March 2, 2016
RiverFront’s 2016 Asset Allocation Strategy: Picking
and Choosing Among Attractive Alternatives
Michael Jones, CFA
CHAIRMAN AND CHIEF
INVESTMENT OFFICER
Financial markets were very volatile in the final weeks of 2015 and thus far in 2016,
valuations on most asset classes have dropped significantly. In light of this new data,
®
we updated all of our Price Matters models to reflect recent market moves and then
recalculated our asset allocation strategies based upon these updated capital market
assumptions. Although this process prolonged the publication of our new strategic
allocation models, it allowed us to incorporate the more attractive expected returns
and downside risk estimates resulting from recent market declines. One challenge we
faced in setting our new asset allocation strategy was choosing which asset classes to
overweight when, in our opinion, many offered attractive risk and potential return
characteristics.
RIVERFRONT’S DYNAMIC STRATEGIC ALLOCATION PROCESS
RiverFront updates its Price Matters® estimates of expected return and downside risk
for a wide array of global asset classes throughout the year. We incorporate these
capital market assumptions into our Mean Reversion Optimization (MRO) process and
update our portfolios’ asset allocation strategies at least once a year.
Deva Meenakshisundaram, FRM
CHIEF OF QUANTITATIVE ANALYTICS
MRO calculates asset allocation strategies for five investment time horizons ranging
from 3 years to more than 10 years. Under MRO, risk is defined as the probability of
losing money; the objective of the process is to seek to minimize the probability of loss
at each of the five defined time horizons. Our allocation strategies are stress-tested to
minimize losses under severe historical economic and market scenarios (e.g., the
Great Depression, 1970’s oil embargos, 2008 financial crisis) and then optimized to
deliver maximum potential upside returns during typical positive market scenarios.
There is no guarantee that our assumptions for strategic allocations will protect
against loss of investments.
Price Matters® is the heart of RiverFront’s MRO process and utilizes current valuation to determine an asset class’s
potential return and downside risk. Price Matters® return estimates fall as prices rise and increase as prices fall,
consistent with historical market behavior. Downside risks are also a function of valuation, since overvalued asset classes
tend to have the most downside risk during market declines. Thus, RiverFront’s MRO imposes a “buy low/ sell high”
discipline: when prices are low, a higher proportion of risky assets are allowed into the portfolio. As prices rise, their
weighting is reduced.
SUMMARY CONCLUSIONS FOR 2016 ASSET ALLOCATION STRATEGY
®
Comparing our 2015 Price Matters capital market assumptions with our updated 2016 calculations, we conclude that
equity asset classes, high yield bonds and investment grade corporate bonds all appear substantially more attractive than
was the case in early 2015. With both equity and corporate bond asset classes offering improved risk and potential return
characteristics, our 2016 asset allocation process produced a largely unchanged stock/bond allocation mix.
Corporate bonds have fallen precipitously in recent months due in large part to selling pressure from sovereign wealth
funds. The yield advantage of 7-10 year investment grade corporate bonds relative to Treasuries has more than doubled
to about 2.3% and these bonds offer yields of about 4.0%, as of 2/26/2016. We believe that negative interest rates across
THE ART & SCIENCE OF DYNAMIC INVESTING.
SEPARATE ACCOUNTS
MUTUAL FUNDS
– Page 1 of 10 –
ETF PORTFOLIOS
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
many of the world’s most important financial markets (e.g. the Eurozone, Japan, and Switzerland) reduce the likelihood of
dramatic rate increases in the US and make 4% yields extremely attractive on a risk-adjusted basis. As a result, we have
added investment grade corporate bonds with maturities between 5 and 10 years to our more conservative asset
allocation strategies. Although we believe 7-10 year bonds are slightly more attractive, we are targeting a modestly
shorter index to allow room for tactical adjustment as rates change during the year.
Equity asset classes have also suffered from sovereign wealth fund selling, and most equity asset classes appear about
®
15% cheaper on our Price Matters framework when compared to the valuation levels used during our 2015 asset
allocation process. Because they have cheapened almost in tandem, allocation across equity asset classes has changed
only modestly in our new models.
Although our weighting in developed international equities is roughly unchanged, for our 2016 asset allocation strategy we
have embraced a consistent 50/50 hedged/unhedged strategy across all portfolios with international holdings. According
®
to our Price Matters calculations, unhedged international is currently about 40% below trend and hedged is about 20%
below trend. Based on this data, we believe that both components of our developed international strategy are priced to
provide significant potential incremental return when compared to alternative equity asset classes. By incorporating a
component of hedged international across all of our strategies, we seek to decrease the risk of our international
overweight relative to US dollar-based investment alternatives, while still providing what we believe to be incremental
upside return potential. There is no guarantee that hedging strategies will protect investments against losses and may
cause greater losses had hedging not been implemented. Throughout the coming year, we plan to continue to alter our
hedging ratio around the 50/50 strategic target using our dynamic hedging process.
We believe that the 20% decline in small cap stocks seen over the past 3 months has made this asset class sufficiently
attractive to be brought back into our Asset Allocation Strategy for the first time in 2 years. To make way for the new small
cap allocation, emerging market equities were reduced and our 2% strategic weighting to MLPs in 2015 was eliminated.
