Looking back on economic slow-down of China, a collapse in the U.S. oil industry, political uncertainty Clearbrook’s Best surrounding the U.K. Brexit vote, and the uncertainty surrounding the November U.S. Ideas for 2016, presidential election. 100% of Our u Central banks continued to deluge the markets with liquidity, the main culprits being Research Team’s the European Central Bank (ECB), Bank of Japan (BOJ) and the People’s Bank of China Recommended (POC). This, along with some unexpected sharp moves in volatility, both up and down, investment Themes caused markets to experience rapid changes in market direction, valuation and liquidity. Yielded Positive investment Results. u These exogenous factors had a profound effect on security prices. (See Appendix for analysis).

Specifically, during the first quarter of 2016, correlations among S&P 500 stocks hovered in the mid 80% for several weeks. Overall, global asset prices during the same time period saw correlations rise above 60%. Market liquidity and beta drove returns, as opposed to fundamentals.

u In addition, the insatiable need for yield drove investors to over-valued, inflated sectors such as utilities, REITs and telecom. In totality, all of these factors had a negative effect on a number of asset classes and investment strategies, particularly those that employ active security selection to generate alpha. Value and fundamentally driven hedge funds and equity managers suffered the most. These managers underperformed their benchmarks on a relative basis and showed lackluster absolute returns.

u Three key events during the second half of 2016 brought fundamentals back into favor. The solid U.S. July jobs report changed the Fed’s interest rate outlook, the adoption of Yield Curve Control policy by the BOJ altered Japan’s rate outlook, and finally the November 8th election of Donald Trump changed expectations from slow to accelerated growth and inflation.

u The change in growth and rate expectations, particularly in the U.S., helped drive global market returns. Solid performance has been seen in domestic equities, high-yield credit and emerging markets. Global bonds have posted a positive year, though much of the return has been dramatically cut due to the severe sell-off that began in November. Industrial metals and agriculture have outperformed precious metals, while the U.S. dollar has appreciated against other major currencies.

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Strategic Overview for 2017 Global Economy

Hope and Reality

u As we enter 2017, global growth is expected to approach 3.0% helped by resilient growth in the U.S., gaining momentum in Europe, improvements in the U.K. and Japan, stabilized EM growth and accommodative China policies.

u The U.S. economy is anticipated to benefit from solid job growth, leading to increased wages and consumer spending, and an increase in capital expenditures helped by rising energy prices. The election of Donald Trump brings expectations of fiscal stimulus such as infrastructure spending, less regulation which positively impacts sectors such as financials, and corporate and individual tax cuts which should spur spending and profits. This could add 0.25% or more to GDP growth beginning in the second half of 2017.

u In Europe, GDP is projected to grow at a pace of 1.5% constrained by regional unemployment hovering around 10%, inflation close to 1.0%, and uncertainty regarding “Brexit” negotiations as well as the upcoming elections in France and Germany. On the plus side, accommodative ECB policy and a falling Euro should contribute to positive growth.

u In Asia, Japan’s economy is slated to grow at 1.3% next year helped by a tightening labor market and a falling Yen. However, the country is still facing headwinds led by persistent deflationary pressures, high-levels of national debt and a central bank running out of fiscal and monetary stimulus alternatives.

u Emerging Markets regions are projected to grow at approximately 4.4% supported by accommodative fiscal and monetary policies in China, improvement in global energy prices and the bottoming out of economies in Russia and Brazil. Potential negatives include a potential trade war between the U.S. and China, plus rising interest rates and USD affecting dollar denominated debt.

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Strategic Overview for 2017

Asset Class Overview

u Investors will seek to achieve “risk premia” in 2017 within a changing market and geo-political environment. The new investment environment will be affected by the reflation trade, rising global interest rates, improvement in corporate earnings, divergent economic growth and a rise in market volatility.

u Major themes that we believe will influence performance of financial assets will include the Federal Reserve’s “dot-plot” which is the speed they will normalize U.S. rates, the success of the new Trump administration at pushing forward its pro-growth, lower tax and regulation agenda, the price of oil, and the political and financial stability of the EU and its banking system.

u With the above mentioned scenario, we are seeking to establish positions in assets that can benefit from an environment of higher economic growth, rising inflation and higher levels of market volatility. We recommend a return seeking strategy that can find value in small- and mid-cap equities, enhance yield and return through credit, benefit from tightening markets in commodities, reduce long only equity and fixed income market risk through use of hedge funds and real assets.

