May 2017
Global Investment Committee Themes
The Global Investment Committee (GIC), which meets monthly to review the economic and political environment and asset allocation models
for Morgan Stanley Wealth Management clients, also discusses favored long-term trends that it believes offer worthy investment
opportunities. Listed below are the GIC’s favored themes and rationales for investing in them. Please contact your Financial Advisor for
investments that track these themes.
Theme
Rationale
I. Continue to pursue Value
Opportunities Within Financials
The global economic recovery has shifted from asynchronous yet steady, to reflationary. Such a pickup in inflation
expectations has helped steepen yield curves globally, and the potential for a pendulum swing on industry regulation and
capital requirements could provide more leeway for lending growth and shareholder-friendly actions like share repurchase.
We prefer US capital market leaders but would overweight banks globally. While US commercial real estate/ REITs are
mature and unattractive at this point in the cycle, we see opportunities in insurance companies as well as global real estaterelated securities. We prefer US capital market leaders, but would overweight banks globally.
II. Japanese Equities to Ride
“Abenomics”
Japan continues to represent an emerging growth story. The reason: the confluence of monetary and fiscal stimulus with
political and structural reform. The GIC favors broad market exposure now that the yen is re-priced. We recommend splitting
between active and currency-hedged passive exposures.
III. Consider Getting More
Aggressive About Cash
Management
Over the past year the short end of the yield curve has steepened materially as both the Fed’s actions and their forward
guidance has driven rates over 1% inside a 2-year maturity. We think fixed income investors could exploit this opportunity
while potentially reducing volatility and exposure to rising rates by shortening duration and rolling up the curve with
1-month and 3-month CDs and Treasury bills.
IV. Opportunities in Emerging
Market Equities
EM currencies have re-priced and may no longer be vulnerable to Fed hikes. Global reflation, improvement in trade and the
potential for real yields to decline from here could set up a multi-year bull market.
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial
instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
GLOBAL INVESTMENT COMMITTEE
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May 2017
Global Investment Committee Themes
Theme
Rationale
V. Focus on Momentum
Strategies, Which Now Appear
Cheap
We are overweight momentum exposure, or equities that have outperformed over the last 6-12 months, which are currently
priced at a discount to market valuations for the first time in the 30-year data history. During previous periods when
momentum has been attractively valued, the stocks have had a record of outperforming. Driving these valuations are an
unusually high exposure to value sectors, including Financials, Materials, and Industrials, which complement traditional highgrowth companies. We believe this constituency may also benefit from our view of continuing global reflation.
VI: Manage Risk of Rising Rates
and Spread Widening: Use
Credit Long/Short and
Structured Credit Funds
The GIC believes interest rate normalization will most likely be a slow and measured affair, but will provide a meaningful
headwind for investors using bonds for principal preservation. In particular, as rates rise, the GIC expects prices of longerduration bonds to fall. Target zero or very low bond duration and minimal equity beta. Particularly attractive opportunities
are focused on CMBS and CLO credit niches. Market neutral total return strategies should benefit from the current active
security selection environment that the GIC envisions in 2016—delivering total return with bond-like volatility.
Recommended correlation range: 0.30 to 0.50 to S&P 500; volatility range: < 8%.
VII: Manage Broad Global
Volatility: Consider Global
Macro and Managed Futures
The GIC believes market volatility, which is at multi-decade lows, will normalize, potentially increasing volatility by as much
as 30% over the next three-to-five years across asset classes. Global slowdown fears could lead to additional volatility across
developed and emerging markets. Balanced growth investors should focus on adding to global macro and managed futures
strategies to mitigate this volatility. These strategies should deliver uncorrelated returns with normalization in the rates,
currency and commodities markets, our most opportunistic trends. Recommended correlation range: < 0.50 to S&P 500;
volatility range: < 12%.
VIII: Focus on Private Credit to
Capture the Illiquidity Premium
Private credit markets continue to be impacted by a deleveraging banking system, financial austerity and limited non-bank
sources of capital. The current supply/demand imbalance in private lending provides a reasonably rich illiquidity premium
and presents attractive risk-adjusted investment opportunities for patient capital. Also, relative value credit hedge fund
managers can take advantage of movements across yield curves and credit spreads based on the present macro picture and
supply/demand dynamics.
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial
instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
GLOBAL INVESTMENT COMMITTEE
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May 2017
Hedged Strategy Definitions
Credit Long/Short This strategy consists of a core holding of long credits hedged at all times with varying degrees of short sales of bonds and/or index options. Some managers maintain a substantial portion
of assets within a hedge structure and commonly employ leverage.
Equity Long/Short This strategy consists of a core holding of long equities hedged at all times with varying degrees of short sales of stock and/or index options. Some managers maintain a substantial
portion of assets within a hedge structure and commonly employ leverage.
