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GLOBAL INVESTMENT COMMITTEE / COMMENTARY SEPTEMBER 2014

On the Markets








MICHAEL WILSON
Chief Investment Officer
Morgan Stanley Wealth Management
TABLE OF CONTENTS
2
A Framework for Flexible Investi ng
Morgan Stanley & Co. introduces a way to
think about cross-asset investing.
4
No Si gns of Hubris and Debt
Capex, inventories, staffing and debt are
in check, so a stock market top is unlikely.
5
Opportunities in Innovati ve Disrupti on
We look at long-term trends that may offer
multiple avenues of investment.
7
Whats Hol di ng Down Gl obal Rates?
The answer can be found in the
beleaguered Euro Zone economies.
9
Bonds Unbound
Nontraditional fixed income strategies
may help investors withstand a rising
interest rate environment.
10
Q&A: Getti ng in on the US Energy
Renaissance
J erry Swank of MainStay Cushing Funds
explains how MLPs invest in energy.
Dont Blink

In last months On the Markets, we discussed the potential market
impact of the Federal Reserves transition from the tapering of
Quantitative Easing (QE) to the inevitable first interest-rate hike. We
thought August might bring more volatility as the Fed began to walk
investors down this path, first with the J ackson Hole symposium,
followed by hints about what it might do at its next Federal Open
Market Committee meeting on Sept. 17. We also suggested investors
be ready to buy into weakness because we thought any market
pullback would be short and sweetand perhaps the last opportunity
for investors to position themselves for the seasonally strong fourth
quarter.
Lo and behold, global equity and credit markets sold off sharply during the first week
of August. However, they rebounded just as sharply, with most ending the month in
positive territory. If you blinked, you would have likely missed it. With August a
popular time for market participants to take vacation, its likely many were caught off-
guard, either missing the chance to buy the dip or getting whipsawed both ways.
The Global Investment Committee decided not to blink, and added exposure to both
US equities and high yield credit shortly after prices bottomed. Whether this was a
durable low for asset prices remains to be seen, but we believe it will prove to have been
a good entry point for what we think is likely to be a solid finish to 2014.
Our thesis remains the same as its been all year: The tapering of QE is the beginning
of a Fed tightening cycle, but it is not the end of the economic and earnings expansion.
Instead, the period is typically one when risky assets consolidate their initial strong post-
recession gains exiting, a sort of pause that refreshes.
While it may not seem like risky assets have consolidated much, we believe that
global equity and credit markets have been going through a rolling correction since the
middle of 2013, when the Fed initially raised the issue of tapering. The correction
started with interest rate-sensitive securities last summer and possibly ended with
European equities in August. The fourth quarter is typically a good time to be fully
invested. Given 12 months of rolling corrections, we decided its probably better to be
early than late to this years party. n




