CompassJune 2014

Wealth and Investment Management

A question of growth

Tactical Asset Allocation Review: Sell in May?

Contents

A question of growth 2

Tactical Asset Allocation Review: Sell in May? 4

US Equities and Bonds ........................................................................................................... 4

Non-US Developed Markets Equities .................................................................................. 5

REITs ......................................................................................................................................... 6

Emerging Markets Equities and Bonds ............................................................................... 6

Commodities ........................................................................................................................... 7

Alternative Trading Strategies .............................................................................................. 7

Interest rates, bond yields, and commodity and equity prices in context 10

Barclays’ key macroeconomic projections 12

Global Investment Strategy Team 13

Compass June 2014 1

A question of growth Dear clients and colleagues,

Economic growth and its attendant issues are (and always will be) on the minds of investors, as recent economic data in the US appeared to move in the opposite direction of what was expected. GDP declined 1% in the first quarter, although a stream of other economic data points portended a much different result.1 Indeed, the original consensus expectation for first quarter growth was on the order of 1.2%.2 A brutal winter, impacting home buying and business spending, was the culprit for the disappointment. A look at the components of GDP reveals reasons for optimism. Healthy consumer spending (which was revised upward) along with the decline in inventories suggest a re-stocking is in the offing.3 This inventory build and the unleashing of pent-up demand should help revitalize growth in the remainder of the year.

Although it was hardly the beginning of the year investors anticipated, prospects for the balance of 2014 remain good. The consumer appears to be in fine form, and business spending seems to be stirring, as evidenced by the spate of corporate acquisitions announced this year. Furthermore, corporate profitability in the US does not map to a stagnant economy. To wit, first quarter profits of the S&P 500 Index grew 4.7% on revenue growth of 2.6%. (Figure 1) Indeed, performance of the market itself foots with earnings growth advancing 4.3% this year.

Our expectations for the US market are unbowed by the rough start. We expect overall growth for the year to be on the order of 2.5% to 3%. A quarter in which growth is above 3.5% seems likely, as buyers transact purchases postponed in the first quarter. As growth improves, more investor attention will shift to when the Fed will start to raise short-term interest rates and whether signs of upward price pressure in the economy are cause for unease. These are legitimate concerns for sure, but they are not imminent threats to prosperity.

Figure 1: US Q1 2014 earnings have been strong

Figure 2: The euro zone is expected to return to growth

Source: Bloomberg as of May 27, 2014 Past performance does not guarantee future results. An investment cannot be made directly in a market index.

Source: Bloomberg as of May 27, 2014

1 Source: Bloomberg, as of May 29, 2014 2 Source: Bloomberg, as of April 30, 2014 3 Source: Bloomberg, as of May 29, 2014

-0.9

1.92.6

0.8

2.62.2

3.7 4.1

8.8

4.7

-2

0

2

4

6

8

10

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014

Percent

S&P 500 Sales YoY Growth S&P 500 Earnings YoY Growth

2.01.6

-0.7-0.4

1.11.5

2.5

1.8

2.8

1.9

2.5

3.1

-1.0

0.0

1.0

2.0

3.0

4.0

2010 2011 2012 2013 2014 2015

Euro Area US

Consensus Estimate

Real GDP YoY, %

Hans F. Olsen, CFA CIO, Americas

Compass June 2014 2

Growth in the euro zone remains sluggish: first quarter GDP advanced 0.2% with inflation within the bloc running at 0.7%4 – less than half the European Central Bank's (ECB) target of 2%. The bloc's struggle to sustain forward economic momentum is creating a chorus of concern over the threat of a deflationary spiral taking hold. These fears are prompting calls for a more muscular approach from Mr. Draghi and Co. to use the central bank's balance sheet to assist in generating economic growth. June may see the ECB’s move to negative deposit rates and/or some form of targeted liquidity measures as a nudge to banks in the periphery to beef up lending to small and medium-sized businesses. In spite of this muted economic backdrop and little to cheer on the corporate earnings front, European equities have continued to forge ahead, perhaps aided by reasonably benign outcomes from both the Ukrainian presidential and European parliamentary elections. We still see core Europe as the region with the most upside for corporate earnings, and economic growth is expected to be positive this year and next. (Figure 2) Within Developed Markets Equities, we would urge investors to put their money in Europe and the US.

The consumer-led rebound in the UK leaves GDP close to pre-crisis peaks. In addition to ongoing retail strength, business investment rose in the first quarter, a sign that the recovery is becoming more balanced and sustainable.5 Of the major western economies, the UK is probably most ready for monetary normalization, and the US is a close second. With this in mind, we suggest investors tread carefully and lightly in the bond market, and look to the equity markets in developed economies for exposure to the pickup in growth.

Hans F. Olsen, CFA Chief Investment Officer, Americas

4 Source: Bloomberg, as of May 15, 2014 (GDP), as of April 30, 2014 (Inflation) 5 Source: Bloomberg, as of May 22, 2014

Compass June 2014 3

Tactical Asset Allocation Review: Sell in May? US equity and bond markets sent mixed messages in May. Economic

data and earnings came in strong, but bond yields reflected a lower-for-longer outlook. Meanwhile, equities continued to march higher. European and Japanese markets remained central bank driven, as uncertainty in the emerging world led to divergent returns.

US Equities and Bonds In May, US markets continued to be a case of “he said, she said”. Equity and fixed income markets witnessed the same events, but had starkly different interpretations. Stocks asserted that an economic rebound is underfoot, while bonds argued that growth, although moving in the right direction, is insufficient to warrant a rise in rates.