Although these two asset classes are also well below their long-term trends, they suffer from short track records and
extreme volatility that create unpredictability in the calculation of appropriate capital market assumptions. The uncertainty
“penalty” applied to emerging market equities makes them less attractive than small cap equities. With respect to MLPs,
we believe the unprecedented correlation to oil prices seen over the past two years reduces their usefulness as a
separate asset class. Going forward, we intend to use these investments as a part of our stock selection strategies in the
energy sector rather than allocating to them as an asset class.
Even under severe default and credit loss scenarios, high yield bonds appear to offer extremely attractive potential returns
at current yields. We increased our weighting to this asset class in our shorter timeframe strategies, which are
Conservative Income and Moderate Growth & Income. In our portfolios with longer time horizons, and therefore greater
allocations to equities and risk, the attractiveness of equities precluded an increased high yield allocation.
(SEE NEXT PAGE)
1214 East Cary Street, Richmond, Virginia 23219
– Page 2 of 10 –
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
Strategic asset allocations do not represent actual current portfolio weightings; they are a strategic tool used by RiverFront.
CIB — Conservative Income Builder
MGI — Moderate Growth & Income
DEI — Dynamic Equity Income
GA — Global Allocation
GG —Global Growth
*Please see the end of this Strategic View for more important disclosure information about the asset classes discussed above.
1. Strategies seeking higher returns generally have a greater allocation to equities. These strategies also carry higher risks and are
subject to a greater degree of market volatility.
2. Master Limited Partnerships (MLP) investing includes risks such as equity- and commodity-like volatility. Also, distribution
payouts sometimes include the return of principal and, in these instances, references to these payouts as "dividends" or "yields"
may be inaccurate and may overstate the profitability/success of the MLP. Additionally, there are potentially complex and adverse
tax consequences associated with investing in MLPs. This is largely dependent on how the MLPs are structured and the vehicle used
to invest in the MLPs. It is strongly recommended that an investor consider and understand these characteristics of MLPs and
consult with a financial and tax professional prior to investment.
3. Using a currency hedge or a currency hedged product does not insulate the portfolio against losses.
FIXED INCOME STRATEGY: IMPROVED POTENTIAL RETURNS AND LOWER EXPECTED RISKS
Historical data and our calculations illustrate that over longer investment horizons, the return on fixed income investments
is largely determined by the starting yield – low starting yields produce low long-term returns and high starting yields
produce high long-term returns. With the yield on the average investment grade bond as measured by the Barclays US
Aggregate Bond Index averaging about 2.25% for the past 3 years, we saw little reason to accept the risk of rising rates
and shorter term capital losses in exchange for such modest long-term returns. Two changes since our last asset
allocation update in February 2015 have caused us to add 5-10 year maturity corporate bonds to our more conservative
portfolios:
 Yields and therefore potential returns on investment grade corporate bonds have risen sharply in recent months.
 In our view, the unprecedented adoption of negative interest rates in Europe and Japan has lowered the potential
for dramatic increases in US interest rates and therefore reduced downside risks in US investment grade bonds.
1214 East Cary Street, Richmond, Virginia 23219
– Page 3 of 10 –
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
Investment Grade Corporate Bonds: Yield Matters
We believe that declining oil prices are forcing the sovereign wealth funds (SWFs) of major oil-producing countries (e.g.
Saudi Arabia, Norway, Kuwait) to liquidate
investment assets in order to fund their
ballooning budget deficits. These
governments accumulated substantial
petrodollar reserves during the past
decade of relatively high oil prices, and the
collapse in oil prices is forcing them to sell
these assets in order to maintain their
current levels of government spending.
Like many investors, low interest rates in
recent years encouraged SWFs to
decrease their allocation to government
bonds and increase their weighting in
corporate debt and equities. Both of these
asset classes have suffered significant
price declines in recent months as SWFs
have been forced to liquidate these
investments, with intermediate 7-10 year
maturity corporate bonds suffering price
declines of about 7% (see the adjacent
chart).
These sharp price declines have pushed
yields on these bonds to approximately
4% as of 2/26/2016 (see the adjacent
chart). In addition, corporate bond prices
have dropped even as Treasury prices
have rallied and Treasury yields declined.
Thus, the yield advantage over Treasuries
of 7-10 year investment grade corporate
bonds has now widened to more than
2.3% as of 2/26/2016, a level typically
seen only during periods of economic
recession.
We believe that the extraordinary widening in Source: RiverFront Investment Group, FactSet. Past performance is no guarantee of future
corporate bond spreads presents a unique
results. Please see the end of this Strategic View for important disclosure information.
investment opportunity. If economic growth stabilizes or accelerates, as we expect, then the Fed will continue its gradual
pace of tightening. Although Treasury yields will likely rise in this scenario, a clearly improving economy would push
investment grade bond spreads back to the levels seen before the SWF liquidations. We believe that Treasury yields
could rise as much a full percentage point (100 basis points), and investment grade corporate bonds still provide positive
price returns.
Conversely, if our economic outlook is wrong and the economy weakens in 2016, Treasury yields are likely to decline.
Since investment grade corporate bond spreads already anticipate a disappointing economic environment, these bonds
would appreciate along with Treasuries and provide a degree of downside protection to our more conservative portfolios,
in our view.
1214 East Cary Street, Richmond, Virginia 23219
– Page 4 of 10 –
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
Given the potential volatility in interest rates during 2016, we prefer the 5-10 year maturity US corporate bonds rather than
the slightly more attractive 7-10 year maturity US corporate bonds. This modestly shorter benchmark will allow our fixed
income team more flexibility to tactically adjust strategy as interest rates fluctuate throughout the year.