ON THE MARKETS / STRATEGY



Please refer to important information, disclosures and qualifications at the end of this material. September 2014 2
ANDREW SHEETS
Chief Cross-Asset Strategist
Morgan Stanley & Co.
ross-asset investors, in the broadest
sense, are those with the flexibility to
move where global markets provide the
greatest opportunity. Being in favor of
flexibility, after all, feels a little obvious.
We need to get more specific about the
advantages.
The advantages start with signals that
market disconnects can provide, and the
opportunity available to those who can
shift between them. The last seven years
are rich with examples. Credit weakness
was an early warning for stock and
government bond markets in 2007 and
2008, while European sovereign bonds
returned the favor to equities and credit in
2011 and 2012. Forced selling in secur-
itized and peripheral bonds, meanwhile,
meant large rewards for those able to
move between markets. Policy catalysts,
from Quantitative Easing in the US to
whatever it takes in the Euro Zone to
Abenomics in J apan, rewarded flexibility
in 2011, 2012 and 2013.
REACTING TO VOLATILITY. Yet the
growth and interest in cross-asset investing
are also about something else. In 2008 and
2009, credit spreads hit levels last seen in
the Great Depression, and global equity
markets suffered a 58% peak-to-trough
decline less than five years after
experiencing a 49% decline from 2000
through 2003. Assets and regions that
previously were thought to be independent
became highly correlated, increasing
volatility further.
Given the current composition of retail
and institutional assets, this matters.
Individual investor ranks are increasingly
dominated by baby boomers, whose
proximity to retirement increases their
aversion to risk. Meanwhile, pension funds
and insurance companies have seen
solvency eroded by low yields and
increased regulation. For a large swath of
the global investor base, managing
volatility matters as never before.
REVISITING AGE-OLD PRINCIPLES.
This problem isnt a new one. Investors
have used asset-allocation theory for more
than 60 years to try to maximize return and
minimize volatility. Part of the resurgence
of cross-asset investing is a renewed focus
on these age-old principles, and taking
them further. Following a crisis that saw
many portfolios ill-suited to investor goals,
this has often meant a shift toward
outcome-oriented investing, trying to
find a less volatile way to achieve returns.
Cross-asset investing, in short, rests on
three pillars: Identifying disconnects
between markets can provide important
signals; flexibility is valuable in a world
where opportunities have been uneven;
and a broader approach should, in theory,
make it easier to address end-investors
more focused on risk-adjusted outcomes.
When put together, our colleagues in
financials equity research see the assets
under management of multiasset funds,
broadly defined, growing to $6 trillion by
2018, from less than $4 trillion now.
CYCLICAL VIEWPOINTS. To build a
cross-asset framework, we start with
cycles because of the oscillating nature of
growth, sentiment and valuation. While
ones cycle horizon can be 20 or more
years, well start with 10-year periods over
which fundamentals and mean-reversion
have tended to dominate asset prices:
Long term (10 years). Long-run views
help to set overall expectations, anchor
shorter-term approaches and guide a large
share of assets that areinvested for the
long term. Valuation and mean-reversion
A Framework for
Flexible Investing
C
The US Cycle: Still Not Full-Fledged Expansion
Stage of the Cycle
Attribute Repair Recovery Expansion Downturn
Economic
Growth
Weak,
Improving
Moderate,
Improving
Strong,
Plateauing
Weak,
Deteriorating
Credit Growth Weak Accelerating High Falling
Central Bank
Policy
Easy
Starting to
Tighten
Tightening Easing
Inflation Low, Stabilizing
Moderate,
Rising
High, Rising
Moderate,
Falling
Yield Curve Steep Flattening Flat/Inverted Steepening
Asset
Valuations
Below Average,
Rising
Near Average,
Rising
Above Average,
Rising
Falling to Below
Average
Fundamentals
Profits
Leverage
Profits
Leverage
Profits
Leverage
Profits
Leverage
Credit Versus
Equity
Credit Preferred
Credit, Equity
Both Up
Equity
Preferred
Credit, Equity
Both Down
Volatility
Above Average,
Falling
Below Average,
Stable
Below Average,
Rising
Above Average,
Rising
Note: Gray boxes represent current stages of the US economic cycle.
Source: Morgan Stanley & Co. Research as of Aug. 5, 2014