Data released this month signaled a pickup in economic activity. Housing starts and building permits surged, and leading economic indicators pointed to a second quarter bounce. First quarter earnings results echoed the same refrain, exceeding expectations in both the large- and smid-cap sectors. The unemployment rate dropped to its lowest level since the start of the recession, and inflation hit the Fed’s elusive 2% target. Consumer and business confidence ticked upward in response.6

Equities were content with this progress, but bonds demanded more. Equity price increases persisted, while 10-year Treasury yields stayed stubbornly in place around 2.5%.7 With yields flat to falling in May, US fixed income performance continued to confound consensus expectations. Increased demand from short covering amplified price increases, as well.

Whose side do we take?

Bond bulls point to a slowing in the growth rates of a handful of economic data, including retail sales, consumer credit, and employment, as evidence of an economy still in need of Federal life support. They argue that inflation, particularly in light of slow wage growth, is not rising aggressively enough to compel an increase in interest rates. Their thinking seems in line with the more dovish tone from the Federal Reserve under the helm of Ms. Yellen. Despite improvements in headline data, the new Chair is looking under the hood for symptoms of weakness, such as stubbornly high long-term unemployment, to avoid prematurely raising rates.

Although these arguments are not without merit, the evidence tilts the scale toward equity-oriented optimists. Economic indicators and earnings growth appear healthy, and easing loan standards and increased capital expenditures should be fodder for continued acceleration. Further, broad equity markets were remarkably resilient during technical corrections in overvalued sectors (technology, biotechnology, and social media), pointing to underlying strength. With reasonable valuations, robust earnings growth, and an improving economy at its back, this equity market has legs.

6 Source: Bloomberg, as of May 2014 7 Source: Bloomberg, as of May 2014

Laura Kane, CFA +1 212 526 2589

laura.kane@barclays.com

Same data, different stories

Compass June 2014 4

We recommend skating to where the puck will be. Improving economic data and rising inflation are building pressure for the eventual increase in interest rates. Rising rates will hurt fixed income investors, especially those with passive, long-duration exposure. (Figure 1) We remain Underweight or Neutral most fixed income assets for this reason.

The exception is US High-Yield Bonds, where the combination of higher coupons and low default risk makes the asset class more attractive than its peers. Within this space, we prefer actively managed credit-related vehicles based on our concern about deteriorating credit quality in the loan market.

We are Neutral on US Large Caps, and continue to expect a mid-to-high single-digit return for the asset class this year. We maintain our Overweight position in US Smid Cap Equities, as this domestically-exposed sector should benefit most from the continued US economic expansion.

Figure 1: Longer duration, more price risk

Source: Barclays Investment Bank, as of May 13, 2014. Past performance does not guarantee future results. An investment cannot be made directly in a market index. Index durations are represented by the following: 1-3 Yr by Barclays 1–3 Year US Treasury; 5-7 Yr by Barclays 5–7 Year US Treasury; TIPS by Barclays US TIPS; 7-10 Yr by Barclays 7–10 Year US Treasury; 25+ Yr by Barclays 25+ Year US Treasury; High Yield Bonds by Barclays US High Yield; MBS by Barclays MBS; Emerging Markets Debt (EMD) by Barclays EM Hard Currency Aggregate; Broad Market by Barclays US Aggregate; Corporate by Barclays US Aggregate Corporate; Munis by Barclays Municipal Bond

Non-US Developed Markets Equities Euro zone equities were resilient in May, as investors weighed disappointing first quarter GDP growth against the increased potential for European Central Bank (ECB) action.8 Germany was the main driver of modest growth in the euro zone as Italy and the Netherlands contracted, while France stagnated. Deflation concerns are increasing pressure on the ECB to provide additional stimulus, which likely would dampen the euro and lift equity prices.

Meanwhile, Japan’s economy grew 5.9% in the first quarter, the fastest pace since 2011. Both capital expenditures and consumer spending in advance of the sales tax increase contributed to the growth surge.9 Although the impact of the tax increase on future sales is yet to be seen, other indicators point to equity market strength in the region. Corporate

8 Source: Bloomberg, as of May 28, 2014. Euro zone equities represented by Euro Stoxx 50. 9 Source: Bloomberg, as of May 2014 Past performance does not guarantee future results. An investment cannot be made directly in a market index.

-1.9

-5.7-6.9

-7.8

-18.1

-4.0-5.3 -5.9 -5.6

-7.1 -7.2

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

1-3 Yr 5-7 Yr TIPS 7-10 Yr 25+ Yr High Yield

MBS EMD Broad Market

Corp Munis

Duration

Bond Price Change for 1% Increase in Rates (Duration, %)

Pressure is mounting for the ECB to act

Compass June 2014 5

profits are strong; the Bank of Japan continues its monetary easing; and Prime Minister Abe’s investor-friendly reform agenda, including corporate tax cuts and a new governance code, should stimulate growth and investment.

We remain Overweight Non-US Developed Markets Equities, as valuations are compelling, and policy actions could be catalysts for outperformance over the long term.

REITs REITs have been the best performing asset class year-to-date, returning over 14%.10 Persistently low interest rates have driven yield-starved investors to high-dividend defensive sectors this year. (Figure 2) Apartment REITs benefitted from increased demand due to the slow recovery in the single-family housing market this year. This trend may reverse as job growth and equity prices give prospective buyers the confidence to purchase new homes. Data released this month showed a healthy pickup in home sales coming out of the harsh winter. Office REITs performed well this month, as major market property values have risen due to foreign investor interest.11

Although REITs probably will keep their gains, the tailwind from lower-than-expected US rates is likely to abate later in the year. Hence, we are keeping our Neutral position on the asset class.