Negative Interest Rates: It’s Different this Time
The second dramatic change seen in fixed income markets in the last year is the adoption of negative interest rate
policies (NIRP) across three of the world’s most important financial markets (the Eurozone, Japan and Switzerland).
Investors in financial assets offering negative interest rates are locking in an assured loss of principal. For example, a 1
year investment at a -1% yield would return 99% of the original investment at maturity.
Economists have long contended that zero is the bottom for interest rates and that negative rates are impossible, but (as
the old saying goes) anything that has actually happened is probably possible. Negative interest rates are now an
established fact across much of the global economy, and they represent another bold experiment on the part of central
bankers to fight deflationary pressures arising from heavy debt burdens and excess capacity in oil and other commodities.
Federal Reserve Chairman Janet Yellen conceded in a recent Congressional testimony that the Fed is investigating the
legality of NIRP in the US, and the Fed has instructed US banks to prepare contingency plans for NIRP as a part of their
annual stress tests.
NIRP cannot improve the long-term return potential of fixed income assets – long term returns are determined by the
starting yield. However, the reality of NIRP in many competing financial markets and the potential for NIRP in the US may
decrease the magnitude of potential future interest rate increases, and therefore the downside risks of high quality bonds.
High Yield Bonds: Priced for Significant Defaults and Appear Attractive
Declining oil prices and fears of recession have hit the high yield bond market very hard in recent months, with prices as
measured by the BofA Merrill Lynch High Yield Master II Index falling by nearly 15% from January 2015 to February 26,
2016. The yield on this index jumped to nearly 10% on 2/26/2016, and the yield spread to Treasuries has approached
levels typically associated with economic recessions. Yields on short maturity high yield climbed even higher to more
than 11% (as of 2/26/2016), and price declines on these shorter maturity bonds were almost as severe as on longer
maturity alternatives.
Despite the much higher yields offered by high yield bonds, our allocation to high yield is increasing only in our more
conservative portfolios. For our longer term portfolios, equity asset classes have also gotten more attractive based on our
Price Matters® framework, and as a result, the MRO process does not suggest decreasing the allocation to these asset
classes for investors with longer timeframes.
The severe stress on many high yield issuers caused by falling oil and materials prices prompted us to assume a 12%
rate of default over the next year. This 12% default rate is approximately equal to the maximum annual default rate seen
in the 2008/2009 recession and about 3 times the default forecasts of most credit rating agencies. We then assumed that
defaults would remain at an elevated rate of 6% for the next 4 years, which is about 50% higher than average, and results
in cumulative defaults much higher than those experienced during the 2008 financial crisis. Even under these extremely
pessimistic assumptions, our calculations indicate that high yield bonds offer some of the best risk and reward
characteristics among the major asset classes.
Although our allocation to high yield is increasing only in our more conservative portfolios, our security selection is likely to
change across all of our portfolios in 2016. In 2015, our credit selection and sector allocation focused on capital
preservation and conservative credit underwriting. With lower quality bonds currently offering attractive returns even under
severe default assumptions, we may choose to adopt a more aggressive security selection strategy in 2016. High-yield
securities are subject to greater risk of loss of principal and interest, including default risk, than higher-rated securities.
EQUITY STRATEGY: STEADY AS SHE GOES (WITH A FEW MINOR COURSE ADJUSTMENTS)
The combination of disappointing 2015 returns and precipitous 2016 declines has left most equity asset classes
approximately 15% cheaper on our Price Matters® framework than valuation levels used during our 2015 asset allocation
1214 East Cary Street, Richmond, Virginia 23219
– Page 5 of 10 –
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
process. Normally, such a substantial decrease in equity asset classes’ valuations would prompt an increased equity
allocation, but comparable decreases in investment grade and high yield bond markets have resulted in a roughly
unchanged stock/bond allocation mix.
International Equity: Applying a Balanced Hedging Approach
Our international equity weightings are roughly unchanged from last year’s relatively aggressive weightings, although we
are altering our hedging strategy. The price declines experienced in international equities in recent weeks have pushed
this asset class to more than 39% below its long term trend. As shown in the chart below, historical periods beginning with
such cheap valuations produced average returns of nearly 20% over the subsequent 5 years. Past performance is no
guarantee of future results.
MSCI EAFE 5-year
Real Total Return
Index (local
currency) vs.
Distance from Trend
Source: RiverFront Investment Group, CRSP*. Data as of 1/31/2016. The MSCI EAFE Index measures the equity market performance of developed
markets, excluding the US & Canada. The index consisted of indices from 22 developed markets. MSCI presents the data for this index in terms of
US dollars and in terms of local currencies. The chart above reflects index data in terms of local currencies. See the end of this article for
important disclosure information.
For our 2016 asset allocation strategy, we have embraced a consistent currency hedging strategy of 50/50
hedged/unhedged across all portfolios with international allocations. In 2015, our shorter timeframe portfolios with
international allocations had 100% hedged allocation targets, while our longer term portfolios had unhedged strategic
targets. While the above chart shows the unhedged international is currently 39% below trend, hedged international is
also undervalued at about 20% below trend (see Appendix for Price Matters® chart). By incorporating hedged international
in our portfolios with international allocations, we seek to lower the currency risk of our international overweight relative to
US dollar-based investment alternatives, while still providing incremental upside return potential. We further believe that
we can improve upon a 50/50 hedged/unhedged strategy through our dynamic currency hedging process, which allows us
to increase or decrease our hedge ratio around the 50% strategic target. Please see the end of this article for a discussion
of the risks associated with currency hedging.
