Market Know-How

Insights and Implementation

1Q 2015

Strategic Advisory Solutions

Macro
GLOBAL GROWTH

MONETARY POLICY

We expect a broadening
recovery, with the US registering
an above-trend 3% growth
pace, and the Euro-area and
Japan modestly accelerating
from recent lows.

In the US and UK, central banks

should begin to tighten policy in
the second half, while the Euroarea may see sovereign asset
purchases. The Bank of Japan
will likely stay accommodative.

GEOPOLITICS

ENERGY

DISRUPTION

Most geopolitical hotspots

currently are, in our view,
regionally tethered and of limited
broader economic consequence.

Rising shale oil/gas production

has potential to play the swing
factor in global energy. MLPs
appear well-positioned for the
energy opportunity.

We believe we are in the

midst of technology-abetted
disruption across virtually every
industrypotentially a key
driver of idiosyncratic risk and
forward returns.

EQUITIES

FIXED INCOME

Earnings growth should help

US equities advance. Amid
potential currency weakness,
Japan and Europe may surprise
higher, while Emerging Market
outperformance seems unlikely.

US yields will likely move higher,

but may still remain below fair
value. Demand for High Yield,
Senior Loans, and Emerging
Market Debt could persist.

COMMODITIES

CURRENCY

VOLATILITY

We are constructive on oil, but

we think the next 36 months
could be challenging as supply
and demand seek equilibrium.
Gold remains vulnerable to
monetary policy shifts.

Even though Dollar strength

has become a well-subscribed
theme, monetary policy
divergence should provide
further scope for a rising Dollar
and currency volatility.

With limited leverage, private

sector imbalances, and
recession risk, we think volatility
may offer opportunities to add
risk assets.

Market

Divergence Defines Opportunity

Above-trend US economic growth, expanding earnings, solid
balance sheets, and contained inflation should provide a
supportive backdrop for risk assets in 2015. Divergent monetary
policies and increasing currency volatility are two other major
themes in the year ahead. In the US, we expect the Federal
Reserve to raise interest rates for the first time in nearly a
decade. Europe and Japan, conversely, should move toward
greater monetary accommodation.
Equity returns should be increasingly governed by earnings
growth and less by Price/Earnings (P/E) multiple and margin
expansion. We believe dividend growth, buybacks, and capital
expenditures (CAPEX) should remain top of mind for equity

1Q
investors. In fixed income, corporate credit continues to benefit

from strong fundamentals and a voracious investor appetite

for income. In emerging markets, we expect valuation and

idiosyncratic conditions to offer select opportunities. Lastly, the

divergence in global monetary policies should contribute to
additional Dollar strength.

As we position for 2015, we also reflect upon the trouble

spots throughout the world. While none appear to possess

significant disruptive clout, each can be amplified by fragile

global recoveries and stressed liquidity. As investors, it is good

not only to hone our tactical capabilities, but also to commit to

structural portfolio design that seeks to endure the unforeseen.

How to Implement
GSAMs Market Know-How explains what investors should
KNOW about current market conditions, and HOW they can
implement an investable strategy. The Market Know-How
is based on our expectations of macro conditions and asset
class performance.
As we look to 2015, we suspect the easy money has been
madeand investors should prepare for the possibility of lower
forward returns than in the recent past. Selectivity and risk
awareness have the potential to become meaningful drivers
of returns. We believe investors should consider maintaining
long-term exposure to risky assets, but also think about
implementing strategies with defensive characteristics, given

2015
the potential for increased market volatility.

Market Know-How 1Q 2015

THE KNOW

THE HOW

The Fed is coming

Dont fear the Fed, equities

have historically endured

Drawdowns happen

Understand the impact

of dividend growers

We live in a data-rich era

Be prepared for disruption

No trend lasts forever

Consider alternative strategies

Not all income is created equal

Expand your income horizon

More energy, more

infrastructure

Appreciate the evolution

of MLPs

Changing munis

Seek out more dynamic and

diversified muni strategies

Views and opinions are current as of December 2014, and may be subject to change, they should not be construed as investment advice.
Economic and market forecasts presented herein reflect our judgment as of the date of this presentation and are subject to change without notice. These
forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual
data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly,
these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions,
and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs Asset Management has no
obligation to provide updates or changes to these forecasts. Examples are for illustrative purposes only.

Market Know-How: Divergence Defines Opportunity

1
Equity Index Level Before/After the Start
of a Rate-Hiking Cycle

140
130

The Fed is coming. Equities generally have been resilient in the

face of rate hikes.
In 32 rate hike cycles, global
equities have usually gained.

Global Equity Return:

75th Percentile
Median1
25th Percentile

Average Start of
32 Global Rate
Hike Cycles

120

Favorable economic conditions

historically have been a key
consideration. Unlike climates of
significant inflation, periods of rising
rates amid an improving economy
have generally been benign for
global equity markets.

110
100
90
80

-12

-10

-8

-6

-4

-2
0
2
4
6
8 10 12 14
Months Relative to Start of Rate-Hiking Cycle

16

18

20

22

24

Source: Goldman Sachs Global Investment Research, GSAM.

Dont fear the Fed. In the US, short-term declines have often
proven to be buying opportunities.
20%

Feb-94

Jul-99

Jun-04

15%

The S&P 500 has tended to dip

initially, then quickly reverse
course.