Please refer to important information, disclosures and qualifications at the end of this material. September 2014 3
both become more important the longer
ones horizon, and will be central to how
we approach long-run return estimates.
This is also the period over which we
would expect structural ideas play out. Its
no accident that Morgan Stanley & Co.
Blue Papers, which look at shifts in
industries and markets, often refer to
changes that will take place over the
coming decade.
Medium term (five years). With long-
run expectations set, adjustments are
needed. Markets often overshoot, due to
the ups and downs of the economy,
sentiment and credit. While the business
and credit cycles may differ, they often
overlap. Both fall into four stages:
Repair. The economic outlook is still
challenged and uncertain, and companies
shore up balance sheets while focusing on
survival. Bondholders take precedence
over stockholders, government and central
bank policy is supportive, borrowing is
weak and volatility is above average but
falling. Equity valuations are below
average and rising, credit spreads are
above average and falling and the yield
curve is steep. Think 2003 and 2009.
Recovery. The economy gains
momentum as confidence improves,
inventories are rebuilt and investment and
hiring resumes. Bondholders and
shareholders benefit from stronger
operations without excessive corporate
risk-taking. Central bank and government
policy becomes less accommodative, loan
growth accelerates and volatility falls
below average. As fear recedes, credit and
equity valuations move from modestly
cheap to modestly rich, and the yield curve
flattens. Think 2004-2005, or today.
Expansion. Optimism returns, and the
scars of the last downturn are all but
forgotten. Businesses are managed for
stockholders at the expense of bondholders
and show the necessary confidence to
increase capital expenditures and
undertake large-scale mergers and
acquisitions. The growth of private debt
accelerates, central banks tighten monetary
policy, the yield curve trends toward
inversion, equity valuations trend well
above average and both inflation and
volatility rise. Think 2006-07.
Downturn. Credit-fuelled growth
stalls, shaking the confidence in the boom
that preceded it. Weakening cash flow in
the face of still-high borrowing causes
companies and consumers to cut back, a
shock that is partially offset by central
bank and government stimulus. Above-
average valuations fall below average,
volatility rises, the yield curve steepens
and inflationary pressures dissipate.
No cycle, of course, is as simple as the
above suggests. In aggregate, global
markets still appear to be late in the
recovery phase, despite central bank policy
more consistent with a repair phase and
credit market issuance and pricing more
typical of expansion (see table, page 2).
Yet this masks a highly unsynchronized
cycle across the world, with Europe in the
early stages and the US further along.
Such unevenness could mean that the
current expansion is unusually long, in our
economists view.
These qualitative assessments can be
tested against a more quantitative
approach. For the US, where we have the
longest data set, we derive a cycle gauge
(see chart) based on employment, credit
conditions, corporate aggressiveness and
the yield curve, with the overall reading
based on the deviation of these metrics
from the long-run trend. The cycle
indicator suggests that the US is still in the
early stages of the expansion phase.
Near term (six to 12 months). For all
that one can analyze long-term valuations
and medium-term cycles, it is the shorter
periods that put investments to the test.
The pressure of quarterly and annual
performance, along with the difficulty of
forecasting earnings or default rates into
the future, mean that many investors focus
on the next six to 12 months out.
How do we as cross-strategy investors
address this? Over the very short term, six
months or less, we plan on monitoring
sentiment, flows and misalignment to
identify opportunities, although we believe
markets are noisier, that is, more random,
the shorter the investment window.
At the six-to-12-month horizon, we
look for guidance to Morgan Stanley &
Co.s strategists, whose recommendations
over this period are tailored to the
fundamental, technical and valuation
factors that matter most to their markets.
These views, along with other factors, help
us quantify how short-term performance
may deviate from the waves of the longer-
run cycle. n

To see the full report on cross-asset
strategy, ask your advisor for Cross-
Asset Dispatches: Introducing Our
Framework, Aug. 5, 2014.
Cycle Indicator Suggests US in Earl y Expansion
Note: Left scale indicates percentile deviation from trend
Source: Morgan Stanley & Co. Research, Bloomberg, Datastream as of J une 30, 2014
-0.4
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
'73 '78 '83 '88 '93 '98 '03 '08 '13
Morgan Stanley Cycle Model
Downturn Repair Recovery Expansion



