The RIC Report Investment Strategy | Global 10 September 2013 The ongoing search for yield Research Investment Committee MLPF&S Martin Mauro The ongoing search for yield Fixed Income Strategist We expect bond yields to rise further. The good news is that eventually bonds will MLPF&S once again provide an acceptable income stream. The bad news is that getting from here to there could bring losses on existing positions. Getting an acceptable yield Cheryl Rowan Portfolio Strategist still requires taking some price risk. MLPF&S Investors can find yield among a variety of equities Matthew Trapp, CFA For income seeking investors in the equity market, we favor stocks that are growing Investment Strategist their dividends, high-dividend-paying stocks based outside the US that may be less MLPF&S affected by rising US bond yields, and selected REITS. The tax-deferred income of Evan Richardson Master Limited Partnerships may also be an appropriate source of higher yield for Fixed Income Strategist investors. MLPF&S Guest column: REITs offer dividend yield plus growth See Team Page for Full List of Contributors Investors may benefit from seeking out those REITs most able to grow despite rising rates. In our view, the current growth environment favors REITs with well positioned development, accretive redevelopment opportunities and occupancy upside. This month’s guest column identifies those REIT opportunities favored by our fundamental analyst team. Fuel efficiency: planes, trains and automobiles New and existing technologies for airplanes, railroads, and autos can help improve fuel efficiency, cutting costs, saving energy, and reducing the environmental impact. We explore advances in technology, and identify companies engaged in creating more fuel efficiency in transportation. Click the image above to watch the video. Table of Contents Financial markets recap 2 The ongoing search for yield 3 American Innovation 8 Guest Column 11 RIC asset class views 14 Fixed Income, Econ, Commodities, Currencies: 15 views & risks Global equity markets: views & risks 16 Asset allocation for individual investors 17 Portfolio of the month 23 Stock lists 24 Research portfolios and stock lists 26 Global economic, interest rate, FX forecast 27 summaries Team Page 33 BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 30 to 32. Link to Definitions on page 29. 11307036 The RIC Report 10 September 2013 Financial markets recap Table 1: Total returns (%) August review As of 31 August 2013 Nearly all major financial markets lost Asset class 2012 1mo 3mo 12mo YTD 3yr2 5yr2 10yr2 Equity Indices (%, US dollar terms) ground during August. Fed tapering S&P 500 16.0 -2.9 0.7 18.7 16.2 18.4 7.3 7.1 concerns and the recent events in the NASDAQ Comp 17.5 -0.8 4.2 18.7 20.0 20.7 9.9 - Middle East were the primary influences. FTSE 100 15.2 -0.5 0.5 13.7 6.7 11.4 3.2 8.1 TOPIX 8.1 -2.1 0.2 23.3 14.0 8.0 1.7 4.5 Despite the decline in August, equities Hang Seng 27.7 -0.4 -1.2 15.6 -1.4 5.6 4.1 - DJ Euro Stoxx 50 20.2 -2.2 0.4 20.7 5.9 6.1 -2.8 5.6 have fared better than almost every MSCI EAFE 17.9 -1.3 0.2 19.2 8.5 9.8 2.1 8.1 other asset class year-to-date. MSCI Emerging Markets 18.6 -1.7 -6.9 0.9 -9.9 1.4 2.2 12.5 Size & Style (%, US dollar terms) Within US markets, the S&P 500 pulled Russell 2000 16.3 -3.2 3.1 26.3 20.0 20.5 8.0 8.8 back by 2.9% last month, lagging S&P 500 Citigroup Growth 14.6 -2.2 0.9 15.2 15.1 19.1 8.4 7.1 Treasuries (-1.3%), IG corporates (-0.7%) S&P 500 Citigroup Value 17.7 -3.6 0.4 22.9 17.3 17.8 6.2 7.0 and cash. Among the size and style S&P 600 Citigroup Growth 14.6 -1.5 5.3 25.8 22.3 23.7 10.1 10.6 buckets, growth indices generally S&P 600 Citigroup Value 18.2 -3.3 2.9 27.7 20.0 21.7 8.9 9.7 outperformed value indices, while large S&P 500 Sectors (%, US dollar terms) caps generally outperformed smaller cap Consumer Discretionary 23.9 -2.8 3.1 29.0 22.5 26.3 15.6 8.7 stocks. Small cap growth (+22.3%) Consumer Staples 10.8 -4.4 -0.8 14.3 14.6 17.6 10.3 9.7 remains in the lead year-to-date. Energy 4.6 -1.7 1.3 14.0 13.4 18.1 3.6 13.7 Financials 28.8 -5.0 -1.5 31.1 19.6 14.8 0.2 -0.3 Health Care 17.9 -3.5 2.8 29.5 24.5 23.2 10.9 7.9 Among US sectors, cyclicals generally lost Industrials 15.3 -2.5 1.8 23.7 17.3 18.8 6.7 7.8 less ground than the defensive sectors, Information Technology 14.8 -0.5 -0.1 5.2 10.2 17.0 8.4 6.8 particularly among the more globally Materials 15.0 0.0 1.1 15.9 8.7 13.1 3.3 8.4 exposed cyclical areas. Materials (0.0%), Telecom Services 18.3 -4.1 -2.1 3.8 6.2 15.7 8.3 8.5 Technology (-0.5%) and Energy (-1.7%) Utilities 1.3 -5.0 0.0 7.0 8.9 11.2 4.3 10.1 outperformed, while Utilities (-5.0%), BofA Merrill Lynch Global Research Bond Indices (%, US dollar terms) Financials (-5.0%) and Staples (-4.4%) 10-Year Treasury 4.2 -1.3 -4.6 -7.5 -6.8 2.3 5.0 5.0 lagged. 2-Year Treasury 0.3 -0.1 0.0 0.1 0.0 0.6 1.8 2.7 TIPS 7.3 -1.5 -4.6 -7.6 -8.7 3.8 4.2 5.4 Within fixed income sectors, August was Municipals* 7.3 -1.6 -5.8 -4.3 -5.5 2.5 4.6 4.8 US Corporate Bonds 10.4 -0.7 -2.7 -1.4 -3.3 4.4 7.2 5.6 a bad month across the board. Since the US High Yield Bonds 15.6 -0.6 -1.4 7.6 2.8 9.6 11.2 8.9 end of April the yield on the 10-year Emerging Market Corporate Bonds 15.8 -1.4 -3.9 0.1 -4.3 5.4 7.6 7.3 Treasury has risen by 1.30 percentage Emerging Market Sovereign Bonds 17.5 -2.3 -5.3 -2.7 -7.6 5.1 7.0 8.6 points. Preferreds 13.6 -2.1 -6.1 -1.9 -3.1 5.2 4.3 2.2 Foreign exchange** (%, in local currencies) In FX markets, the pound appreciated by US dollar 1.5 0.7 -1.0 7.8 6.3 1.0 0.3 -1.9 2.9%, while the euro came down by 1.0%. British pound 3.2 2.9 1.8 -3.0 -2.6 -0.1 -1.9 -1.6 The US dollar is up 6.3% year-to-date. Euro 0.9 -1.0 0.4 8.9 4.1 1.2 -1.7 0.8 Yen -11.0 0.5 2.4 -20.8 -11.4 -5.6 2.9 0.9 Within commodities, Brent crude oil Commodities** (%, US dollar terms) (+5.9%) and Gold (+5.3%) were among the CRB Index -3.4 2.5 3.3 -6.0 -1.3 3.3 -5.8 2.8 top performers. Gold 7.1 5.3 0.5 -17.5 -16.7 3.8 10.9 14.0 WTI Crude Oil -7.1 2.5 17.0 11.6 17.2 14.4 -1.4 13.1 Brent Crude Oil 3.5 5.9 13.6 -0.5 2.6 15.2 0.0 14.5 Alternative Investments† (%, US dollar terms) Hedge Fund - CS Tremont¹ 7.7 0.9 -0.4 8.7 4.6 6.0 3.6 6.6 Hedge Fund - HFRI Fund of Funds¹ 4.8 1.0 0.2 7.5 4.4 3.1 0.1 3.5 Notes: *Not tax adjusted. **BoE calculated effective FX indices. ¹Data is lagged by one month; 23yr, 5yr, and 10yr returns are annualized; CS AUM-weighted, HFRI equal-weighted; †AI data not comparable to other asset classes because of reporting delays, lack of standardized reporting, and survivorship and self selection biases. Crude oil prices are spot USD. Source: S&P, MSCI, Bloomberg, FactSet, BofAML Bond Indices (US Treasury Current 10yr, Current 2yr, Inflation-Linked; Muni Master, US Corp Master, US HY Master II, EM Corp Plus Index; EM External Debt Sovereign Index; US Preferred Stock, Fixed Rate). 2 The RIC Report 10 September 2013 The ongoing search for yield Cheryl Rowan Not so long ago, investors faced depressingly low yields on bonds.