Start of Fed
Tightening
Cycle

Return

10%
5%
0%
-5%
-10%

69 Months
Prior to Hike

36 Months
Prior to Hike

3 Months
Prior to Hike

First 3 Months
of Hike

Months 36
of Hike

Months 69
of Hike

Dont be shocked by a short-term

dip. In the US, at the onset of a
rate-hike cycle, the S&P 500 has
frequently fallen before bouncing
back. The dip generally has been
temporary. Because declines have
tended to be short-lived, rate scare
selloffs frequently have turned into
attractive buying opportunities.

Source: Bloomberg, GSAM.

1. The median of a set of ascending/descending numbers is either the middle number for an odd set of numbers, or the average of the two middle numbers for an even set
of numbers.
Top chart notes: Returns shown are based on the monthly average performance of equity indices over 32 rate hike cycles from Europe, Australia, Asia and North America. Rate
hike cycles are defined as the first policy-rate hike after policy rates pause (stable for the next 12 months). Bottom chart notes: Chart is based on monthly average S&P 500
returns over a three-month period. For a given rate hike cycle, the start of the hike is defined as the average S&P 500 index price of the previous month.
Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 1316.

Drawdowns happen. S&P 500 drawdowns do not happen often,

but they have been unexpected and meaningful in magnitude.

2011
European
Debt Crisis

2010
Greek
Bailout

2012
Growth
Slowdown

Return

-9%

2014
Growth
Scare

Average
Drawdown of
at least 10%

2012
Fiscal
Cliff

-7%

-7%

-16%

-16%

-22%

Drawdowns are a normal

experience for equity investors.
Large cap equities have generated
solid returns over time, although
they have been susceptible to bouts
of volatility. Sizable drawdowns
in the S&P 500 do not take place
often, but they have still taken place
unexpectedly and meaningfully.

Source: Bloomberg, GSAM.

Understand the impact of dividend growers. Historically, they

have outperformed the S&P 500 during significant drawdowns.
300

S&P 500
Dividend Growers
Maximum Calendar Year
Drawdown Period for S&P 500

Growth of $100

250

Dividend growers in particular

have exhibited notably less
downside and long-term
outperformance.

29-Apr-11 to 3-Oct-11
S&P 500: -18.6%
Dividend Growers: -13.1%

200
150

21-May-13 to 24-Jun-13
S&P 500: -5.6%
Dividend Growers: -5.8%

100
31-Dec-07 to 20-Nov-08
S&P 500: -47.7%
Dividend Growers: -34.1%

50
0

May-05

May-07

May-09

May-11

As sizable and unexpected

drawdowns have taken place in the
S&P 500, dividend growers have
tended to outperform, potentially
making them worthy of consideration
as a core equity replacement.

May-13

Source: Bloomberg, GSAM.

Top chart notes: First five time periods chosen as recent examples of S&P 500 drawdowns. The Average drawdown of at least 10% refers to the average of all drawdowns
(10% or greater) in the S&P 500, occurring from Dec. 29, 1989 to Nov. 30, 2014. Drawdowns are defined as a period when equities fall. Bottom chart notes: Chart shows the
growth of $100 in the S&P 500 TR index and S&P 500 Dividend Aristocrats TR index. The S&P 500 Dividend Aristocrats index measures the performance of S&P 500 constituents
that have increased dividends every year for the last 25 consecutive years. The three highlighted periods are selected to illustrate examples of notable historical calendar year
drawdowns. Accordingly, highlighted periods include two with significant performance differentials as well as one with a similar performance differential. Analysis based on
data from May 2, 2005 to Nov. 30, 2014, which represents earliest common inception. GROWTH OF $100: A graphical measurement of a portfolios gross return that simulates
the performance of an initial investment of $100 over the given time period. The example provided does not reflect the deduction of investment advisory fees and expenses which
would reduce an investors return. Please be advised that since this example is calculated gross of fees and expenses the compounding effect of an investment managers fees
are not taken into consideration and the deduction of such fees would have a significant impact on the returns the greater the time period and as such the value of the $100 if
calculated on a net basis, would be significantly lower than shown in this example. Dividends are not guaranteed and a companys future ability to pay dividends may be limited.
Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 1316.

Market Know-How: Divergence Defines Opportunity

We live in a data-rich era. Unstructured data and the

Internet of Things may become the next mega trends.
There is tremendous insight to be
gained from the volume, variety,
and velocity of data.

Approximately 90% of the worlds data

has been created in only the past two years

Digital insight is transforming

virtually every industry, investing
included, amid increasing bandwidth,
expanding wireless coverage, and
the proliferation of Big Data. In 2013,
IBM estimated that the world is
generating more than 2.5 billion
gigabytes1 of data every day, roughly
the equivalent of 250 million football
fields full of books.

Source: Goldman Sachs Global Investment Research, IBM, McClatchy-Tribune, GSAM.

Be prepared for disruption, including new winners and losers.

The
10 01010 010 01 of data has the potential to drive corporate earnings.
1010 0power
010 0
0 010 0

010 01010 010 01010 010 0

01010
0100
0 010
10 0
1
0
0
1
0 10 01010 010 01010 010 01
10 0
1
0
0
1
0
0
010
1
1
010
0
1
0
0
00
1
0
0
1
0
1
0
010 010
0
1
1
0
0
1
1
0
0
1
0
0
0
0
1
1
0
1
010 010
0
0
0
1
1
0
0
0
0
0
0
0
0
01
1
10 0
1
01
010 0 010 010 01010
01 1
10 0
1
10
010
01010
10 1000 10 010
010 0100 00
0
1
0
0
1
1
0
0
0
1010 0
1
00
0 0 0 01
010 01
100
10 0
1
010
101
01
00
01010 010
0
1
0
0 01
0
0
1
1
0
010
0
010
100 10
10
010
10
10
01010010 010100
01
0
1
10
1
100
I
N
0
01010010
1
0
T
1
0
010
010
01
0101001 S
0
1
0