Event Driven Investment managers in this strategy maintain positions in companies currently or prospectively involved in corporate transactions of a wide variety including but not limited to mergers,
restructurings, financial distress, tender offers, shareholder buybacks, debt exchanges, security issuance or other capital structure adjustments. Security types can range from most senior in the capital
structure to most junior or subordinated, and frequently involve additional derivative securities. Event-driven exposure includes a combination of sensitivities to equity markets, credit markets and
idiosyncratic, company-specific developments. Investment theses are typically predicated on fundamental characteristics (as opposed to quantitative), with the realization of the thesis predicated on a
specific development exogenous to the existing capital structure.
Relative Value Investment managers in this strategy maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities.
They employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivatives or other security types.
Risk Considerations
International investing entails greater risk, as well as greater potential rewards compared to US investing. These risks include political and economic uncertainties of foreign countries as well as the risk of
currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.
Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. Alternative investments are suitable only for eligible,
long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may
increase the volatility and risk of loss. Alternative Investments typically have higher fees than traditional investments. Investors should carefully review and consider potential risks before investing. Certain
of these risks may include but are not limited to: Loss of all or a substantial portion of the investment due to leveraging, short-selling, or other speculative practices; Lack of liquidity in that there may be no
secondary market for a fund; Volatility of returns; Restrictions on transferring interests in a fund; Potential lack of diversification and resulting higher risk due to concentration of trading authority when a
single advisor is utilized; Absence of information regarding valuations and pricing; Complex tax structures and delays in tax reporting; Less regulation and higher fees than mutual funds; and Risks
associated with the operations, personnel, and processes of the manager. As a diversified global financial services firm, Morgan Stanley Wealth Management engages in a broad spectrum of activities
including financial advisory services, investment management activities, sponsoring and managing private investment funds, engaging in broker-dealer transactions and principal securities, commodities
and foreign exchange transactions, research publication, and other activities. In the ordinary course of its business, Morgan Stanley Wealth Management therefore engages in activities where Morgan
Stanley Wealth Management’s interests may conflict with the interests of its clients, including the private investment funds it manages. Morgan Stanley Wealth Management can give no assurance that
conflicts of interest will be resolved in favor of its clients or any such fund. All expressions of opinion are subject to change without notice and are not intended to be a forecast of future events or results.
Further, opinions regarding Alternative Investments expressed herein may differ from the opinions expressed by Morgan Stanley Wealth Management and/or other businesses/affiliates of Morgan Stanley
Wealth Management. This is not a "research report" as defined by NASD Conduct Rule 2711 and was not prepared by the Research Departments of Morgan Stanley Smith Barney LLC or Morgan Stanley &
Co. LLC or its affiliates. Certain information contained herein may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or the performance of a fund may
differ materially from those reflected or contemplated in such forward-looking statements. Clients should carefully consider the investment objectives, risks, charges, and expenses of a fund before
investing. Interests in alternative investment products are offered pursuant to the terms of the applicable offering memorandum, are distributed by Morgan Stanley Smith Barney LLC and certain of its
affiliates, and (1) are not FDIC-insured, (2) are not deposits or other obligations of Morgan Stanley or any of its affiliates, (3) are not guaranteed by Morgan Stanley and its affiliates, and (4) involve
investment risks, including possible loss of principal. Morgan Stanley Smith Barney LLC is a registered broker-dealer, not a bank. In Consulting Group’s advisory programs, alternative investments are
limited to US-registered mutual funds, separate account strategies and exchange-traded funds (ETFs) that seek to pursue alternative investment strategies or returns utilizing publicly traded securities.
Investment products in this category may employ various investment strategies and techniques for both hedging and more speculative purposes such as short-selling, leverage, derivatives and options,
which can increase volatility and the risk of investment loss. Alternative investments are not suitable for all investors. As a diversified global financial services firm, Morgan Stanley Wealth Management
engages in a broad spectrum of activities including financial advisory services, investment management activities, sponsoring and managing private investment funds, engaging in broker-dealer
transactions and principal securities, commodities and foreign exchange transactions, research publication, and other activities. In the ordinary course of its business, Morgan Stanley Wealth Management
therefore engages in activities where Morgan Stanley Wealth Management’s interests may conflict with the interests of its clients, including the private investment funds it manages. Morgan Stanley
Wealth Management can give no assurance that conflicts of interest will be resolved in favor of its clients or any such fund. Alternative investments involve complex tax structures, tax inefficient investing,
and delays in distributing important tax information. Individual funds have specific risks related to their investment programs that will vary from fund to fund. Clients should consult their own tax and legal
advisors as Morgan Stanley Wealth Management does not provide tax or legal advice.
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial
instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
GLOBAL INVESTMENT COMMITTEE
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May 2017
Risk Considerations (cont’d)
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii)
governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities
and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other
disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.
The value of fixed income securities will fluctuate and, upon a sale, may be worth more or less than their original cost or maturity value. Bonds are subject to interest rate risk, call risk, reinvestment risk,
liquidity risk, and credit risk of the issuer.
High yield bonds (bonds rated below investment grade) may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk, price volatility,
and limited liquidity in the secondary market. High yield bonds should comprise only a limited portion of a balanced portfolio.
Duration, the most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio. The longer the duration, the more sensitive the bond or
portfolio would be to changes in interest rates.
Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax (AMT). Also, municipal bonds acquired in the secondary
market at a discount may be subject to the market discount tax provisions, and therefore could give rise to taxable income. Typically, state tax-exemption applies if securities are issued within one’s state of
residence and, if applicable, local tax-exemption applies if securities are issued within one’s city of residence. The tax-exempt status of municipal securities may be changed by legislative process, which
could affect their value and marketability.
The majority of $25 and $1000 par preferred securities are “callable” meaning that the issuer may retire the securities at specific prices and dates prior to maturity. Interest/dividend payments on certain
preferred issues may be deferred by the issuer for periods of up to 5 to 10 years, depending on the particular issue. The investor would still have income tax liability even though payments would not have
been received. Price quoted is per $25 or $1,000 share, unless otherwise specified. Current yield is calculated by multiplying the coupon by par value divided by the market price.
The initial interest rate on a floating-rate security may be lower than that of a fixed-rate security of the same maturity because investors expect to receive additional income due to future increases in the
floating security’s underlying reference rate. The reference rate could be an index or an interest rate. However, there can be no assurance that the reference rate will increase. Some floating-rate securities
may be subject to call risk.
The market value of convertible bonds and the underlying common stock(s) will fluctuate and after purchase may be worth more or less than original cost. If sold prior to maturity, investors may receive
more or less than their original purchase price or maturity value, depending on market conditions. Callable bonds may be redeemed by the issuer prior to maturity. Additional call features may exist that
could affect yield.
Some $25 or $1000 par preferred securities are QDI (Qualified Dividend Income) eligible. Information on QDI eligibility is obtained from third party sources. The dividend income on QDI eligible preferreds
qualifies for a reduced tax rate. Many traditional ‘dividend paying’ perpetual preferred securities (traditional preferreds with no maturity date) are QDI eligible. In order to qualify for the preferential tax
treatment all qualifying preferred securities must be held by investors for a minimum period – 91 days during a 180 day window period, beginning 90 days before the ex-dividend date.
Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Companies paying dividends can reduce or cut payouts at any time.
REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as
interest rate changes and market recessions
Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.
Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less
liquid than other securities and more sensitive to the effect of varied economic conditions.
Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.
Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks.
Principal is returned on a monthly basis over the life of a mortgage-backed security. Principal prepayment can significantly affect the monthly income stream and the maturity of any type of MBS,
including standard MBS, CMOs and Lottery Bonds.
Asset-backed securities generally decrease in value as a result of interest rate increases, but may benefit less than other fixed-income securities from declining interest rates, principally because of
prepayments.
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial
instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
GLOBAL INVESTMENT COMMITTEE
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May 2017
Mortgage Backed Securities and Collateralized Loan Obligations -Principal is returned on a monthly basis over the life of a mortgage-backed security. Principal prepayment can significantly affect
the monthly income stream and the maturity of any type of MBS, including standard MBS, CMOs and Lottery Bonds. Yields and average lives are estimated based on prepayment assumptions and
are subject to change based on actual prepayment of the mortgages in the underlying pools. The level of predictability of an MBS/CMO’s average life, and its market price, depends on the type of
MBS/CMO class purchased and interest rate movements. In general, as interest rates fall, prepayment speeds are likely to increase, thus shortening the MBS/CMO’s average life and likely causing its
market price to rise. Conversely, as interest rates rise, prepayment speeds are likely to decrease, thus lengthening average life and likely causing the MBS/CMO’s market price to fall. Some
MBS/CMOs may have “original issue discount” (OID). OID occurs if the MBS/CMO’s original issue price is below its stated redemption price at maturity, and results in “imputed interest” that must be
reported annually for tax purposes, resulting in a tax liability even though interest was not received. Investors are urged to consult their tax advisors for more information.
Disclosures
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes
only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide
to future performance.
The material has been prepared for informational purposes only and is not an offer or recommendation to buy, hold or sell or a solicitation of an offer to buy or sell any security, sector or other financial
instrument, or to participate in any trading strategy. It has been prepared without regard to the individual financial circumstances and objectives of individual investors. The appropriateness of a particular
investment or strategy will depend on an investor's individual circumstances and objectives.
This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We and our third-party data
providers make no representation or warranty with respect to the accuracy or completeness of this material. Past performance is no guarantee of future results.
This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is not intended to, and should not, form a primary basis for
any investment decisions that you may make. Morgan Stanley Wealth Management is not acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or
under section 4975 of the Internal Revenue Code of 1986 as amended ("Code") in providing this material.
Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice. Each client should always consult his/her personal tax and/or legal advisor
for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.
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Recipients are required to comply with any legal or contractual restrictions on their purchase, holding, sale, exercise of rights or performance of obligations under any securities/instruments transaction.
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© 2017 Morgan Stanley Smith Barney LLC. Member SIPC.
Past performance is no guarantee of future results. Estimates of future performance are based on assumptions that may not be realized. This material is not a solicitation of any offer to buy or sell any security or other financial
instrument or to participate in any trading strategy. Please refer to important information, disclosures and qualifications at the end of this material.
GLOBAL INVESTMENT COMMITTEE
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