Emerging Markets Equities and Bonds Emerging Markets Equities were the strongest performer this month, returning approximately 4.5%.12 Russian and Indian stocks were the standouts. (Figure 3) Russian equities rallied from earlier lows as President Vladimir Putin took steps to ease tensions with the Ukraine ahead of the presidential election. Putin’s less-aggressive stance reduced the probability of further sanctions in the near future. Meanwhile, in India, the Bharatiya Janata Party (BJP), under the leadership of Prime Minister Narendra Modi, secured a parliamentary

Figure 2:REITs have been supported by declining yields

Figure 3:Russian and Indian stocks performed well in May

Source: Bloomberg as of May 27, 2014 Past performance does not guarantee future results. An investment cannot be made directly in a market index.

Source: Bloomberg as of May 27, 2014 Past performance does not guarantee future results. An investment cannot be made directly in a market index.

10 Source: Bloomberg, as of May 28, 2014. REITs represented by FTSE NAREIT US – ALL Equity REITs 11 Source: Bloomberg, as of May 2014. 12 Source: Bloomberg, as of May 28, 2014. Emerging Markets Equities represented by MSCI EM. Past performance does not guarantee future results. An investment cannot be made directly in a market index.

2.4

2.5

2.6

2.7

2.8

2.9

3

3.1

1100011200114001160011800120001220012400126001280013000

Dec-13 Jan-14 Feb-14 Mar-14 Apr-14

Yield, %Index Value

FTSE NAREIT All Equity REITs Index - LHS

10 Year US Treasury Yield - RHS

-30%

-20%

-10%

0%

10%

20%

30%

Jan-14 Feb-14 Mar-14 Apr-14 May-14

MSCI Russia MSCI India

Year-to-date Return

Election results spurred rally in Indian equities

Compass June 2014 6

majority in recent national elections. Stocks rallied on the victory, reflecting investor optimism that Modi will deliver on campaign promises of reforms aimed at spurring growth and taming inflation.

We maintain a Neutral weight on Emerging Markets Equities, and continue to expect differentiated returns. Although the conflict in Eastern Europe has de-escalated, the potential for flare-ups remains. We remain cautious on markets most exposed to tensions in the region, and prefer those with less geopolitical risk and healthy balance sheets.

The Russian ruble and Indian rupee reversed their slide on positive developments during the month. Increased currency stability was a tailwind for Emerging Markets Bonds. The lower-than-expected rates in the US did not hurt either. The asset class added 2.2% in May for a total return of 4.5% year-to-date. A return to positive performance is welcome after Emerging Markets Bonds’ rough start this year: they dropped 5% in January before retracing those losses and returning to positive territory by the end of the first quarter.13

We are Underweight Emerging Market Bonds due to an unfavorable risk-return profile in light of geopolitical and currency risks.

Commodities After rallying at the start of the year, commodity returns flattened out in May, ending the month down 220 basis points.14 Agricultural commodities slumped from early year highs. For example, coffee fell from April peaks, as Brazilian growers and dealers exported stockpiled beans to capitalize on higher prices. Meanwhile, industrial metals posted modest returns. Nickel prices surged in May due to supply concerns stemming from an export ban by Indonesia and the potential for more sanctions by the US and Europe against Russia, which is home to the biggest producer of the refined metal.

Despite the recent strength in Commodities, we remain Underweight the asset class. This year’s tailwinds, particularly in the Agricultural sector, are likely to be temporary. Further, an increase in US interest rates may make Commodities less attractive as a portfolio diversifier.

Alternative Trading Strategies Our Overweight to most Alternative Trading Strategies is a winning hedge against anticipated variability in asset prices, as markets adjust to the decreased pace of US monetary stimulus. Given muted market returns, Long/Short Equity and Event Driven hedge funds outperformed in the first quarter. Meanwhile, Global Macro funds suffered due to the drop in interest rates. Managed Futures funds, where we are Underweight, have underperformed this year, as current central bank policy does not bode well for trend followers.15

Figure 4 details our portfolio positioning across all risk profiles. Figure 5 displays the year-to-date returns for all sub asset classes by weighting, and Figure 6 shows our tactical tilts for the Moderate portfolio on a sub asset class level.

13 Source: JPMorgan, JPMorgan GBI-EM Total Return Diversified Index. Past performance does not guarantee future results. An investment cannot be made directly in a market index. 14 Source: Bloomberg, as of May 28, 2014. Commodities represented by DJ UBS Commodity TR. 15 Source: Bloomberg, as of April 30, 2014. Global Macro Strategies by Barclay Hedge Fund Global Macro Index; Relative Value Strategies by HFRI Relative Value Index; Event Driven Strategies by Dow Jones CS Event Driven Index; Managed Futures by Dow Jones CS Managed Futures Index

The upbeat trend for Emerging Markets Bonds continues…

Commodity returns are flattening

Compass June 2014 7

Figure 4: Strategic Asset Allocation (SAA) and Tactical Asset Allocation (TAA) by risk profile: asset class*

Low Medium Low Moderate Medium High High

Asset class SAA TAA SAA TAA SAA TAA SAA TAA SAA TAA

Cash and Short-maturity Bonds 46.0% 49.0% 17.0% 19.0% 7.0% 10.0% 3.0% 7.0% 2.0% 6.0%