Big Data Universe

0 01010 010 01010 010 010

010 01
10
0
1
10 01
0 01
10 01010 010 0101
10 0
010
01010 0
0 010
010 010 010
010
01
010 01
10
0
0
1
1
0
0
0
1
0
0
10 01010
0 01
0
0
00
0
1
1
1
0
0
1
01 1001
0 01
01 010
1010
01
00
0
01
0
10 0
1010 010 01010 010 0
1
1
01
00
0
0
010 0
1
10 0
10
0 01
10
010
10
01 1
1
0
0
0
010 01010 0
00
1
10
0
10
10 0
0
01010
1
010
10
00
010
010
01
01
010 01010 010
010
01
01
01010
0
1
0
0
10
100 01
0 01
10
01
0 010 01010 01001
01
0
101
010
00
01
01
100101001001
01
100
0
10
01001010010
10

10 0
0101
101
0 01010 010 010
010
01010 01
0 01
10 01
0
0
1
1
0
0
0 01
0
1
1
0
1
0
010 010 01010
010 0 010
10 010 01
10
010 0
10 0
10
0
0
0
1
0
10
0
0
0
101
10
0 01 010 010
01 0101
010
10 010 01010 010 01010 01
0
1
0
0
1
0
0
0
0
0
1
0 01
0
00
010
010 1010
01
01010 010 01
00
0
010 010
010
01
01
01
D
U
0
0
0
10 0
01
LO
01
1
EC
IA L MEDI A 010 010 0
TH
101 0100
SOC
0
1
01
0
T HINGS 01001
0
01
0 01
T OF
NE
01
C
H
R
ER
A
0
0100
SE
B
10
WE
0
PHONES
ART
0
M

Connecting the expanding universe

of data can reveal valuable industry,
company, and investment insights

01010 010 0 010 010 0

1010
010 010
01
10 01
0
0
1
0
0
1
1
0
0
1
0
010 01
10 0
010 010 0
0 010 10100
010
010 0
10 0
10
010 01010
010 010 01010 010 01
0
1
0
1
10
1
0
0
0
0
10 0
010 0
00
010
01 101
1
010
10 1010
0
100 001 00
010 01010 010 01010 0100
0 01
0
1010
10
101
01
00
01 0
0
10 0
10
0
0 010 010
1
1
0
10
0
10 010 0
1
0
10 010
010
01 01
1
10 0
10 0
01
00
0 010 01010 010
010
1
0
0101
1
10
010 0010
00 10010
01
01010010 0
00
1
0
10
0010
1
00
101
10
00
0
010010010100
0 01
10
01
01001001010
01

Source: GSAM.

1. One gigabyte is one billion bytes, and is a measure of digital information.

Please see additional disclosures and definitions on pages 1316.

Investment selectivity may rise

in importance as the creative
disruption of Big Data takes hold.
Many multi-national companies
are now actively engaged in Big
Data analytics to better understand
customers, products, and processes.
In doing so, new markets can be
identified, old markets defended, and
competitive markets disrupted. Its
often easier for investors to pinpoint
the losers than to isolate the winners.
We believe investment selectivity
should increase in importance.

No investment trend lasts forever. Traditional asset class

performance may be underwhelming in the future.

Annual Returns %

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
18 30 12 26
9

38 23 33 29 26 12

16

10 -3 18 14 16

-3 14

10 -3 11

Core Equity

10 29 11

16 10

26 15

16 32

21

12

10

7 -21 11

10 -5

-1

-9 -12 -22 4

5 -37 6

-6

-2

Core Fixed Income

Alternative Strategies

Source: Bloomberg, GSAM.

Alternative strategies typically

have outperformed core equities
during bear markets and fixed
income during periods of rising
interest rates.
Since 1990, alternative strategies
have outperformed at least
one element of an investors core
(equity/fixed income) portfolio in
almost 80% of calendar years. In a
world of potentially weaker traditional
asset class returns, the attraction
of alternative strategies could grow.

Consider owning a diversified range of alternative strategies.

Seek to adapt to the possibility of a low-return environment.

Potential Market Conditions

More company-specific risk
Increasing price/earnings dispersion1
Higher volatility
Increased restructuring activity 2
Rising interest rates
Desired Outcome
Higher return

Equity Long/Short

Potential Alternative Strategies

Event Driven
Relative Value

Tactical Trading

Alternative strategies have

a number of potential benefits.
Alternative strategies could potentially
help investors find differentiated
returns versus major asset classes,
reduce portfolio risk, and mitigate
the effects of severe drawdowns,
particularly in equity markets.

More diversification
Lower volatility
Source: GSAM.
1. Price/earnings dispersion refers to the magnitude of the difference in stock valuation among all stocks (i.e. increasing Price/Earnings dispersion indicates that valuation is
increasingly different from stock to stock). 2. Restructuring activity refers to various corporate activities (e.g. stock buybacks, debt issuance, etc.). Diversification does not protect
an investor from market risk and does not ensure profit.
Top chart notes: Analysis compares the performance of the S&P 500 (Core Equity), the Barclays US Aggregate Bond Index (Core Fixed Income), and Alternative Strategies (HFRI FoF
Index), on an annual basis from Jan. 1, 1990, earliest common inception, to Dec. 31, 2013. HFRI FoF = HFRI Fund of Funds Composite Index; HFRI and related indices are trademarks
and service marks of Hedge Fund Research, Inc. (HFR) which has no affiliation with GSAM. Information regarding HFR indices was obtained from HFRs website and other public
sources and is provided for comparison purposes only. HFR does not endorse or approve any of the statements made herein. For illustrative purposes only. Bottom chart notes:
Equity Long/Short, Event Driven, Relative Value, and Tactical Trading refer to various examples of alternative strategies. Please see glossary for detailed definitions of each.
Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 1316.