Small Cap: Attractive Valuation at Last
Since most equity asset classes cheapened by a relatively consistent 15% over the last year, changes across equity asset
classes were also fairly modest. After two years of underperformance, we believe that small cap equities have worked off
their overvaluation, and we are thus reintroducing them to our portfolios. To make room for this very volatile asset class in
our allocations, emerging market equities were slightly reduced in most allocation strategies with international allocations,
1214 East Cary Street, Richmond, Virginia 23219
– Page 6 of 10 –
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
and our 2% weighting in MLPs was removed. Emerging markets continue to fall below trend on our Price Matters®
models but have yet to fall enough relative to other asset classes and relative to their own history to prompt an increased
allocation. Historically, emerging market equities have not pulled out of a bear market until they have reached about 50%
below trend on Price Matters® models.
MLPs: A Security Selection Rather Than Strategic Allocation Decision
We have removed MLPs from our strategic allocation, despite believing them to be an attractive investment opportunity.
The correlation with oil that MLPs have shown over the past two years is inconsistent with their historical behavior, and we
believe it suggests that MLPs may be evolving into just another way to invest in the energy/commodity industry. Since
MLPs no longer appear to behave as a separate and distinct asset class, we intend to invest in these companies as a part
of our security selection within the oil sector and tactical allocation processes rather than through a strategic weighting.
PUTTING IT ALL TOGETHER – POTENTIAL RETURNS AT OUR INVESTMENT HORIZONS
®
The primary goal of RiverFront’s Price Matters and Mean Reversion Optimization processes is to generate positive,
inflation-adjusted returns over the investor’s chosen timeframe, even under extremely adverse environments. Thanks to
improved valuations across most asset classes, we believe our 2016 asset allocation strategies offer better prospects for
positive inflation-adjusted returns at their investment horizons. In rapidly rising interest rate scenarios, our shortest time
frame strategy (CIB) could suffer appreciable losses over a 3-year horizon. Additionally, our 5-year horizon strategy
®
(MGI) faces risk of modest losses in a small number of potential outcomes in our Price Matters scenarios. Although we
would use tactical strategies to mitigate these risks, we believe that investors who require protection from interest rate
risks must adopt a longer investment horizon (at least 5 years) and accept more short-term volatility, as illustrated in the
simulation below.
Source: RiverFront Investment Group; based on 2016 Strategic Allocation Simulation. Please see below for important disclosure information.
Although the primary aim of our MRO process is to achieve real returns after accounting for inflation, we recognize that
investors tend to focus on nominal portfolio returns. We believe the substantial cheapening in equity and corporate bond
asset classes has also improved the prospects for positive nominal returns.
1214 East Cary Street, Richmond, Virginia 23219
– Page 7 of 10 –
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
The charts above represent the return distribution results for the 1,000 scenarios at the end of the specified time period based on
the mix of asset classes that are in each model. The high in the charts is the 99th Percentile; the low is the 1 Percentile of the
simulation results at the time horizons listed above.
The analysis illustrated above models asset classes, not investment products. As a result, the actual experience of an investor in a
given investment product (e.g., separately managed accounts, mutual funds, unified managed accounts) may differ from the range
generated by the simulation, even if the broad asset allocation of the investment product is similar to the one being modeled.
Possible reasons for divergence include, but are not limited to, active management by the manager of the investment product or
the costs, fees, and other expenses associated with the investment product. Active management for any particular investment
product — the selection of a portfolio of individual securities that differs from the broad asset classes modeled in the analysis —
can lead to the investment product having higher or lower returns than the range used in this analysis.
The analysis relies on certain assumptions, combined with a return model that generates a wide range of possible return scenarios
for these assumptions. Despite our best efforts, there is no certainty that the assumptions for the model will accurately estimate
asset class return rates going forward. As a consequence, the results of the analysis should be viewed as approximations, and users
should allow a margin of error and not place too much reliance on the apparent precision of the results.
Nominal Rate of Return is the amount of money generated by an investment before factoring in expenses such as taxes,
investment fees, and inflation. Real Return is the annual percentage return realized on an investment adjusted for changes in
prices due to inflation, but does not factor in expenses such as taxes or investment fees.
Please see the end of this report for important information regarding this simulation data.
Calculating Expected Returns & Downside Risk
The RiverFront MRO process uses Monte Carlo simulations to produce potential outcomes based on probability and
historical experience. For equity asset classes, long-term expected real returns are modeled as a function of distance
from trend, potential inflation environments and, for certain asset classes, fixed income returns. Long-term expected
returns for fixed income asset classes are based on the simulated inflation environment and the historical relationship
between inflation and the level of interest rates. In the Real Return Distribution Simulation shown above, the expected
returns incorporate these scenarios. These return expectations are used by RiverFront to assist in portfolio allocation and
security selection. RiverFront relies on historical data to create these simulations; however, there is no guarantee that
these outcomes will occur.
The above assumptions about long-term returns are combined with the shorter term volatility characteristics of the asset
class to generate monthly returns for each asset class over a 10-year horizon. The cumulative returns for every asset
class at various time horizons (1 year, 3 year, etc.) are restricted to ensure asset class returns conform to historical norms
given the initial valuation level (e.g., below-trend valuation generates higher maximum and minimum returns than the
same asset class starting at an over-trend valuation).