u Our outlook calls for an underweight to long duration fixed income, non-yielding precious metals such as gold, and selective emerging markets which would experience a downside should a global tariffs between countries such as the U.S., Canada and Mexico come to fruition.

u In equities we favor a growth bias with an emphasis on financials, energy, and cyclicals such as industrials and materials. Regionally, we favor U.S. small caps and selective Emerging Markets due to higher relative GDP and earnings growth rates, but are leery of the protectionist rhetoric coming from the Trump administration. We suggest an underweight to Europe due to geo-political risks.

u For fixed income, we continue to underweight an allocation to developed market sovereign bonds, have moderate exposure to duration, and are enhancing yield via an allocation to high yield. Highyield is providing at present an average yield of 6.3%, and the default rate declined to 2.5% according to JPMorgan in December, as the improvement in energy prices have improved the default outlook.

u In commodities and real assets, we see a tightening in oil supply due to the recent output reductions and increasing demand out of China, and a gain in industrial metals due to accelerating growth. Agricultural commodities such as sugar, wheat and cotton are seeing positive supply/ demand dynamics.

u In alternatives, returns will be generated due to manager selection process as to regional exposures, strategy and security selection as intra-market and intra-sector correlations are falling. This environment should favor selective macro managers that employ discretionary strategies taking advantage of price movements in currencies, rates, and fixed income. Long/short equity market neutral should see opportunities as fundamentals should drive equity prices as the affect of central bank QE lessens. Merger Arbitrage funds should remain attractive, as merger activity to improve competitiveness and revenues remain intact.

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Best Ideas 2017 Improved Economic Growth and Reflation Favor Value Versus Defensive Positions

1 U.S. Equity Opportunities Value and Mid/Small Cap

Favor Selective U.S. and Non- U.S. Equities and Credit

• An acceleration of global economic growth with the U.S. acting as the engine should propel value stocks in 2017. • Energy is poised to see upside due to the reduced production from OPEC and non-OPEC members and higher global economic growth should reduce the existing supply glut. • Financials, particularly banks, should benefit from the steepening of the yield curve, as well as the proposed reduction in regulations in the U.S. • Materials should outperform as the U.S. moves from monetary to fiscal stimulus, including the proposed increase in infrastructure spending.

2 European Equities Large Cap • Although European equities are attractive on a forward P/E basis, we would tend to recommend an underweight to the region. • On the plus side is the continuing decline of the euro which should be a positive for exporters, plus the continuation of accommodative monetary policy from the ECB through 2017. • The geo-political risk in Europe, plus unresolved issues to the stability of their banking system, are a factor. Specifically, the uncertainty brought about by “Brexit” and the potential influence of populist movements on the elections in the Netherlands, France and Germany could be a drag on capex decisions, and in turn, growth.

3 Emerging Markets Selective EM Equities • We recommend an underweight to overall emerging markets to begin 2017, as the potential for trade tensions engendered by the incoming Trump administration could dampen growth. • As Emerging Market growth is estimated to be 4.4% versus 2.8% for developed markets, we are selective in our allocations. We favor countries with a high positive carry, where currency valuations are attractive, and where there is growing domestic demand, which provides insulation from potential trade wars.

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• Markets poised to see improved economic growth: China (recovery in over-capacity industries and growth in domestic consumption), Russia (attractive dividend yields and recovery in energy prices) and Brazil (improved earnings from a low base and lower debt costs).

4 Structured Credit Opportunities ABS, MBS, CMBS and CLOs

Favor Selective U.S. and Non- U.S. Equities and Credit

• The avoidance of complex structured credit products by mainstream investors has created opportunities to buy securities below true asset valuations. • The re-financing “wall” from 2006 and 2007 vintage real estate debt, and the inability of some borrowers to easily re-finance could cause pricing-dislocations in the CMBS sector. • Redemptions confronting some credit oriented hedge funds may cause non-fundamental selling of assets, creating attractive valuations for investors with available cash to invest.

5 Real Assets – Real Estate, Commodities and Energy Capital Appreciation and Inflation Hedge • Non- Core real estate assets with operational and structural improvements can provide yield and growth, along with properties associated with logistics. • Industrial metals can benefit from rising improved economic growth, rising demand along with an increase in inflation. • Energy and agricultural commodities are attractive. Specifically, oil has upside due to expected production cuts, industrial metals are attractive due to increased global growth pushing demand higher, as well as agricultural commodities such as wheat and sugar (weather conditions to lower crop yields) and cotton (increased demand from China).