Market Know-How: Divergence Defines Opportunity

Barclays US High Yield Index (High Yield)

Russell 1000 Value Index (Large Value)
S&P 500 Dividend Aristocrats Index (Dividend Growers)
DJ US Select Real Estate Residential Index (REITs)
Alerian Master Limited Partnerships Index (MLPs)
Barclays US High-Yield Loans Index (Bank Loans)
-10%

-5%

0%
Return During Rising Rate Periods

5%

Non-traditional income sources

have historically proven to be less
sensitive to rising interest rates.

Non-traditional Income Sources

Barclays US Long Treasury Index

Barclays US Aggregate Bond Index
Barclays US Intermediate Treasury Index
Barclays US Aggregate Municipal Bond Index
Barclays US Corporate Bond Index
Barclays US 13 Year Treasury Index
Barclays High Yield Municipal Bond Index
JPM GBI-EM Global Diversified Index

Traditional Income Sources

Not all income is created equal. If rates normalize, traditional

fixed income investors should be prepared for more volatility.

In 2014, fixed income markets

surprised many forecasters with a
return to lower interest rates and
higher duration. Going forward, this
combination of lower income and
higher interest rate sensitivity may
increase fixed income volatility.

10%

Source: Bloomberg, Barclays, GSAM.

Expand your horizons to consider non-traditional income

sources. Be mindful of the rate risk in your portfolio.
A portfolios cash flow could
potentially be improved and risks
diversified with the introduction of
non-traditional income sources.

10% Large Value

20% Bank Loans

10% Dividend Growers

20% High Yield

Non-traditional
Income
Portfolio

20% MLPs
20% REITs

Yield Without Duration

Total Return During Recent Rate Spikes

Yield

Return

Volatility

Oct-10

Apr-13

Non-traditional Portfolio

5.2%

8.6%

10.2%

4.4%

0.5%

Barclays Aggregate

3.1%

5.3%

3.3%

-1.3%

-2.3%

10-Year Treasury

2.2%

6.8%

6.0%

-3.7%

-3.4%

S&P 500

1.9%

7.7%

15.5%

10.8%

2.9%

These sources include Real Estate

Investment Trusts, High Yield Bonds,
and Master Limited Partnerships.
While hedging capabilities of
traditional fixed income remain vital
to portfolio design, they introduce
concentrated rate riskwhich nontraditional income sources could
potentially mitigate.

Source: Barclays, GSAM.

Top chart notes: Performance based on time periods when the US 10-Year Treasury rate rose at least 100 basis points in 3 months from 1996 to 2014. A basis point is 1/100th of a
percent. For each index the maximum available time period was used. For index definitions please see disclosures. Bottom chart notes: Index names for the abbreviated asset classes
in the non-traditional income portfolio can be found in the top chart. The performance results are based on historical performance of the indices used. The result will vary based on
market conditions and your allocation. The non-traditional income portfolio represents a diversified portfolio whose allocation is depicted in the chart. The performance statistics are
from May 31, 2006, earliest common inception, to Nov. 28, 2014. Yield shown is current dividend yield for equities and current yield as of Nov. 28, 2014 for fixed income.
Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 1316.

6
120

More energy, more infrastructure. Recent pressure on oil prices

does not change the need for a US pipeline infrastructure build out.
WTI Oil Price (LHS)
US Crude Supply Growth (RHS)

110

Price ($/barrel)

8
90
7
80

Barrels/day (millions)

100

70
60

Energy supply growth over the

last few years has remained
extraordinary.

10

Forecast

2011

2012

2013

2014

2015

2016

We continue to believe an extensive

build out of US energy infrastructure
is required. We also expect new
infrastructure entrants to continue to
invest in the spaceand we believe
MLPs remain well-positioned in the
energy renaissance.

Source: Bloomberg, Energy Information Administration (EIA), GSAM.

Appreciate the evolution of MLPs. As the universe expands, we

believe that smaller size and newer vintage are key considerations.
Average 2013 Distribution Growth for MLP IPOs

Median 2013 MLP Distribution Growth

5.9%

19862008

< $2bn

Source: Bloomberg, GSAM.

4.9%

Year of IPO

Market Cap

> $2bn

8.0%

20082012

13.7%

A focus on smaller and younger

MLPs could prove beneficial
for investors.
Historically, when the MLP universe
was smaller, the Alerian MLP Index
provided investors with sufficient
exposure to the best performers.
However, as the asset class has
evolved, we believe smaller and
younger MLPs offer the potential
for more rapidly growing and
tax-efficient distributions.

Top chart notes: WTI refers to West Texas Intermediate Crude Oil. LHS refers to the axis on the Left Hand Side. RHS refers to the axis on the Right Hand Side. The economic
and market forecasts presented herein are for informational purposes as of the date of this presentation. There can be no assurance that the forecasts will be achieved. Please
see additional disclosures at the end of this presentation. Bottom chart notes: Data reflects growth in quarterly distribution from Q4 2012 to Q4 2013; For IPOs in Q3 and Q4
2012, analysis reflects minimum quarterly distribution as disclosed in public company filings. Analysis includes universe of midstream Energy Master Limited Partnerships (MLPs)
that are currently publicly traded (as of Mar. 31, 2014) and were publicly traded for the full year 2013. Excludes names with variable distribution policies and General Partners
structured as MLPs.
Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 1316.