Developed Government Bonds 8.0% 8.0% 7.0% 7.0% 4.0% 4.0% 2.0% 2.0% 1.0% 1.0%

Investment Grade Bonds 6.0% 4.0% 9.0% 7.0% 7.0% 5.0% 4.0% 2.0% 2.0% 0.0%

High Yield and Emerging Markets Bonds 6.0% 4.0% 10.0% 8.0% 11.0% 8.0% 10.0% 8.0% 8.0% 6.0%

Developed Markets Equities 16.0% 18.0% 28.0% 32.0% 38.0% 43.0% 45.0% 49.0% 50.0% 53.0%

Emerging Markets Equities 3.0% 3.0% 6.0% 6.0% 10.0% 10.0% 14.0% 14.0% 18.0% 18.0%

Commodities 2.0% 1.0% 4.0% 2.0% 5.0% 2.0% 6.0% 2.0% 5.0% 2.0%

Real Estate 2.0% 2.0% 3.0% 3.0% 4.0% 4.0% 6.0% 6.0% 7.0% 7.0%

Alternative Trading Strategies 11.0% 11.0% 16.0% 16.0% 14.0% 14.0% 10.0% 10.0% 7.0% 7.0%

Source: Barclays Wealth and Investment Management, as first published on February 7, 2014. Gray: TAA is slightly underweight our SAA. Light blue: TAA is slightly overweight our SAA. Black: TAA is neutral weight the SAA. * The recommendations made for your actual portfolio will differ from any asset allocation or strategies outlined in this document. The model portfolios are not available to investors since they represent investment ideas, which are general in nature and do not include fees. Your asset allocation will be customized to your preferences and risk tolerance and you will be charged fees. You should ensure that your portfolio is updated or redefined when your investment objectives or personal circumstances change. Our Strategic Asset Allocation (SAA) models offer a baseline mix of assets that, if held on average over a five-year period, will in our view provide the most desirable combination of risk and return for an investor’s degree of Risk Tolerance. They are updated annually. Our Tactical Asset Allocation (TAA) tilts our SAA views, incorporating small tactical shifts from one asset class to another, to account for the prevailing environment and our shorter-term outlook. For more information, please see our Asset Allocation at Barclays white paper.

Compass June 2014 8

Figure 5: Year-to-date returns and TAA weightings for key asset and regional sub asset classes (by weighting)

Figure 6: SAA, TAA and tilts with key regional sub asset classes (Moderate Risk Profile)

Asset Class (including key regional sub asset classes)

Recommended allocation Tilt

SAA TAA SAA vs. TAA

Cash & Short-maturity Bonds 7% 10% +3%

Cash 0% 7% +7%

Short-maturity Bonds 7% 3% -4%

Developed Government Bonds 4% 4% 0%

US Government Bonds 4% 4% 0%

Investment Grade Bonds 7% 5% -2%

US Investment Grade Bonds 7% 5% -2%

High Yield & Emerging Markets Bonds 11% 8% -3%

US High Yield Bonds 5% 8% +3%

Emerging Markets Bonds 6% 0% -6%

Developed Markets Equities 38% 43% +5%

US Large Cap Equities 12% 12% 0%

US Smid Cap Equities 5% 7% +2%

Non-US Developed Markets Equities 16% 19% +3%

Developed Private Equity 5% 5% 0%

Emerging Markets Equities 10% 10% 0%

Emerging Markets Equities 10% 10% 0%

Commodities 5% 2% -3%

Real Estate 4% 4% 0%

US Developed Public Real Estate 4% 4% 0%

Alternative Trading Strategies 14% 14% 0%

Global Macro Strategies 3.5% 3.85% +.35%

Relative Value Strategies 3.5% 4.2% +.70%

Event Driven Strategies 3.5% 4.2% +.70%

Managed Futures 3.5% 1.75% -1.75%

Source: Bloomberg as of May 23, 2014. Diversification does not guarantee against losses. Past performance is not an indication of future performance.

Gray = TAA is slightly underweight the SAA. Light blue = TAA is slightly overweight the SAA.

Source: Barclays Wealth and Investment Management, Americas Investment Committee. As first published on February 7, 2014.

*Returns as of April 30, 2014 for: Relative Value Strategies, Event Driven Strategies and Managed Futures; returns as of March 31, 2014 for Global Macro Strategies. Note to Figure 2: We consider private equity to be part of the overall Developed Markets Equities allocation; however, as a reliable performance index is not available, it has been excluded from year-to-date returns/TAA weightings bar chart above. Cash and Short-maturity Bonds: Cash by Barclays 3-6 month T-bills; Short-maturity Bonds by Barclays 1-3 Year US Treasury; Developed Government Bonds: US Government Bonds by Barclays US Treasury; Investment Grade Bonds: US Investment Grade Bonds by Barclays US Aggregate Corporate; High-Yield and Emerging Markets Bonds: US High Yield Bonds by Barclays US Corporate High Yield; Emerging Markets Bonds by JP Morgan GBI-EM Total Return Diversified; Developed Markets Equities: US Large Cap Equities by Russell 1000; US Smid Cap Equities by Russell 2500; Non-US Developed Markets Equities by MSCI EAFE Net Return; Emerging Markets Equities by MSCI EM; Commodities by DJ UBS Commodity TR; Real Estate: US Developed Public Real Estate by FTSE NAREIT US – ALL Equity REITs; Alternative Trading Strategies (*see note above): Global Macro Strategies by Barclay Hedge Fund Global Macro Index; Relative Value Strategies by HFRI Relative Value Index; Event Driven Strategies by Dow Jones CS Event Driven Index; Managed Futures by Dow Jones CS Managed Futures Index. The benchmark indices are used for comparison purposes only and this comparison should not be understood to mean that there will necessarily be a correlation between actual returns and these benchmarks. It is not possible to invest in these Indices; they are not subject to any fees or expenses. It should not be assumed that investment will be made in any specific securities that comprise the indices. The volatility of the indices may be materially different than that of the hypothetical portfolio.