6 Alternative Investments – Economic and Geo-Political Risk, Market and Sector Dislocations Favored Strategies: (Long/Short Equity, Macro and Event Driven/Merger Arbitrage) • Long/short equity market neutral should see profit opportunities as markets shift from a defensive to a growth mode, and the decline in intra-region and intra-sector/industry correlations. • This environment should favor selective macro managers that employ a discretionary approach, as profit opportunities should be seen in fixed income, rates, currencies and commodities. • Merger Arbitrage funds should remain attractive as merger activity to improve competitiveness and revenues remain intact.

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Outlook By Asset Class for 2017

Equities

Asset Class Outlook • Accelerated growth supported by fiscal stimulus, tax reform and less regulation in the U.S. is positive for equities.

Improved Outlook for U.S. Equity, EM Opportunities, Prefer Mid/ Small Cap

• Specifics to look for include companies with high tax rates to get relief, potential repatriation of cash leading to higher payouts and cap-ex, infrastructure stocks to benefit from increased government spending, and companies that will be added by de-regulation. • We would favor a value approach preferring energy, financials, materials and healthcare. • Geopolitical risks weigh down Europe, but some tailwinds include declining Euro, composite PMI readings above 54 and projected EPS growth rate of 9.5%. • Emerging Markets are trading at an attractive estimated forward P/E of 12X, versus Europe 14X and the U.S. at 17X. • In Asia we would recommend an overweight to Japan as corporations will benefit from the declining Yen. Specifically, Information, Technology, Energy, Discretionary and Materials.

Region Negative

Neutral

Capitaization Positive

Negative

US

Large Cap

Non-BRIC EM

Mid Cap

BRIC

Small Cap

Asia

Micro Cap

Europe

Style Negative

Growth High Dividend Debt

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Value

Neutral

Positive

Neutral

Positive


Fixed Income

Asset Class Outlook

Rising Rates Pose Risk for Core Fixed Income and Sovereigns, Opportunities in Selective Credit

• Anticipation of improved global economic growth, the shift from monetary to fiscal government policy, global reflation and the divergence between U.S. Fed policy versus the other central banks should lead to higher yields which imply a steeper yield curve. • In Europe, expectations are for higher yields and steeper yield curve as the ECB withdraws stimulus in 2017, rates being influenced by increases seen in other regions and a projected heavy calendar for bond issuance. • In Emerging Markets, EM sovereign bonds are attractive based on higher yields, structural reforms, recovery in commodity prices and cheap currencies. We are more cautious of EM corporate debt due to the large debt issuance seen over the past few years and the potential for downgrades. • In regards to sectors, we favor high-yield bonds, structured credit and floating rate debt such as leveraged loans which provide higher yields versus sovereign debt and have less interest rate sensitivity. In terms of duration, we maintain a short bias of five years or less.

Fixed Income Negative

Neutral

Positive

High-Yield Non-Agency Mortages Bank Debt Sovereign Debt EM Local Debt IG Corporates EM Corprorates

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Hedge Funds/Commodities

Asset Class Outlook

Favor Hedge Funds that Benefit from Elevated Levels of Volatility, Prevalent Macro Themes and are Tactical

• Global macro managers can prosper with the global investment landscape changing due to geo-political uncertainty, divergent central bank policy, economic growth differen- tials between developed and emerging markets, and the anticipated rise in volatility in currencies and interest rates. • We are seeing credit markets, particularly outside the US, continuing to reach for yield and move lower in credit quality or longer in duration. Long/short credit managers are finding attractive short opportunities given current tighter spreads. Credit opportunity managers are seeing undervalued assets on a number of fronts, caused by fundamental and technical issues. • Merger Arbitrage funds should remain attractive as merger activity to improve competitiveness and revenues remain intact. Additionally, should the U.S. provide a tax amnesty to corporations to repatriate in excess of $1 trillion in cash, the last such act in 2005 ignited a 35% increase in M&A activity from the previous year. • In Commodities and real assets, we can see a tightening of the oil supply, increase in the value of industrial metals due to improved global growth, and the increase in agricultural commodity prices due to supply/demand imbalances caused by weather and production issues.

Hedge Funds / Commodities Negative

Equity Market Neutral Hedged Equity Relative Value Distressed/High-Yield Global Macro Structured Debt Commodities

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Neutral

Positive


Private Equity/Real Estate/ Direct Lending Asset Class Outlook

Direct Lending and Selective Real Estate Opportunities Attractive versus Private Equity

• Imposed regulations and narrowing net interest margins have resulted in a reduction of lending to small and mid sized companies, creating opportunities for asset based and direct lending funds. • The number of companies owned by PE firms and the amount of dry powder are at record highs. These companies will need to be sold and if the exit environment becomes less attractive, holding periods will likely increase, reducing returns. • As investment periods come to an end, expiring dry powder may force asset purchases at less than ideal valuations. Additionally, the global exits that are converted into new PE fund commitments may exacerbate these concerns. • Non- Core real estate assets with operational and structural improvements can provide yield and growth. In addition, shifting demographics are presenting compelling opportunities for multifamily housing and multi-purpose workspaces.