Market Know-How: Divergence Defines Opportunity

Changing munis. The days of set it and forget it are over amid
a new scarcity of AAA-rated municipal investments.
AAA

% Barclays Aggregate Municipal Bond Index

AA

49.4%

68.8%

18.7%

New municipal bond supply is

limited and the availability of the
highest rated bonds has collapsed.

32.9%
7.4%

13.0%

2007

2014

Source: Barclays, GSAM.

Tighter fiscal budgets and the

impairment of AAA-rated insurers
have reshaped the muni market.
Since 2007, the number of AAA-rated
munis has declined from roughly 70%
of the muni market to 13% today.
This trend has coincided with the
precipitous decline in the availability
of coverage by AAA-rated insurers.

Seek out more dynamic and diversified muni strategies.

Active strategies could potentially exploit market nuances.

Portfolio Allocation

5%

10%

11% 12% 12% 12% 12% 12%

11%

Muni Ladder
4.7%
Return
1.4%
Yield
3.5%
Volatility

5%

Duration1-equivalent Portfolios: 4.6 Years

13% 13% 13% 13% 10% 10%

Source: Barclays, GSAM.

8%

8%

6
7
8
Years to Maturity

20%

10

15

20

High Yield
Muni

Diversified Munis
Return
4.9%
Yield
2.2%
Volatility
2.6%

The muni markets nuances may

present investment opportunities.
We believe detailed security
research, broader sector and credit
exposure, and an adaptive process
are key. By broadening the maturity
distribution and credit profile of
a muni portfolio, investors could
potentially enhance cash flow and
return while reducing volatility
through active strategies.

1. Duration is a measure of a bonds price sensitivity to a change in interest rates.

Top chart notes: According to ratings that Barclays uses, if Moodys, Standard & Poors, and Fitch all provide a credit rating, the Barclays Aggregate Municipal Bond Index (Index)
rating is the median of the three agency ratings. If only two agencies provide ratings, the Index rating is the more conservative rating. If only one agency provides a rating,
the Index rating reflects that agencys rating. The objective of a rating from a rating agency is to help provide investors a means in evaluating risk. The rating should reflect
the agencys opinion in terms of creditworthiness of the bonds issuer. For example, a rating of AAA is the highest possible rating and a rating of D is the lowest possible
rating. Bottom chart notes: The muni ladder portfolio is a hypothetical portfolio, attempting to represent what a typical muni laddered portfolio could potentially look like. The
performance results are based on historical performance of the indices used. The analysis is based on data from Jan. 1, 2006, earliest common inception, to Nov. 28, 2014. The
result will vary based on market conditions and your allocation. The diversified muni portfolio is a hypothetical portfolio, intending to demonstrate that greater diversification could
potentially lead to better results. Both hypothetical portfolios have an equal duration of 4.6 years. For both hypothetical portfolios, the maturity allocations are equally weighted
across the maturity spectrum, where allocations exist (e.g. a 12 year maturity would be split 50% 1 year and 50% 2 year). The muni ladder portfolio is represented by the 110
Year Managed Money Short/Intermediate index. The diversified portfolio includes Barclays Muni Revenue bonds from maturities 1 through 6, the Barclays 7 Year (68) Muni
Index, and the Barclays High Yield Muni Index. Yield shown is Yield to Worst as of Nov. 28, 2014.
Past performance does not guarantee future results, which may vary. Please see additional disclosures and definitions on pages 1316.

10

1Q
2015
Market Know-How: Divergence Defines Opportunity

11

Our Contributors
Heather Kennedy Miner, CFA
Managing Director, Global Head of Strategic Advisory Solutions
Heather is the global head of Strategic Advisory Solutions, which delivers
GSAMs perspectives on global markets, strategic asset allocation, and innovative
business practices. Strategic Advisory Solutions provides this suite of integrated
solutions to help our clients grow and enhance their businesses.
John Tousley, CFA
Managing Director, Head of Market Strategy
John is a senior market strategist with GSAMs Strategic Advisory Solutions.
He leads the Market Strategy team, focusing on global capital markets, macro
strategy, and implementation. John specializes in developing tactical and strategic
investment insights within a risk-aware framework.
Candice Tse
Vice President, Senior Market Strategist
Candice is a senior market strategist with GSAMs Strategic Advisory Solutions.
She is responsible for economic and market strategy, along with client
engagement on investment solutions. Candices areas of expertise include
Womenomics and emerging markets.
Allen Sukholitsky, CFA
Vice President, Senior Market Strategist
Allen is a senior market strategist with GSAMs Strategic Advisory Solutions.
He focuses on economic and market strategy as well as client engagement on
investment implementation. Allen is responsible for helping clients make sense of
the markets and turning insights into actionable strategies.
Brendan Conway
Vice President, Senior Financial Writer
Brendan is a senior financial writer with GSAMs Strategic Advisory Solutions.
He helps drive content production for Market Strategy, Portfolio Strategy, and
Business Practices, as well as for other teams across GSAM.