1214 East Cary Street, Richmond, Virginia 23219
– Page 8 of 10 –
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
This process is repeated for 1000 potential outcomes. The asset allocation strategies are optimized to provide maximum
upside potential across the 1000 simulations, subject to a maximum loss restriction in the worst-case simulated scenarios.
This loss restriction is applied at the investment horizon in simulated outcomes that resemble the worst-case outcomes of
history (e.g., Great Depression, 1970s oil shocks, financial crises of 2008, etc.).
RiverFront’s MRO begins by simulating potential inflation environments. This simulation closely resembles US historical
inflation with two exceptions. First, our simulation’s average inflation rate is lower than the 3.4%, 100-year average. This
lower assumption reflects the Federal Reserve’s explicit inflation target of 2.0–2.5%, and our belief that the internet and
globalization have increased price competition and reduced inflation pressures. Based on its response to the 2008
financial crises, we also assume that the Fed will not allow extended deflation and would counter any deflationary
pressures within 2 to 3 years.
These inflation assumptions do not have an impact on our equity downside risk estimates – equities are assumed to
experience crashes comparable to those of the Great Depression and the 1970’s period of high inflation. However,
lowering the average inflation rate in the simulation increases the average returns calculated by our MRO. Real returns
for equities from a given starting valuation have historically been above average in a 2.0–2.5% inflation environment. In
addition, the lower inflation assumptions boost the real return of bonds, because a lower average inflation rate is
subtracted from nominal returns. Thus, average real returns for both bonds and equities in the simulation are
slightly higher than the average returns in comparable valuation periods from history.
Potential worst case losses for all asset classes are assumed to be fairly close to their worst historical returns. Maximum
potential equity returns are reduced by our assumption that an equity bubble (like those in 1929, 1970, and 1999) is
extremely unlikely, and maximum bond returns are reduced by our assumption that an extended period of deflation will
not occur.
To see the 2015 Strategic Allocation weightings for the RiverFront strategies, please contact your Financial Advisor. Financial Professionals can
visit the Advisor Website at www.riverfrontig.com. Financial Professionals who have not registered for the RiverFront Advisor Website, can do so
on the public website, or by contacting 804-549-4800.
Important Disclosures
* Calculated based on data from CRSP 1925 US Indices Database ©2014 Center for Research in Security Prices (CRSP®), Booth School of Business, The
University of Chicago.
Used as a source for cap-based portfolio research appearing in publications, and by practitioners for benchmarking, the CRSP Cap-Based Portfolio Indices
Product data tracks micro, small, mid- and large-cap stocks on monthly and quarterly frequencies. This product is used to track and analyze performance
differentials between size-relative portfolios.
CRSP ranks all NYSE companies by market capitalization and divides them into ten equally populated portfolios. Alternext and NASDAQ stocks are then
placed into the deciles determined by the NYSE breakpoints, based on market capitalization. The series of 10 indices are identified as CRSP 1 through CRSP
10, where CRSP 10 has the largest population and smallest market-capitalization. CRSP portfolios 1-2 represent large cap stocks, portfolios 3-5 represent
mid-caps and portfolios 6-10 represent small caps.
Past performance is no guarantee of future results.
RiverFront’s Price Matters® discipline compares inflation-adjusted current prices relative to their long-term trend to help identify extremes in valuation.
Technical analysis is based on the study of historical price movements and past trend patterns. There are no assurances that movements or trends can or
will be duplicated in the future.
Strategies seeking higher returns generally have a greater allocation to equities. These strategies also carry higher risks and are subject to a greater degree
of market volatility.
Modified duration follows the concept that interest rates and bond prices move in opposite directions. This formula is used to determine the effect that a
100-basis-point (1%) change in interest rates will have on the price of a bond.
Yield to worst is calculated on all possible call dates. It is assumed that prepayment occurs if the bond has call or put provisions and the issuer can offer a
lower coupon rate based on current market rates. If market rates are higher than the current yield of a bond, the yield to worst calculation will assume no
prepayments are made, and yield to worst will equal the yield to maturity. The assumption is made that prevailing rates are static when making the
calculation. The yield to worst will be the lowest of yield to maturity or yield to call (if the bond has prepayment provisions); yield to worst may be the
same as yield to maturity but never higher.
RiverFront Investment Group, LLC, is an investment advisor registered with the Securities Exchange Commission under the Investment Advisors Act of 1940.
The company manages a variety of portfolios utilizing stocks, bonds, and exchange-traded funds (ETFs). Opinions expressed are current as of the date shown
and are subject to change. They are not intended as investment recommendations.
1214 East Cary Street, Richmond, Virginia 23219
– Page 9 of 10 –
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
Principal Risks
Buying commodities allows for a source of diversification for those sophisticated persons who wish to add this asset class to their portfolios and who are
prepared to assume the risks inherent in the commodities market. Any commodity purchase represents a transaction in a non-income-producing asset and is
highly speculative. Therefore, commodities should not represent a significant portion of an individual’s portfolio.
Dividends are not guaranteed and are subject to change or elimination.
ETFs are subject to substantially the same risks as those associated with the direct ownership of the securities comprising the index on which the ETF is
based. Additionally, the value of the investment will fluctuate in response to the performance of the underlying index. ETFs typically incur fees that are
separate from those fees charged by RiverFront. Therefore, investments in ETFs will result in the layering of expenses.