ON THE MARKETS / EQUITIES



Please refer to important information, disclosures and qualifications at the end of this material. September 2014 4
ADAM S. PARKER, PhD
Chief US Equity Strategist
Morgan Stanley & Co.
he US stock market took a slight dip
in late J uly and early August, but the
water barely touched its ankles. The S&P
500 declined not quite 4% and turned
upward. The index first closed at 2,000 on
Aug. 26 and, three days later, finished the
month at 2,003. The index is now a hairs
breadth from where we thought it would
be late when we made our 2,014 in 2014
forecast in December. Even the 12-month
update we made in J une2,050 by mid-
2015is only 2.3% away (see table).
Its natural to question whether stocks
are making a top. And if so, how would
we call the top of the cycle? Our view is
that hubris and debt define the top of every
cycle, and as such, we monitor for signs of
growing costs that could ultimately
translate into more downside to corporate
earnings. Today, it is hard to find evidence
to make that argument. In fact, we think it
is possible that capital intensitythe ratio
of capital spending to salesis now
peaking for the biggest 1,500 US
companies at around 7%, which is still
below the 40-year median of 8.1%.
CAPEX MUTED. A big increase in
capital spending, while positive for GDP,
would worry us because of the potential
downside impact on earnings. The reason
for that is that fixed costs, like a depre-
ciation burden on cost of goods sold, can
cause material downside to earnings in the
event of a revenue shortfall. But for the
moment, this doesnt appear likely. We
would wait for signs that backlogs are
aging and growing or that book-to-bill
ratios are well above 1.0 in the technology
and industrial sectors before wed expect
to see a pickup in total capital spending.
We maintain our long-held stance that
capital spending will remain muted.
It is always difficult to assess aggregate
inventory relative to sales, but it is worth
pointing out that it has grown modestly
recently. We dont see this as a big
impediment to margin expansion, but
would be concerned if third-quarter
earnings were to show bigger inventory
expansion. Through the second-quarter
earnings, we havent seen too many areas
of concern for total inventory dollars in
technology and industrials, and are
encouraged that there will be less
inventory expansion in the retail sector
than there was last year.
HIRING DISCIPLINE. In prior cycles,
hiring has been another worrisome sign of
management confidence. But this time, the
largest companies really have maintained
hiring discipline, showing a far slower
growth rate in headcount than in revenue.
So overall, we just dont see enough
capital spending, inventories or hiring to
worry about a top in the cycle any time







soon. Can debt cause a problem? Interest
coverage has markedly improved for the
overall US market since the last crisis,
from four times to nearly eight times
during the past five years. This means that
the odds of many companies experiencing
difficulties in making their debt payments
in the next few years are markedly lower
than they have been in some time.
Refinancing also shouldnt be a
problem for most companies for a while as
most management teams have pushed out
their financial obligations until 2017 or
later, taking advantage of low cost of
financing and credit availability. Overall,
we just dont see sufficient evidence, from
a hubris and debt perspective, to worry
about the top of the cycle or a large
earnings contraction. n
No Signs of Hubris and
Debt in This Market

T
MS & Co. S&P 500 Price Targets for Mid-2015
EPS
Landscape
Scenario
Probability
2014E 2015E
2H15E-
1H16E
P/E
Ratio
Scenario
Target
Upside /
Downside
Bull Case 20% 122.6 134.9 141.6 17.9 2,540 26.8%
Growth 11% 10% 10%
Base Case 60% 116.0 122.9 126.6 16.2 2,050 2.3%
Growth 5% 6% 6%
Bear Case 20% 102.0 102.0 104.0 15.0 1,560 -22.1%
Growth -8% 0% 2%
Current S&P 500 Price 2,003
Source: Thomson Reuters, Morgan Stanley & Co. Research as of Aug. 29, 2014



ON THE MARKETS / EQUITIES



Please refer to important information, disclosures and qualifications at the end of this material. September 2014 5
DAN SKELLY
Senior Equity Strategist
Morgan Stanley Wealth Management
n the words of that 80s cinematic
iconoclast Ferris Bueller, Life moves
pretty fast. If you don't stop and look
around once in a while, you could miss it.
With a nod to that classic line from Ferris
Buellers Day Off, we pause from our
usual equity market commentary to take a
step back and examine what we view as
disruptive trends that are running across
multiple sectors and industries and having
an impact on the way large companies
operate. From studying these trends, we
also hope to identify potential investment
opportunities.