Steven Russolillo
Associate, Financial Writer
Steven is a financial writer with GSAMs Strategic Advisory Solutions. He is
responsible for producing content for Market Strategy, Portfolio Strategy, and
Business Practices. Steven contributes to the weekly Market Monitor, monthly
Market Pulse, and various other publications across GSAM.
12

Risk Disclosures

Investors should also consider some of the potential risks of alternative

investments: Alternative Strategies. Alternative strategies often engage in
leverage and other investment practices that are speculative and involve a high
degree of risk. Such practices may increase the volatility of performance and the
risk of investment loss, including the entire amount that is invested. Manager
experience. Manager risk includes those that exist within a managers organization,
investment process or supporting systems and infrastructure. There is also a
potential for fund-level risks that arise from the way in which a manager constructs
and manages the fund. Leverage. Leverage increases a funds sensitivity to market
movements. Funds that use leverage can be expected to be more volatile than
other funds that do not use leverage. This means if the investments a fund buys
decrease in market value, the value of the funds shares will decrease by even more.
Counterparty risk. Alternative strategies often make significant use of over- thecounter (OTC) derivatives and therefore are subject to the risk that counterparties
will not perform their obligations under such contracts. Liquidity risk. Alternative
strategies may make investments that are illiquid or that may become less liquid in
response to market developments. At times, a fund may be unable to sell certain of its
illiquid investments without a substantial drop in price, if at all. Valuation risk. There
is risk that the values used by alternative strategies to price investments may be
different from those used by other investors to price the same investments. The above
are not an exhaustive list of potential risks. There may be additional risks that should
be considered before any investment decision.
Equity securities are more volatile than fixed income securities and subject to greater
risks. Small and mid-sized company stocks involve greater risks than those customarily
associated with larger companies.
Dividends are not guaranteed and a companys future ability to pay dividends may
be limited.
Master Limited Partnerships (MLPs) may be generally less liquid than other publicly
traded securities and as such can be more volatile and involve higher risk. Investments
in securities of an MLP involve risks that differ from investments in common
stocks, including risks related limited control and limited rights to vote on matters
affecting the MLP, risks related to potential conflicts of interest between the MLP
and the MLPs general partner, cash flow risks, dilution risks and risks related to
the general partners right to require unitholders to sell their common units at an
undesirable time or price. MLPs are also generally considered interest-rate sensitive
investments. During periods of interest rate volatility, these investments may not
provide attractive returns.

also result in additional filing requirements for tax exempt investors. Non-US investors
may be subject to US taxation on a net income basis and have US filing obligations
as a result of investing in MLPs. The tax reporting information for MLPs generally is
provided to investors on an annual IRS Schedule K-1, rather than an IRS Form 1099. To
the extent the Schedule K-1 is delivered after April 15, you may be required to request
an extension to file your tax returns.
MLP distributions consist largely of return of capital and not of current income. The
ultimate composition of these distributions may vary due to a variety of factors
including projected income and expenses, depreciation and depletion, and any tax
elections made by the MLP. The final characterization of such distribution will be made
when an MLP can determine each investors share of the MLPs income, expenses,
gains and losses. The final tax status of the distribution may differ substantially from
this information.
An investment in real estate securities is subject to greater price volatility and the
special risks associated with direct ownership of real estate.
Investments in fixed-income securities are subject to credit and interest rate risks.
Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise
in interest rates can result in the decline in the bonds price. Credit risk is the risk that
an issuer will default on payments of interest and principal. This risk is higher when
investing in high yield bonds, also known as junk bonds, which have lower ratings and
are subject to greater volatility. All fixed income investments may be worth less than
their original cost upon redemption or maturity.
Although Treasuries are considered free from credit risk, they are subject to interest
rate risk, which may cause the underlying value of the security to fluctuate.
Income from municipal securities is generally free from federal taxes and state taxes
for residents of the issuing state. While the interest income is tax-free, capital gains,
if any, will be subject to taxes. Income for some investors may be subject to the
federal Alternative Minimum Tax (AMT).

MLPs may also involve substantially different tax treatment than other equity-type
investments, and such tax treatment could be disadvantageous to certain types
of investors, such as retirement plans, mutual funds, charitable accounts, foreign
investors, retirement accounts or charitable entities. In addition, investments in MLPs
may trigger state tax reporting requirements. Generally, a master limited partnership
(MLP) is treated as a partnership for Federal income tax purposes. Therefore,
investors in an MLP may be subject to certain taxes in addition to Federal income
taxes, including state and local income taxes imposed by the various jurisdictions in
which the MLP conducts business or owns property. In addition, certain tax-exempt
investors in an MLP, such as tax-exempt foundations and charitable lead trusts, may
incur unrelated business taxable income (UBTI) with respect to their investment.
UBTI may result in increased Federal, and possibly state and local, tax costs, and may

Market Know-How: Divergence Defines Opportunity

13

General Disclosures

This information discusses general market activity, industry or sector trends, or other
broad-based economic, market or political conditions and should not be construed
as research or investment advice. This material has been prepared by GSAM and is
not financial research nor a product of Goldman Sachs Global Investment Research
(GIR). It was not prepared in compliance with applicable provisions of law designed
to promote the independence of financial analysis and is not subject to a prohibition
on trading following the distribution of financial research. The views and opinions
expressed may differ from those of Goldman Sachs Global Investment Research or
other departments or divisions of Goldman Sachs and its affiliates. Investors are
urged to consult with their financial advisors before buying or selling any securities.
This information may not be current and GSAM has no obligation to provide any
updates or changes.
Economic and market forecasts presented herein reflect a series of assumptions
and judgments as of the date of this presentation and are subject to change without
notice. These forecasts do not take into account the specific investment objectives,
restrictions, tax and financial situation or other needs of any specific client. Actual
data will vary and may not be reflected here. These forecasts are subject to high
levels of uncertainty that may affect actual performance. Accordingly, these forecasts
should be viewed as merely representative of a broad range of possible outcomes.
These forecasts are estimated, based on assumptions, and are subject to significant
revision and may change materially as economic and market conditions change.
Goldman Sachs has no obligation to provide updates or changes to these forecasts.
Case studies and examples are for illustrative purposes only.
Although certain information has been obtained from sources believed to be reliable,
we do not guarantee its accuracy, completeness or fairness. We have relied upon
and assumed without independent verification, the accuracy and completeness of all
information available from public sources.