Using a currency hedge or a currency hedged product does not insulate the portfolio against losses. RiverFront portfolios that invest in non-U.S. securities
may employ a dynamic currency hedging strategy. Because of this, these portfolios may have lower returns than an equivalent non-currency hedged
investment when the component currencies are rising relative to the U.S. dollar. As such, contracts to sell foreign currency will generally be expected to
limit any potential gain that might be realized by the portfolio if the value of the hedged currency increases. In addition, although the portfolios seek to
minimize the impact of currency fluctuations on returns, the use of currency hedging will not necessarily eliminate exposure to all currency fluctuations.
Hedging against a decline in the value of a currency does not eliminate fluctuations in the value of a portfolio security traded in that currency or prevent a
loss if the value of the security declines. Moreover, it may not be possible for the portfolios to hedge against a devaluation that is so generally anticipated
that RiverFront is not able to contract to sell the currency at a price above the devaluation level it anticipates.
Investments in international and emerging markets securities include exposure to risks such as currency fluctuations, foreign taxes and regulations, and the
potential for illiquid markets and political instability.
Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain
emerging market countries.
Master Limited Partnerships (MLP) investing includes risks such as equity- and commodity-like volatility. Also, distribution payouts sometimes include the
return of principal and, in these instances, references to these payouts as "dividends" or "yields" may be inaccurate and may overstate the
profitability/success of the MLP. Additionally, there are potentially complex and adverse tax consequences associated with investing in MLPs. This is
largely dependent on how the MLPs are structured and the vehicle used to invest in the MLPs. It is strongly recommended that an investor consider and
understand these characteristics of MLPs and consult with a financial and tax professional prior to investment.
Diversification does not ensure a profit or protect against a loss.
There are special risks associated with an investment in real estate and Real Estate Investment Trusts (REITs), including credit risk, interest rate
fluctuations and the impact of varied economic conditions.
Small-, mid- and micro-cap companies may be hindered as a result of limited resources or less diverse products or services and have therefore historically
been more volatile than the stocks of larger, more established companies.
In a rising interest rate environment, the value of fixed-income securities generally declines.
High-yield securities (including junk bonds) are subject to greater risk of loss of principal and interest, including default risk, than higher rated securities.
Index Definitions
Barclays US Aggregate Bond Index is an unmanaged index that covers the investment grade fixed rate bond market with index components for government
and corporate securities, mortgage pass-through securities, and asset-backed securities. The issues must be rated investment grade, be publicly traded, and
meet certain maturity and issue size requirements.
The BofA Merrill Lynch US High Yield Master II Index is a commonly used benchmark index for high-yield corporate bonds. It is administered by Merrill
Lynch. The Master II is a measure of the broad high yield market, unlike the Merrill Lynch BB/B Index, which excludes lower-rated securities.
The BofA Merrill Lynch 7-10 Year US Corporate Index is a subset of The BofA Merrill Lynch US Corporate Index, including all securities with a remaining
term to final maturity greater than or equal to 7 years and less than 10 years.
The BofA Merrill Lynch US Corporate Index tracks the performance of US dollar-denominated investment-grade corporate debt publicly issued in the US
domestic market.
Important Simulation Disclosures

Extreme market movements may occur more often than in the model.

Some asset classes have relatively short histories. Actual long-term results for each asset class may differ from our assumptions, with those for classes
with limited histories potentially diverging more.

Market crises can cause asset classes to perform similarly, lowering the accuracy of our return assumptions and diminishing the benefits of
diversification (that is, using many different asset classes) in ways not captured by the analysis. As a result, returns actually experienced by the
investor may be more volatile than those used in our analysis.

The model does not take into consideration short-term correlations among asset class returns (correlation is a measure of the degree in which returns
are related or dependent upon each other). It does not reflect the average periods of bull and bear markets, which can be longer than those modeled.

The analysis does not use all asset classes. Other asset classes may provide different returns or outcomes than those used.

Taxes and investment fees are not taken into account.

The analysis illustrated above models asset classes, not investment products. As a result, the actual experience of an investor in a given investment
product (e.g., separately managed accounts, mutual funds, unified managed accounts) may differ from the range generated by the simulation, even if
the broad asset allocation of the investment product is similar to the one being modeled. Possible reasons for divergence include, but are not limited
to, active management by the manager of the investment product or the costs, fees, and other expenses associated with the investment product.
Active management for any particular investment product—the selection of a portfolio of individual securities that differs from the broad asset
classes modeled in the analysis—can lead to the investment product having higher or lower returns than the range used in this analysis.
Copyright ©2016 RiverFront Investment Group. All rights reserved.
1214 East Cary Street, Richmond, Virginia 23219
– Page 10 of 10 –
TEL
804) 549-4800
RIVERFRONTIG.COM
APPENDIX: RiverFront’s 2016 Asset Allocation Strategy
PRICE MATTERS® ASSET CLASS EVALUATION
Large Cap Stocks
Below-trend returns in 2015 coupled with sharp price declines thus far in 2016 have pushed large cap US stocks slightly
below the long term trend. Based on our Price Matters® methodology, we believe that current valuations are close enough
to fair value that investors could expect a long-term average real return of between 6% and 7%. Downside risks are
approximately equal to long-term averages, which is a slight decrease in risk from 2015.
Source: RiverFront Investment Group, CRSP*. Data from Jan 1926 through Jan 2016. Past performance is no guarantee of future
results. It is not possible to invest directly in an index.
* Calculated based on data from CRSP 1925 US Indices Database ©2015 Center for Research in Security Prices (CRSP®), Booth School
of Business, The University of Chicago.