4.3%

2.9%

2.8%

2.7%

0.3%

0.0%

-1.5%

14.0%

4.8%

3.7%

2.6%

7.9%

5.4%

5.0%

0.4%

-3.9%

US High Yield Bonds

Event Driven Strategies*

Non-US Developed Markets Equities

Relative Value Strategies*

US Smid Cap Equities

Cash

Global Macro Strategies*

US Developed Public Real Estate

Emerging Markets Equities

US Large Cap Equities

US Government Bonds

Commodities

Emerging Markets Bonds

US Investment Grade Bonds

Short Maturity Bonds

Managed Futures*

Year-to-date Asset Class total return

Und

erw

eigh

tO

verw

eigh

tN

eutr

al

Compass June 2014 9

Interest rates, bond yields, and commodity and equity prices in context* Figure 1: Short-term interest rates (global) Figure 2: Government bond yields (global)

Source: FactSet, Barclays Source: FactSet, Barclays

Figure 3: Inflation-linked real bond yields (global) Figure 4: Inflation-adjusted spot commodity prices

Source: Bank of America Merrill Lynch, Datastream, FactSet, Barclays Source: Datastream, Barclays

Figure 5: Government bond yields: selected markets Figure 6: Global credit and emerging market yields

*Monthly data with final data point as of COB 27 May 2014. Past performance does not guarantee future results. An investment cannot be made directly in a market index. Source for Figures 5-6: FactSet, Barclays

0

1

2

3

4

5

6

7

8

9

Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10

Global Government10-year moving average± one standard deviation

Nominal Yield Level 3 Months (%)

1

2

3

4

5

6

7

8

9

10

Jan-87 Jan-92 Jan-97 Jan-02 Jan-07 Jan-12

Barclays Global Treasury10-year moving average± one standard deviation

Nominal Yield Level (%)

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Dec-96 Dec-99 Dec-02 Dec-05 Dec-08 Dec-11

Inflation Linked10-year moving average± one standard deviation

Real Yield Level (%)

70

100

130

160

190

220

250

280

310

340

Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11

Dow Jones UBS Commodity

10-year moving average

± one standard deviation

Real Prices (USD, 1991=100)

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Global US UK Germany Japan

± one standard deviationCurrent10-year average

Nominal Yield Level (%)

2

4

6

8

10

12

Investment Grade

High Yield Hard Currency EM

Local Currency EM

± one standard deviation

Current

10-year average

Nominal Yield Level (%)

Compass June 2014 10

Figure 7: Developed stock market, forward PE ratio Figure 8: Emerging stock market, forward PE ratio

Figure 9: Developed world dividend and credit yields

Figure 10: Regional quoted-sector profitability

Figure 11: Global stock markets: forward PE ratios

Figure 12: Global stock markets: price/book value ratios

All sources on this page: MSCI, IBES, FactSet, Datastream, Barclays Past performance does not guarantee future results. An investment cannot be made directly in a market index.

8

10

12

14

16

18

20

22

24

26

Dec-87 Dec-93 Dec-99 Dec-05 Dec-11

MSCI The World Index

10-year moving average

± one standard deviation

PE (x)

6

8

10

12

14

16

18

20

22

24

26

28

Dec-87 Dec-93 Dec-99 Dec-05 Dec-11

MSCI Emerging Markets

10-year moving average

± one standard deviation

PE (x)

0

1

2

3

4

5

6

7

8

Jan-01 Jan-04 Jan-07 Jan-10 Jan-13

Global Investment Grade Corporates Yield

Developed Markets Equity Dividend Yield

Yield (%)

3

5

7

9

11

13

15

17

19

World USA UK Eu x UK Japan Pac x JP EM

± one standard deviation

Current

10-year average

Return on Equity (%)

9

11

13

15

17

19

21

23

World USA UK Eu x UK Japan Pac x JP EM

± one standard deviation

Current

10-year average

PE (x)

0.8

1.2

1.6

2.0

2.4

2.8

World USA UK Eu x UK Japan Pac x JP EM

± one standard deviationCurrent10-year average

PB (x)

Compass June 2014 11

Barclays’ key macroeconomic projections

Figure 1: Real GDP and consumer prices (% y-o-y)

Real GDP Consumer prices

2013E

2014F

2015F

2013E

2014F

2015F

Global 3.0

3.3

3.8

2.6

2.9

2.9

Advanced 1.2

1.9

2.2

1.3

1.6

1.8

Emerging 4.8

4.7

5.4

4.8

5.1

4.9

United States 1.9

2.2

2.6

1.5

1.9

2.1

Euro area -0.4

1.2

1.5

1.4

0.7

1.0

Japan 1.6

1.6

1.3

0.4

2.7

2.3

United Kingdom 1.7

3.0 ↑ 2.7 ↑ 2.6

1.7

1.9

China 7.7

7.2

7.2

2.6

2.4

3.0

Brazil 2.3

1.9

2.4

6.2

6.4

5.8

India 4.6

5.2

6.4

6.3

5.4

5.6

Russia 1.3

0.1

1.3

6.8

6.7

5.7

Source: Barclays Research, Global Economics Weekly, 23 May 2014 Note: Arrows appear next to numbers if current forecasts differ from previous week by 0.2pp or more. Weights used for real GDP are based on IMF PPP-based GDP (5yr centred moving averages). Weights used for consumer prices are based on IMF nominal GDP (5yr centred moving averages). There can be no guarantees that these projections will be achieved.