Number: 198602165W), in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad

(880767W), and in or from India by Goldman Sachs Asset Management (India) Private
Limited (GSAM India).
Australia: This material is distributed in Australia and New Zealand by Goldman
Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948
(GSAMA) and is intended for viewing only by wholesale clients in Australia for
the purposes of section 761G of the Corporations Act 2001 (Cth) and to clients who
either fall within any or all of the categories of investors set out in section 3(2) or
sub-section 5(2CC) of the Securities Act 1978 (NZ) and fall within the definition of
a wholesale client for the purposes of the Financial Service Providers (Registration
and Dispute Resolution) Act 2008 (FSPA) and the Financial Advisers Act 2008 (FAA)
of New Zealand. GSAMA is not a registered financial service provider under the
FSPA. GSAMA does not have a place of business in New Zealand. In New Zealand,
this document, and any access to it, is intended only for a person who has first
satisfied GSAMA that the person falls within the definition of a wholesale client for
the purposes of both the FSPA and the FAA. This document is intended for viewing
only by the intended recipient. This document may not be reproduced or distributed
to any person in whole or in part without the prior written consent of GSAMA. This
information discusses general market activity, industry or sector trends, or other
broad based economic, market or political conditions and should not be construed
as research or investment advice. The material provided herein is for informational
purposes only. This presentation does not constitute an offer or solicitation to any
person in any jurisdiction in which such offer or solicitation is not authorized or to any
person to whom it would be unlawful to make such offer or solicitation.

This material is provided for informational purposes only and should not be construed
as investment advice or an offer or solicitation to buy or sell securities.

Canada: This material has been communicated in Canada by Goldman Sachs Asset
Management, L.P. (GSAM LP). GSAM LP is registered as a portfolio manager under
securities legislation in certain provinces of Canada, as a non-resident commodity
trading manager under the commodity futures legislation of Ontario and as a portfolio
manager under the derivatives legislation of Quebec. In other provinces, GSAM LP
conducts its activities under exemptions from the adviser registration requirements.
In certain provinces, GSAM LP is not registered to provide investment advisory or
portfolio management services in respect of exchange-traded futures or options
contracts and is not offering to provide such investment advisory or portfolio
management services in such provinces by delivery of this material.

Past performance does not guarantee future results, which may vary. The
value of investments and the income derived from investments will fluctuate
and can go down as well as up. A loss of principal may occur.

Japan: This material has been issued or approved in Japan for the use of professional
investors defined in Article 2 paragraph (31) of the Financial Instruments and
Exchange Law by Goldman Sachs Asset Management Co., Ltd.

Views and opinions expressed are for informational purposes only and do not
constitute a recommendation by GSAM to buy, sell, or hold any security. Views and
opinions are current as of the date of this presentation and may be subject to change,
they should not be construed as investment advice.

United Kingdom and European Economic Area (EEA): In the United Kingdom, this
material is a financial promotion and has been approved by Goldman Sachs Asset
Management International, which is authorized and regulated in the United Kingdom
by the Financial Conduct Authority.
Asia Pacific: Please note that neither Goldman Sachs Asset Management
International nor any other entities involved in the Goldman Sachs Asset Management
(GSAM) business maintain any licenses, authorizations, or registrations in Asia
(other than Japan), except that it conducts businesses (subject to applicable local
regulations) in and from the following jurisdictions: Hong Kong, Singapore, Malaysia,
and India. This material has been issued for use in or from Hong Kong by Goldman
Sachs (Asia) L.L.C, in or from Singapore by Goldman Sachs (Singapore) Pte. (Company

14

Confidentiality
No part of this material may, without GSAMs prior written consent, be (i) copied,
photocopied or duplicated in any form, by any means, or (ii) distributed to any person
that is not an employee, officer, director, or authorized agent of the recipient.
Goldman, Sachs & Co., member FINRA.
2015 Goldman Sachs. All rights reserved.
Date of first use: 1/7/2015. 149292.MF.MED.OTU.

Glossary

Equities

Fixed Income

The S&P 500 Index is the Standard & Poors 500 Composite Stock Prices Index of
500 stocks, an unmanaged index of common stock prices. The index figures do
not reflect any deduction for fees, expenses or taxes. It is not possible to invest
directly in an unmanaged index.

The 10-Year Treasury is a US Treasury debt obligation that has a maturity of

10 years.

The S&P 500 Dividend Aristocrats index measures the performance of S&P 500
constituents that have increased dividends every year for the last 25 consecutive
years.
The Russell 1000 Value Index is an unmanaged index of common stock prices that
measures the performance of the large-cap value segment of the US equity universe.
The Alerian MLP Index is a composite of the 50 most prominent energy MLPs
calculated by Standards & Poors using a float-adjusted market capitalization
methodology. Alerian MLP Index, Alerian MLP Total Return Index, AMZ, and
AMZX are trademarks of Alerian and their use is granted under a license
from Alerian.
The DJ Wilshire Real Estate Securities Index is an unmanaged index of publicly
traded REITs and real estate operating companies.