Private Funds Negative

Neutral

Positive

LBO Large Cap LBO Mid-Market Mezzanine Ventue Capital Real Estate Direct Lending

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Review of Best Ideas From 2016

Appendix

Elevated asset prices and few bargains call for tactical, relative value and quality investing Each Year, the Clearbrook Research Team Reviews the Prior Year’s Published Ideas and Their Potential Investment Impact. 1

US Equity Opportunities

Value and Yield

100%

of Clearbrook’s Best Ideas From 2016 Yielded Positive Results.

• Subdued economic growth and corporate earnings focuses us on value equities that provide yield. (Value equities led by financials and energy post sold return – Russell 1000 Value Index +18.52% YTD.) • Energy is a sector that has upside potential with an attractive yield and reversal of the oil supply/demand dynamic. (Energy was one of year’s best performers aided by production cuts – Morningstar Energy ETF +29.62%.) • REITs and consumer staples are also a source of income and offer defensive positioning. (REITs rise on low rates and appreciation - Morningstar U.S. Real Estate Sector ETF +6.23% and Consumer Staples have decent year as improving jobs data supports the sector – Morningstar US Consumer Defensive ETF +7.77%.) Midstream Master limited partnerships • Midstream MLPs have only recovered about a third of their decline seen in 2015 . Experienced severe price corrections as oil prices fell. • Out of three areas (up-, mid-, and downstream), midstream looks most attractive: transportation of refined product, storage, and pipelines are an attractive sector to invest. Forward P/E of 10.5 versus 16.6 for the S&P 500. • The use of a highly skilled active manager is essential due to disparate valuations and opportunities in the sector. (Midstream MLPs experience outsize returns with improvement in energy supply/demand dynamic – Tortoise MLP & Pipeline Fund +43.41%.)

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Non U.S. Emerging Markets (Active Equity)

Long Emerging Market Equities • Accommodating central bank policies in developed markets (DM) keeps a lid on DM currency appreciation. • Emerging Market earning growth for 2016 and 2017 projected at 6.5% and 13.1% respectively, versus MSCI ex-UK estimates of 0.1% and 12.8% (JPMorgan). • Capital flows have turned positive for emerging market equities. (Emerging markets despite dramatic rise in USD achieve positive return led by Russian and Brazilian markets – MSCI EM Index +8.30%)

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Appendix

3 Selective Credit Opportunities Direct and Asset Based Lending: (Continued Dis-Intermediation of Banks) • Stricter leverage lending guidelines prompted corporate and financial deal makers to seek non-traditional financing. • Imposed regulations and narrowing net interest margins caused banks to reduce lending to small- and mid-sized companies. • Diminishing access to financing has lenders in a more favorable position versus borrowers. (Direct lending funds had a solid year as deal flow was robust and default rates remained low – SJ Czech Fund +8.67%.)

4 Real Assets – Real Estate, Commodities and Energy Yield and Appreciation Potential • Non- Core real estate assets with operational and structural improvements can provide yield and growth. (Real estate appreciates as institutions vie for returns versus traditional fixed income and equity – NCREIF Property Index +7.97%.) • Precious metals offer upside due to market volatility and overly accommodative central bank policies. (Gold +6.94%) • Energy has possible upside as the supply/demand equation in oil improves, and in energy conglomerates seeking to sell assets to raise cash and improve their balance sheets. (Oil rallies on proposed reductions in output – Spot Oil +30.8%.)

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Alternative Investments – Economic and Geo-Political Risk, Market and Sector Dislocations

Favored Strategies: (Long/Short Equity, Macro and Event Driven/Merger Arbitrage) • Long/short equity opportunities should be prevalent in the U.S. and Europe, due to major sector dislocations we have seen recently in financials and energy, as well as over-valuations in the utility sector. (HFRI Equity Hedge +5.49%.) • This environment should favor selective macro managers that employ trend following aspects to their program and ability to be active traders on the discretionary side. Opportunities are seen in equities, rates and fixed income. (HFRI Macro/Multi-Strategy +4.05%.) • Merger Arbitrage/Event Driven funds should remain attractive as merger activity to improve competitiveness and revenues remain intact. (HFRI Event Driven Index+10.50.)