Figure 2: Central bank policy rates (%)

Official rate % per annum (unless stated)

Forecasts as at end of

Current Q2 14 Q3 14 Q4 14 Q1 15

Fed funds rate 0-0.25 0-0.25 0-0.25 0-0.25 0-0.25

ECB main refinancing rate 0.25 0.10 0.10 0.10 0.10

BoJ overnight rate 0.10 0-0.10 0-0.10 0-0.10 0-0.10

BOE bank rate 0.50 0.50 0.50 0.50 0.50

China: 1y bench. lending rate 6.00 6.00 6.00 6.00 6.00

Brazil: SELIC rate 11.00 11.00 11.00 11.00 12.00

India: Repo rate 8.00 8.00 7.75 7.50 7.50

Russia: One-week repo rate 7.50 7.50 7.50 7.50 6.50

Source: Barclays Research, Global Economics Weekly, 23 May 2014 Note: Rates as of COB 22 May 2014.There can be no guarantees that these projections will be achieved.

Compass June 2014 12

Global Investment Strategy Team

AMERICAS

Hans Olsen, CFA Chief Investment Officer, Americas hans.olsen@barclays.com +1 212 526 4695

Laura Kane, CFA Investment Strategy laura.kane@barclays.com +1 212 526 2589

David Motsonelidze Investment Strategy david.motsonelidze@barclays.com +1 212 412 3805

Kristen Scarpa Investment Strategy kristen.scarpa@barclays.com +1 212 526 4317

ASIA

Benjamin Yeo, CFA Chief Investment Officer, Asia and Middle East benjamin.yeo@barclaysasia.com +65 6308 3599

Eddy Loh, CFA Equity Strategy eddy.loh@barclaysasia.com +65 6308 3178

EUROPE

Kevin Gardiner Chief Investment Officer, Europe kevin.gardiner@barclays.com +44 (0)20 3555 8412

Peter Brooks, PhD Behavioural Finance specialist peter.brooks@barclaysasia.com +44 (0)20 3555 1261

Greg B Davies, PhD Head of Behavioural and Quantitative Finance greg.davies2@barclays.com +44 (0)20 3555 8395

Emily Haisley, PhD Behavioural Finance emily.haisley@barclays.com +44 (0)20 3555 8057

Antonia Lim Global Head of Quantitative Research antonia.lim@barclays.com +44 (0)20 3555 3296