Used as a source for cap-based portfolio research appearing in publications, and by practitioners for benchmarking, the CRSP CapBased Portfolio Indices Product data tracks micro, small, mid- and large-cap stocks on monthly and quarterly frequencies. This
product is used to track and analyze performance differentials between size-relative portfolios.
CRSP ranks all NYSE companies by market capitalization and divides them into ten equally populated portfolios. Alternext and
NASDAQ stocks are then placed into the deciles determined by the NYSE breakpoints, based on market capitalization. The series of
10 indices are identified as CRSP 1 through CRSP 10, where CRSP 10 has the largest population and smallest market-capitalization.
CRSP portfolios 1-2 represent large cap stocks, portfolios 3-5 represent mid-caps and portfolios 6-10 represent small caps.
THE ART & SCIENCE OF DYNAMIC INVESTING.
SEPARATE ACCOUNTS
APPENDIX
MUTUAL FUNDS
P A G E |1
ETF PORTFOLIOS
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
Developed International Stocks
At nearly 40% below trend, developed
international stocks are approaching the 50%
record distance below trend seen during the
height of the 2008 financial crisis and the
inflation-plagued late 1970s and early 1980s.
Based on our Price Matters® methodology, we
believe international stocks will recover closer
to trend, offering an appealing combination of
upside potential and downside protection. In
our view, this makes developed international
the most attractive equity asset class that we
evaluated.
Chart Source: RiverFront Investment Group, MSCI. Data from Jan 1970 through Jan 2016. Past performance is no guarantee of
future results. It is not possible to invest directly in an index. The MSCI EAFE Index measures the equity market performance of
developed markets, excluding the US & Canada. The index consisted of indices from 22 developed markets. MSCI presents the data
for this index in terms of US dollars and in terms of local currencies. The chart above reflects index data in terms of US dollars.
Currency Hedged International Equities
Since the breakdown of the Bretton Woods fixed currency exchange system in 1971, currency fluctuations have provided
a substantial amount of the return and incremental risk from international equity investments. A long-term declining trend
in the value of the dollar has boosted returns for US investors. Hedging out these currency gains reduces the trend rate
of return for hedged international equities to
about 4.7% and shrinks its distance from
trend to about -20%. However, hedged
international remains cheaper than US
alternatives and compensates for lower
potential return than unhedged alternatives
through its lower downside risks. A currency
hedging strategy allows our allocation
strategies to maintain a higher international
equity weighting with less potential volatility
than a completely unhedged strategy would
typically provide. There are, however, risks
associated with any currency hedging
strategy, and it is important that all investors
take time to understand those risks described
in the disclosures section on page 8 of this
Strategic View.
Chart Source: RiverFront Investment Group, MSCI. Data from Jan 1970 through Jan 2016. Past performance is no guarantee of
future results. It is not possible to invest directly in an index. The MSCI EAFE Index measures the equity market performance of
developed markets, excluding the US & Canada. The index consisted of indices from 22 developed markets. MSCI presents the data
for this index in terms of US dollars and in terms of local currencies. The chart above reflects index data in terms of local
currencies.
1214 East Cary Street, Richmond, Virginia 23219
APPENDIX
P A G E |2
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
Emerging Markets
There are only about 26 years of emerging market data and this comparatively short time is characterized by repeated
bubbles and busts. These characteristics make it difficult to rely on our calculated average trend return and valuation
relative to trend. Thus, we place an uncertainty penalty on emerging market downside risk assumptions. Based on these
conservative risk assumptions, we see value only for longer term investment horizons.
Source: RiverFront Investment Group, MSCI. Data from Jan 1988 through Jan 2016. Past performance is no guarantee of future
results. It is not possible to invest directly in an index. The MSCI Emerging Markets Index measures equity market performance of
emerging markets. The Index consists of 21 emerging market country indices.
Small and Mid-Cap
After spending most of the past two years overvalued, the sharp price declines seen in recent months have brought both
of these asset classes back to more attractive valuation levels. Mid-cap stocks are about fair value, and we believe
investors could expect average returns and downside risk from this asset class. At 9% below trend, small-cap stocks are
beginning to look fairly attractive to us and have been added in varying proportions across all of RiverFront’s 2016
Strategic Asset Allocations.
Source: RiverFront Investment Group, calculated based on data from CRSP 1925 US Indices Database ©2015Center for Research in
Security Prices (CRSP®), Booth School of Business, The University of Chicago. Data from Jan 1926 through Jan 2016. Past
performance is no guarantee of future results. It is not possible to invest directly in an index.
1214 East Cary Street, Richmond, Virginia 23219
APPENDIX
P A G E |3
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
Dividend Payout
Using the same CRSP data that we use for our US indexes, we created an index of the 300 largest dividend payers. The
dollar amount of the dividend determines its weighting in the index. The result is an index with a faster growth trend and
less volatility than the broader large-cap stock universe.
Dividend stocks offer only slightly better value than large-cap stocks based on distance from trend statistics, but they offer
superior long-term trend returns, according to our models. Upside potential versus downside risk is still favorable in the
next one to three years, in our view, and more attractive than the broader large-cap stock index on a risk-adjusted basis.
Chart Source: RiverFront Investment Group, calculated based on data from CRSP 1925 US Indices Database ©2015Center for
Research in Security Prices (CRSP®), Booth School of Business, The University of Chicago. Data from Feb 1926 through Jan 2016.