The Barclays US Aggregate Bond Index represents an unmanaged diversified

portfolio of fixed-income securities, including US Treasuries, investment-grade
corporate bonds, and mortgage-backed and asset-backed securities.
The Barclays 110 Year Managed Money Short/Intermediate Index is a
rules-based, market-value-weighted index engineered for the tax-exempt bond
market. It represents the Managed Money Short/Intermediate (110) component
of the Managed Money Index, a subset of the Municipal Bond market.
The Barclays US 13 Year Treasury Index represents the 13 year maturity
range of the US Treasury Index.
The Barclays US Intermediate Treasury represents the intermediate maturity
range of the US Treasury Index.
The Barclays US Long Treasury represents the long maturity range of the
US Treasury Index.
The Barclays Municipal Bond Index 7 Year (68) is the 68 Year component
of the Municipal Bond index.
The Barclays US Corporate Index represents the corporate component of the
US Credit Index.
The Barclays Revenue 1 Year (12) Index is the 12 Year sub-component of the
broader Barclays Revenue Bond Index.
The Barclays Revenue 3 Year (24) Index is the 24 Year sub-component of the
broader Barclays Revenue Bond Index.
The Barclays Revenue 5 Year (46) Index is the 46 Year sub-component of the
broader Barclays Revenue Bond Index.
The Barclays US High-Yield Index covers the USD-denominated, non-investment
grade, fixed-rate, taxable corporate bond market.
The J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) is an
unmanaged market capitalization Index that tracks total returns for USD-denominated
debt instruments issued by emerging market sovereign and quasi-sovereign issuers.
The Barclays US Aggregate Municipal Bond Index is an unmanaged broad-based
total return index composed of approximately 8,000 investment grade, fixed rate,
and tax-exempt issues, with a remaining maturity of at least one year.
The Barclays US High Yield Municipal Bond Index (formerly the Lehman Brothers
High Yield Municipal Bond Index) is an unmanaged index made up of bonds that are
noninvestment grade, unrated, or rated below Ba1 by Moodys Investors Service with
a remaining maturity of at least one year.

Market Know-How: Divergence Defines Opportunity

15

Glossary continued

Alternative Strategies
The Hedge Fund Research, Inc. (HFR) Fund of Funds Composite Index is an
equal-weighted index of over 500 domestic and offshore fund of funds. All funds
report in USD and report Net of All Fees returns on a monthly basis. All funds included
in the index must have at least $50 million in assets under management or have been
actively trading for at least 12 months.
Source: Hedgefundresearch.com.
In an effort to distinguish funds by what they own, as well as by their prospectus
objectives and styles, Morningstar developed the Morningstar Categories. While the
prospectus objective identifies a funds investment goals based on the wording in
the fund prospectus, the Morningstar Category identifies funds based on their actual
investment styles as measured by their underlying portfolio holdings (portfolio and other
statistics over the past three years).
Equity Long/Short refers to the Morningstar category for Long/Short Equity and
Bear Market, where the goal is to generate returns through long and short equity
views through bottom-up fundamental, top-down macro and quantitative investment
styles.
Event Driven refers to the Morningstar category for Market Neutral, Long/Short
Equity, and Nontraditional Bond, where the goal is to profit from corporate events,
such as mergers and spinoffs through merger arbitrage, event driven, and long/short
credit investment styles.
Relative Value refers to the Morningstar category for Market Neutral, where
the goal is to profit from perceived mispricings within and across various securities
through convertible arbitrage, equity market neutral, and volatility arbitrage
investment styles.
Tactical Trading refers to the Morningstar category for Managed Futures,
Multialternative, and Multicurrency, where the goal is to profit from long and short
directional positions in equities, bonds, commodities, and currencies through trend
following, countertrend, discretionary macro/GTAA, and absolute return currency
investment styles.

It is not possible to invest in an unmanaged index.

16

A Long-term Partnership
Strategic Advisory Solutions provides a comprehensive
suite of integrated solutions designed to help our clients
grow and enhance their businesses. Our global team
of experienced strategists aims to deliver in-depth
expertise to help clients understand dynamic markets,
design well-diversified strategic portfolios, and
implement industry best practices through programs
tailored to each organization. We partner with our
clients to develop actionable solutions to help them
achieve their goals.
For more information,
contact us at StrategicAdvisorySolutions@gs.com.

New York
San Francisco
Los Angeles
Salt Lake City
Boulder
Chicago
Toronto
Miami
Greenwich
Burlington
Boston
So Paulo
London
Madrid
Paris
Amsterdam
Geneva
Zurich
Frankfurt
Milan
Stockholm
Dubai
Mumbai
Bangalore
Hong Kong
Kuala Lumpur
Singapore
Beijing
Shanghai
Seoul
Tokyo
Melbourne
Sydney

GSAMFUNDS.com

Goldman Sachs Asset Management is

one of the worlds leading investment
managers. With more than 2,000
professionals across 33 offices worldwide,
GSAM provides institutional and individual
investors with investment and advisory
solutions, with strategies spanning asset
classes, industries, and geographies.
Our investment solutions include fixed
income, money markets, public equity,
commodities, hedge funds, private
equity, and real estate. Our clients access
these solutions through our proprietary
strategies, strategic partnerships, and our
open architecture programs.

Our investment teams represent over

700 investment professionals, capitalizing
on the market insights, risk management
expertise, and technology of Goldman
Sachs. We help our clients navigate
todays dynamic markets and identify the
opportunities that shape their portfolios
and long-term investment goals. We
extend these global capabilities to the
worlds leading pension plans, sovereign
wealth funds, central banks, insurance
companies, financial institutions,
endowments, foundations, individuals,
and family offices, for whom we invest
or advise on more than $999 billion
of assets.

As of September 30, 2014. GSAM leverages the resources of Goldman, Sachs & Co. subject to legal, internal, and regulatory
restrictions. Assets Under Supervision (AUS) includes assets under management and other client assets for which Goldman Sachs
does not have full discretion.
SASMARKET1Q15