Christian Theis, CFA Macro christian.theis@barclays.com +44 (0)20 3555 8409

Compass June 2014 13

Asset class risks Alternative Trading Strategy – There are specific concerns related to alternative investment strategies with respect to private wealth clients. These include: investor taxability; suitability of funds that require long lock-up periods for investors with liquidity needs or multiple investment horizons; communicating complex strategies to a non-professional client; greater likelihood of decision risk (changing strategies at the point of maximum loss) and clients whose wealth stems from concentrated positions in closely held companies may not be suited to other illiquid investments. Bonds – Bonds are subject to market, interest rate and credit risk; and are subject to availability and market conditions. Generally, the higher the interest rate the greater the risk. Bond values will decline as interest rates rise. Government bonds are subject to federal taxes. Municipal bond interest may be subject to the alternative minimum tax; other state and local taxes may apply. High yield bonds, also known as “junk bonds” are subject to additional risks such as the increased risk of default. Debt securities may be subject to call features or other redemption features, such as sinking funds, and may be redeemed in whole or in part before maturity. These occurrences may affect yield. Like all bonds, corporate bonds tend to rise in value when interest rates fall, and they fall in value when interest rates rise. The longer the maturity of the bond, the greater the degree of price volatility. If you hold a bond until maturity, you may be less concerned about these price fluctuations (which are known as interest rate risk or market risk), because you will receive the par or face value of your bond at maturity. Distressed Debt – Although distressed debt opportunities are cyclical, in that they multiply during economic slowdowns, the time taken to profit from them depends on how long a firm takes to restructure, which varies from one case to another. The process can be lengthy - for instance, if the negotiations between a firm's management team and its creditors start to drag. Event risk relates to unexpected company-specific or situation-specific events that affect valuation. Market liquidity risk arises because distressed securities are less liquid, and demand runs in cycles. J-factor risk relates to the judge presiding over bankruptcy proceedings. The track record in adjudication and restructuring can play a significant role in both the overall outcome and determining the optimum securities in which to invest. Cash Equivalents – Portfolios that invest in very short-term securities provide taxable or tax-advantaged current income, pose little risk to principal and offer the ability to convert the investment into cash quickly. These investments may result in a lower yield than would be available from investments with a lower quality or longer term. Commodities – Commodities are assets that have tangible properties, such as oil, metals, and agricultural products. An investment in commodities may not be suitable for all investors. Commodities may be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes, or political and regulatory developments. Commodities are volatile investments and should only form a small part of a diversified portfolio. Diversification does not ensure against loss. Consult your investment representative to help you determine whether a commodity investment is right for you. Market distortion and disruptions have an impact on commodity performance and may impact the performance and values of products linked to commodities or related commodity indices. The levels, values or prices of commodities can fluctuate widely due to supply and demand disruptions in major producing or consuming regions. Equities – Large Growth and Value Stocks – Portfolios that emphasize large and established US companies may involve price fluctuations as stock market conditions change. Stocks of small- and mid-capitalization companies tend to involve more risk than stocks of larger companies. Investments in small- and mid-sized corporations are more vulnerable to financial risks and other risks than larger corporations and may involve a higher degree of price volatility than investments in the general equity markets. International/Global lnvesting/Emerging Markets – International investing may not be suitable for every investor and is subject to additional risks, including currency fluctuations, political factors, withholding, lack of liquidity, the absence of adequate financial information, and exchange control restrictions impacting foreign issuers. These risks may be magnified in emerging markets. Real Estate Investment Trusts (REITs) – The properties held by REITs could fall in value for a variety of reasons, such as declines in rental income, poor property management, environmental liabilities, uninsured damage, increased competition, or changes in real estate tax laws. There is a risk that REIT stock prices overall will decline over short or even long periods because of rising interest rates. Other risks include: Sensitive to Demand for Other High-Yield Assets. Generally, rising interest rates could make Treasury securities more attractive, drawing funds away from REITs and lowering their share prices. Property Taxes. REITs must pay property taxes, which can make up as much as 25% of total operating expenses. State and municipal authorities could increase property taxes to make up for budget shortfalls, reducing cash flows to shareholders. Tax Rates. One of the downsides to the high yield of REITs is that taxes are due on dividends, and the tax rates are typically higher than the 15% most dividends are currently taxed at. This is because a large chunk of a REIT's dividends (typically about three quarters, though it varies widely by REIT) is considered ordinary income, which is usually taxed at a higher rate. Index definitions Barclays EM Hard Currency Aggregate Index – A broad-based index includes USD, EUR, and GBP denominated debt from sovereign, quasi-sovereign, and corporate EM issuers. It reflects the evolution of EM benchmarking from traditional sovereign bond indices to Aggregate-style benchmarks that are more representative of the EM investment choice set. Country eligibility and classification as an Emerging Market is rules-based and reviewed on an annual basis using World Bank income group and International Monetary Fund (IMF) country classifications. This index was previously called the Barclays Global EM Index. Barclays Global Treasury – Tracks fixed-rate local currency government debt of investment grade countries. The index represents the Treasury sector of the Global Aggregate Index and currently contains issues from 37 countries denominated in 23 currencies. The three major components of this index are the U.S. Treasury Index, the Pan-European Treasury Index, and the Asian-Pacific Treasury Index, in addition to Canadian, Chilean, Mexican, and South-African government bonds. Barclay Hedge Global Macro – Represents a measure of the average return of the macro geared/strategized hedge funds within the Barclay database whose positions concertedly reflect the direction of the overall market as attributed to major economic trends and events. The portfolios of these funds are comprised of an offering of stocks, bonds, currencies and commodities in the form of cash or derivative instruments. A majority of these index linked funds invest globally in both developed and emerging markets. Barclays MBS Index – The MBS Index covers the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The MBS Index is formed by grouping the universe of over 600,000 individual fixed rate MBS pools into approximately 3,500 generic aggregates. Barclays Municipal Bond Index – The Barclays Municipal Bond Index is a rules-based, market-value-weighted index engineered for the long-term tax-exempt bond market. To be included in the index, bonds must be rated investment-grade (Baa3/BBB- or higher) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be investment-grade. They must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. The bonds must be fixed rate, have a dated-date after December 31, 1990, and must be at least one year from their

