Markets In Motion, March 15th, 2016,

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Markets In Motion, March 15th, 2016,

Macro Backdrop:

After nearly 2 years of declines, commodities have staged their largest rally since 2012, with the S&P Goldman Sachs Commodity Index gaining 16% from its February low. This rally has unsurprisingly coincided with relative weakness in the US dollar—the Broad Trade Weighted US Dollar Index has declined by 4%, its second largest decline since 2012. Our portfolios have been well positioned for this reversal, having added significant foreign currency exposure, commodity-sensitive equity exposure in Canada and Australia, and an allocation to gold.

The US dollar rally that has taken place in the last two years has been the main proponent of tighter global financial conditions. A gradually weakening dollar—as we have seen since late January—has the reverse effect. A weaker dollar stimulates credit growth by boosting inflation and inflation expectations. It also benefits emerging market countries significantly, both through its positive impact on commodity prices and by lowering the debt burden of EM sovereigns and companies that have borrowed in dollars. Lastly, a weaker US dollar allows for a weaker Chinese RMB without necessitating an overt devaluation against the US dollar, something that has roiled global markets twice in the past year.

Despite the global benefits of a weaker US dollar, we’ve found ourselves in a classic prisoner’s dilemma—many foreign central banks, most notably the Bank of Japan (BOJ) and the European Central Bank (ECB), deem it in their best interest to pursue a weaker currency of their own. Last week, the ECB increased its asset purchase program and took interest rates further negative in its latest attempt to stave off deflation and stimulate credit growth. Risk assets rallied on the news, but the euro failed to weaken. Our portfolios were well positioned to capture this rally, with a large European equity allocation and a recently added position in European high yield bonds.

GTA Portfolio Positioning

Our equity positions are limited to developed market countries and our fixed income positions are well-diversified. Overall, our GTA portfolio holds 52% fixed income, 13% US equities, 28% international equities, 5% alternatives, and 2% cash. We have large allocations to US treasuries and US preferred stock, smaller allocations to US investment grade corporate bonds and dollar denominated emerging market bonds, and we have recently added a position in European high yield bonds. We favor developed international equities and are avoiding emerging market equities. We also hold a position in gold, which has benefitted from increased market uncertainty.

Our fixed income holdings provide us with global diversification, while avoiding the US high yield market and international developed sovereign bond market. We hold positions in long-duration US treasuries, investment grade corporate bonds, preferred stock, and dollar-denominated emerging market debt. We have recently added a position in European high yield bonds. Improving credit conditions and aggressive policy from the ECB should support European corporate credit, and we also expect to benefit from a strengthening euro.

Our US equity exposure is limited to low volatility equities, giving us broad exposure while minimizing drawdown risk by focusing on conservative sectors and companies. This increases our relative exposure to non-cyclical sectors and has served us well—outperforming the S&P 500 by 6.0% since we added the position in November.

We hold a position in low volatility international developed market (Europe, Australasia, and Far East) equities. This gives us diversified international equity and currency exposure, while minimizing drawdown risk by focusing on conservative sectors and companies.

We hold a position in unhedged Eurozone equities which should benefit from improving credit conditions, aggressive policy from the ECB, and a strengthening euro.

We have sold our position in currency-hedged Japanese equities. Incremental monetary policy accommodation implemented by the BOJ has not been successful in weakening the Yen, and we expect that to continue to be true. We have maintained our position in unhedged Japanese equities, as we believe they continue to represent good value.

We hold a position in Canadian equities and have recently initiated a position in Australian equities. We expect a weaker US dollar to provide some relief to commodity producers, and Canadian and Australian equities and currencies are a conservative way to participate.

We hold a position in gold. A weaker dollar and easier Fed policy, along with elevated volatility, should support gold. Additionally, as an asset with low correlations to most others, it should lower overall portfolio volatility.

*Emerging Markets allocation overlaps with regional allocations

^Excluding GTA’s 59% fixed income, alternative, and cash positions

**Individual account allocations may differ slightly from model allocations.

JFG Team
JAForlines, LLC
Investment Management

Past performance is no guarantee of future results. The material contained herein as well as any attachments is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies, opportunities and, on occasion, summary reviews on various portfolio performances. Returns can vary dramatically in separately managed accounts as such factors as point of entry, style range and varying execution costs at different broker/dealers can play a role. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts are inherently limited and should not be relied upon as an indicator of future results. There is no guarantee that these investment strategies will work under all market conditions, and each advisor should evaluate their ability to invest client funds for the long-term, especially during periods of downturn in the market.

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