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The Clearbrook Research Team

Appendix

Timothy C. Ng, Chief Investment Officer Tim joined the firm in 2010 and is Chief Investment Officer at Clearbrook, as well as Head of the Clearbrook Investment Committee. Within this role, Tim is involved in global macro and manager research, portfolio analysis and risk management. Prior to Clearbrook, Tim was President and Chief Investment Officer of Structured Investments Group, LLC. Tim began his career in 1982 and has served as an alternative investment and hedge fund advisor in numerous capacities. Previously, Tim was a Managing Partner with Access International Advisors and has held the title of Senior Vice President in varying roles at Prudential Securities, Smith Barney, and Oppenheimer & Company. During his career, Tim was one of the first advisors to place investor capital into hedge funds, portable alpha portfolios, structured/hedge fund linked notes, and insurance dedicated hedge fund products. Tim has had oversight of more than $5 billion of investor capital on behalf of corporations, pension funds, endowments and foundations, banks, investment advisory firms, and family offices. Tim is a Board member of Clearbrook Global Advisors and the Florida Alternative Investment Association. He has been a holder of securities licenses Series 3, 7, 24, 63 and 65. Tim received a BA in Economics from Stony Brook University and an MBA with honors from Long Island University. Mark N. Hong, CFA, Managing Director, Head of Research Mark joined Clearbrook in 2010 and is a Managing Director and Head of Research at Clearbrook, responsible for manager research, capital markets research, due diligence, structured finance and corporate analysis. Prior to Clearbrook, Mark was co-founder and Principal of Structured Investments Group, LLC. Previously, Mark held several roles at Sands Brothers & Co., Ltd., serving as a Vice President in their asset management division, where he was a member of the firm’s Investment and Manager Selection Committees. Mark also served as Director of Research and Vice President of their Critical Capital Growth Fund, LP, where he completed several senior secured and mezzanine debt transactions. During his career, Mark has been involved in the sourcing, evaluation, structuring, financing, and monitoring of numerous transactions. Before joining Sands Brothers, Mark served as an Analyst with Prudential Financial’s Asset Management Division, where he supported the investment grade corporate trading desk. He is a CFA Charterholder and is a member of the New York Society of Securities Analysts. Mark received a BBA in Financial Engineering from James Madison University. Deanna Wong, CFA, Senior Analyst Deanna joined Clearbrook in 2014 as a Senior Analyst. Her responsibilities include research, performance and investment analysis, asset allocation modeling, database administration, and client reporting. Before coming to Clearbrook, Deanna worked at State Street Investment Analytics for over 4 years, during which she held multiple roles spanning market data analysis, performance data management and investment analytics. Deanna has a B.A in Economics from Carleton University, and is a CFA Charterholder. Kevin O’Connor, Senior Analyst Kevin joined Clearbrook in 2013 as a Research Analyst. His responsibilities include research, performance and investment analysis, asset allocation modeling, database maintenance, and client reporting. Before joining Clearbrook full time, Kevin worked at the firm as an intern in Clearbrook’s research group while completing his undergraduate degree. Kevin has completed all three levels of the CFA program. He holds a Series 3 license. Kevin holds a Bachelor’s of Science with a double major in Finance and Management from the Martin J. Whitman School of Management at Syracuse University. Natalie Brisbane, Research Analyst Natalie joined Clearbrook in 2014 as a Research Analyst. Her responsibilities include research, performance and investment analysis, asset allocation modeling, database maintenance, and client reporting. Before joining Clearbrook, Natalie interned as a trading assistant at Wooster Capital Management, a value-oriented long/short equity hedge fund. Natalie holds a Bachelor’s of Arts, majoring in Economics from Villanova University. Natalie is a Level II candidate in the CFA program.

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Appendix

Disclaimer This paper discusses general market activity, industry or sector trends, and other broad-based economic, market or political conditions and should not be construed as research or investment advice. This paper is for informational purposes only and does not constitute, and is not to be construed as, an offer, solicitation or recommendation to buy or sell any securities or related financial instruments. Opinions expressed in this paper reflect current opinions of Clearbrook as of the date appearing in this material only. This paper is based on information obtained from sources believed to be reliable, but no independent verification has been made and Clearbrook does not guarantee its accuracy or completeness. Clearbrook does not make any representations in this material regarding the suitability of any security or investment strategy for a particular investor. Investors are urged to consult with their financial advisors before buying or selling any securities. The information in this paper may not be current and Clearbrook has no obligation to provide any updates or changes.

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