Past performance is no guarantee of future results. It is not possible to invest directly in an index.
Dividend Payout Index: Using the same CSRP* data that we use for our US indexes, we have created an index of the 300 largest
dividend payers in which the dollar amount of the dividend determines its weighting in the index. The result is an index with faster
trend growth and less volatility than the broader large cap stock universe. Upside potential versus downside risk is still favorable
in the next one to three years, in our view, and more attractive than large cap stocks on a risk adjusted basis. Equally, from this
starting point, we believe investors with 5- to 10-year time horizons have strong odds of beating inflation. Dividends are not
guaranteed and are subject to change or elimination.
1214 East Cary Street, Richmond, Virginia 23219
APPENDIX
P A G E |4
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
Fixed Income
Long-term fixed income returns are primarily determined by their starting yield. For example, historical periods that began
with 9% yields produced average nominal returns of 9% over the next ten years, and periods that began with 5% yield
produced 5% returns, as shown in the chart below. Over long periods, bonds mature at face value and any capital gains
or losses disappear, leaving interest income as the primary source of return. With 10-year Treasury bonds offering yields
of about 1.7% (as of 2/26/2016) and shorter maturity Treasuries offering even less than that, we believe history suggests
that government bond market returns will be low over the coming years. Past performance is no indication of future
results.
Three of the most important global financial markets adopted negative interest rates over the past year (Eurozone, Japan
and Switzerland), defying conventional wisdom that zero represents the practical bottom for interest rates. In our view, the
increasing adoption of negative rates may keep US bond yields lower than would otherwise be the case. If so, we believe
lower rates represent only a tactical opportunity for treasury bonds, since over the long run, low rates lead to low nominal
returns. By contrast, the 4%+ yields now available in investment grade corporate bonds look relatively attractive in a
world increasingly characterized by negative interest rates.
Chart Source: RiverFront Investment Group, Center for Research in Security Prices (CRSP®), Booth School of Business, The
University of Chicago.
We believe that with yields approaching 11% (as of 2/26/2016), short-maturity high yield bond are the most attractive fixed
income asset class. In addition to providing some protection from rising rates, short-maturity high yield bonds provide
better credit visibility than longer maturity alternatives, in our view. Thus, we believe we can increase exposure to this
asset class without significantly increasing portfolio risk. High-yield securities are subject to greater risk of loss of principal
and interest, including default risk, than higher rated securities. In a rising interest rate environment, the value of fixed
income securities generally declines.
1214 East Cary Street, Richmond, Virginia 23219
APPENDIX
P A G E |5
TEL
804) 549-4800
RIVERFRONTIG.COM
THE STRATEGICVIEW
A PUBLICATION OF RIVERFRONT INVESTMENT GROUP
Low Volatility
We divided the large cap portion of the CRSP
stock universe into volatility categories, thereby
creating an 86-year time series when added to
existing S&P 500 data.
We find the results very revealing. In general,
we believe that Low Volatility stocks are more
attractive as their trend is faster than large
caps, and their volatility is lower. However, at
current prices, Low Volatility remains
significantly above trend.
Chart Source: RiverFront Investment Group,
calculated based on data from CRSP 1925 US
Indices Database ©2015Center for Research in
Security Prices (CRSP®), Booth School of Business, The University of Chicago. Data from Feb 1927 through Jan 2016. Past
performance is no guarantee of future results. It is not possible to invest directly in an index.
Low Volatility Index: Attempts to replicate the S&P 500® Low Volatility Index, using the CRSP Daily Historical Returns Series and
Historical S&P Series. It is constructed by inverse volatility weighting the 100 least volatile stocks in the S&P 500 (meaning the
least volatile stocks get the highest weights in the index). From 1926-1957, CRSP deciles 1-4 are used for the universe of stocks
from which the index is constructed. From 1957 on, the S&P 500’s historical holdings are used. It is not possible to invest directly
in an index.
High Volatility
The High Volatility Index is constructed with the
most volatile (highest beta) stocks in the S&P
500. This asset class is typically attractive only
when extremely undervalued, since it offers
above average risks and below average long
term trend returns. High Volatility played a
major role in our 2013 strategies, but has not
been a part of our portfolios since 2014. High
Volatility stocks have underperformed
significantly since being removed from the
portfolio, but have not yet reached valuation
levels that would allow us to accept the
significant downside risk associated with this
asset class.
Chart Source: RiverFront Investment Group, calculated based on data from CRSP 1925 US Indices Database ©2015Center for
Research in Security Prices (CRSP®), Booth School of Business, The University of Chicago. Data from Feb 1927 through Jan 2016.
Past performance is no guarantee of future results. It is not possible to invest directly in an index.
High Volatility Index: Attempts to replicate the S&P 500® High Beta Index, using the CRSP Daily Historical Returns Series and
Historical S&P Series. Beta measures volatility relative to a benchmark. The index is constructed by beta weighting the 100 highest
beta stocks in the S&P 500 (meaning the highest beta stocks get the highest weights in the index). From 1926-1957, CRSP deciles 14 are used for the universe of stocks from which the index is constructed. From 1957 on, the S&P 500’s historical holdings are
used. A result greater than 1.0 implies that a security is more volatile than the benchmark; a result less than 1.0 suggests that the
security is less volatile than the benchmark. Betas may change over time.
1214 East Cary Street, Richmond, Virginia 23219
APPENDIX
P A G E |6
TEL
804) 549-4800
RIVERFRONTIG.COM