maturity date. Remarketed issues, taxable municipal bonds, bonds with floating rates, and derivatives, are excluded from the benchmark. Barclays US Aggregate Bond – The index is market capitalization weighted that includes Treasury securities, Government agency bonds, Mortgage-backed bonds and Corporate bonds. It excludes Municipal bonds and Treasury Inflation-Protected securities because of tax treatment. Barclays US. Aggregate Corporate – An unmanaged index considered representative of the U.S. investment-grade, fixed-rate bond market. Barclays US Corporate High Yield measures the US corporate market of non-investment grade, fixed-rate corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Barclays US High Yield – Measures U.S. corporate, fixed rate, non-investment grade, fixed rate bond market. Barclays US Treasury – The index includes public obligations of the U.S. Treasury with a remaining maturity of one year or more. Barclays US TIPS – Index consists of Inflation-Protection securities issued by the U.S. Treasury. Barclays US 1-3 Yr. Treasury – Barclays Capital 1-3 Year U.S. Government/Credit Index is composed of all bonds of investment grade with a maturity between one and three years. Barclays US 3-6 Mo. Treasury – Comprised of all treasuries with 3-6 month maturities purchased at the beginning of each month and held for a full month. At the end of the month, issues with less than three months to maturity are sold and rolled into newly selected issues. Barclays US 5–7 Yr. Treasury – Barclays Capital 5–7 Year US Government/Credit Index is composed of all bonds of investment grade with a maturity between five and seven years. Barclays US Treasury 7–10 Year – Measures the performance of U.S. Treasury securities that have a remaining maturity of at least seven years and less than 10 years. Barclays US Treasury 25+ Year – Measures the performance of U.S. Treasury securities that have a remaining maturity of at least seven years and less than 10 years. Dow Jones UBS Commodity Index measures price movements of the commodities included in the appropriate sub index. It does not account for effects of rolling futures contracts or costs associated with holding the physical commodity. Dow Jones CS Event Driven – The Dow Jones Credit Suisse Event Driven Index is an asset-weighted hedge fund index derived from the TASS database of more than 5000 funds. The Index consists only of Event-Driven funds with a minimum of US $50 million AUM, a 12-month track record, and audited financial statements. Event-Driven funds invest in various asset classes and seek to profit from potential mispricing of securities related to a specific corporate or market event (e.g.,. mergers, bankruptcies, financial or operational stress, restructurings, asset sales, recapitalizations, spin-offs, litigation, regulatory and legislative changes etc.). Event-Driven funds can invest in equities, fixed income instruments, options and other derivatives. Many managers use a combination of strategies and adjust exposures based on the opportunity sets in each sub-sector. Dow Jones CS Managed Futures – The Dow Jones Credit Suisse Managed Futures Index is an asset-weighted hedge fund index derived from the TASS database of more than 5000 funds. The strategy invests in listed financial and commodity futures markets and currency markets around the world. The managers are usually referred to as Commodity Trading Advisors, or CTA's. Trading disciplines are generally systematic or discretionary. Systematic traders tend to use price and market specific information (often technical) to make trading decisions, discretionary managers use a judgmental approach. The EURO STOXX 50 Index, Europe's leading Blue-chip index for the Eurozone, provides a Blue-chip representation of supersector leaders in the Eurozone. The index covers 50 stocks from 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The EURO STOXX 50 Index is licensed to financial institutions to serve as underlying for a wide range of investment products such as Exchange Traded Funds (ETF), Futures and Options, and structured products worldwide. FTSE NAREIT - All Equity REITs – An index that consists of all Real Estate Investment Trusts that currently trade on the New York Stock Exchange, the NASDAQ National Market System and the American Stock Exchange. Equity REITs include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property. HFRI Relative Value TR is comprised of investment managers who maintain positions in which the investment thesis is predicated on realization of a valuation discrepancy in the relationship between multiple securities. Managers employ a variety of fundamental and quantitative techniques to establish investment theses, and security types range broadly across equity, fixed income, derivative or other security types. Fixed income strategies are typically quantitatively driven to measure the existing relationship between instruments and, in some cases, identify attractive positions in which the risk adjusted spread between these instruments represents an attractive opportunity for the investment manager. Relative Value is further subdivided into eight sub-strategies: Asset Backed, Convertible Arbitrage, Corporate, Sovereign, Volatility, Yield Alternatives-Energy Infrastructure, Yield Alternatives-Real Estate, and Multi-Strategy. JP Morgan GBI-EM Total Return Diversified – The JPMorgan Government Bond Index-Emerging Markets (GBI-EM) indices are comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging Market governments. The Diversified version was launched in January 2006. MSCI EAFE – The MSCI EAFE Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed equity. As of January 2012 the MSCI EAFE Index consisted of the following 22 developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. MSCI EM Index represents a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of February 2013, the MSCI Emerging Markets Index includes 23 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. MSCI India Index – Designed to measure the performance of the large and mid cap segments of the Indian market. With 71 constituents, the index covers approximately 85% of the Indian equity universe. MSCI Russia Index – Designed to measure the performance of the large and mid cap segments of the Russian market. With 22 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Russia. MSCI World Index represents a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. As of February 2013, it includes 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. Russell 1000 – measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. As of December 31, 2011, the weighted average market capitalization was approximately $86.1 billion; the median market capitalization was approximately $5.1 billion. Russell 2500 Index – Measures the performance of the 2,500 smallest companies in the Russell 3000 Index. The index is market cap-weighted and includes only common stocks incorporated in the United States and its territories.

Russell 3000 – A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of the entire U.S. stock market. This index encompasses the 3,000 largest U.S.-traded stocks, in which the underlying companies are all incorporated in the U.S. The Standard & Poor's (S&P) 500 Index represents a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock market companies; the NYSE Euronext and the NASDAQ OMX. A selection committee selects the companies in the S&P 500 so they are representative of the industries in the United States economy. An investment cannot be made directly in a market index. Other definitions Chartered Financial Analyst Institute owns the CFA designation, which it awards to individuals who successfully complete rigorous certification requirements. Duration – A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. Modified duration represents the current returns modified duration of the returns universe. This is calculated as the duration of the securities in the returns universe including the cash flows generated during the month by these securities (i.e., coupon payments). Returns duration provides a measure of the sensitivity of index returns to changes in yield. Price-to-Book Value (P/B) – A valuation metric that compares a stock's market value to its book value. Book value refers to a company’s total assets minus its total liabilities. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Another way is to divide the current share price by the book value per share. Price-to-earnings (P/E) multiple – The ratio of a stock’s price to the company’s earnings per share (EPS). It is calculated by dividing the stock’s price by its EPS. It is a measure of how much an investor is paying for earnings.

Disclaimer Past performance does not guarantee future returns.

The value of the investments which may be stated in this document, and the income from them, may fall as well as rise. Past performance of investments is no guide to future performance. You may not get back the amount of capital you invest. Any income projections and yields are estimated and are included for indication only.

Barclays does not guarantee favorable investment outcomes. Nor does it provide any guarantee against investment losses.

Benchmarks are shown for illustrative purposes only, may not be available for direct investment, are unmanaged, assume reinvestment of income, and have limitations when used for comparison or other purposes because they may have volatility, credit, or other material characteristics (such as number and types of securities) that are different. It is not possible to invest in these indices and the indices are not subject to any fees or expenses.

Information is as of the date hereof unless otherwise indicated. Certain information is based on data provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed.

This document has been prepared by Barclays for information purposes only.

Diversification does not protect a profit or guarantee against losses. Investing in securities involves a certain amount of risk. You are urged to review any prospectuses and other offering information prior to investing.

This material is provided by Barclays for information purposes only, and does not constitute tax advice. Please consult with your accountant, tax advisor, and/or attorney for advice concerning your particular circumstances.

IRS Circular 230 Disclosure: BCI and its affiliates do not provide tax advice. Please note that (i) any discussion of US tax matters contained in this communication (including any attachments) cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

“Barclays” refers to any company in the Barclays PLC group of companies.

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