Cloud Computing
The oft-cited migration to the cloud
entails companies shifting on-premises
enterprise servers to the Internet. This
web-based cloud model allows companies
to lower their information technology (IT)
costs, improve application development
and free up valuable resources that were
previously spent on upgrading physical
hardware. A proprietary survey conducted
late last year by Morgan Stanley & Co.
Research (MS & Co.) indicates that more
than two-thirds of companies polled plan
to be running workloads in the public
cloud by the end of 2014, up from half at
the end of 2013. Whats more, a J une 2014
survey shows about 9% of their
application workload in the cloud, and
they expect that to grow to 15% by the end
of this year and 21% by the end of 2015
(see chart).
In addition, the latest quarterly survey
of chief information officers by MS &
Co.s tech research team shows that cloud
computing topped the IT priority list for a
third consecutive quarter. The implications
of the shift to the cloud are significant.
According to Katy Huberty, MS & Co.s
IT hardware analyst, the migration to
cloud environments will be one of the
primary drivers of technology spending
during the next three years, producing
significant growth opportunities for those
companies positioned to provide cloud
services or build cloud infrastructure. On
the other hand, cloud migration will
present significant challenges for vendors
with products and services tied to on-site
servers.
We favor select providers of cloud
application products and services, and
would avoid companies with hardware
products that may compete with the cloud.

Energy Efficiency
As corporations deal with environ-
mental regulations, geopolitical tensions
and managing profitability amid a frus-
tratingly slow recovery, products and
processes promoting energy efficiency are
paramount. In North America, cheap and
abundant natural gas is enabling
companies to lower factory utilization
costs. As a result, we are seeing some
incremental manufacturing output shift
back here and away from parts of Asia,
where a decade of labor-cost inflation has
also reduced the advantages of sending
production offshore. Aside from cost-
efficient manufacturing processes, we see
two other areas clearly impacted by energy
efficiency trends: transportation and
building infrastructure.
On the transportation front, we favor
railroad companies, given their significant
energy-efficiency advantage over truckers.
We also like, as an example, providers of
turbochargers and other products that
improve automotive fuel efficiency.
Finally, we favor companies that
provide sophisticated motion-and-flow-
control products that help reduce energy
use in office buildings and industrial
spaces. Energy efficiency is an important
driver for upgrades in lighting; heating,
ventilation and air-conditioning; and
building controls (see chart, page 6).

Opportunities in
Innovative Disruption

I
Cloud Share Still Small, but Expected to Grow

Source: Morgan Stanley & Co. CIO Survey as of J une 25, 2014
71%
65%
59%
14%
14%
13%
6%
6%
7%
9%
15%
21%
0% 20% 40% 60% 80% 100%
June 2014
End of 2014
End of 2015
Respondents
On Premise Managed Hosting
Co-Location Public Cloud




Please refer to important information, disclosures and qualifications at the end of this material. September 2014 6
Online/Mobile Retailing
Theres typically a burst of consumer
spending that accompanies an economic
recovery, but that hasnt been the case
over the past few years. In the wake of the
Great Recession, employment has been
slow to recover, households have been
focused on paying down debt instead of
taking on new obligations and ultra-low
interest rates have crimped cash flow for
those who depend on interest income. That
said, recent job growth and a likely
imminent uptick in wages portend higher
spending in the next year, according to
Lisa Shalett, a member of the Global
Investment Committee (GIC).
We believe that a material amount of
that spending will take place online rather
than at traditional brick-and-mortar
retailers. A MS & Co. AlphaWise survey
suggests that global eCommerces
penetration of retail sales will increase to
more than 9% by 2016 from 6.5% today; if
so, that means retail eCommerce would
surpass $1 trillion. Furthermore, we
believe that more of that spending will
take place via mobile payments systems as
smartphone usage increases.
We favor retailers that have business
models and core products inherently more
insulated from online competition, namely
club store discounters and home-
improvement stores. Home improvement
fares well in an MS & Co. study of how
threatened/insulated various types of
retailers are from online competition (see
chart, below). In clothing, we prefer
apparel makers that have first-mover
advantage online with the necessary
supporting capital and scale. Last, we also
like the network-payment processors given
their toll keeper fee-based business
models that benefit from increased
transaction volume, whether it comes
online, through mobile devices or via
traditional physical locations.
The Internet of Things
Perhaps one of the most far-reaching
trends is the Internet of things (IoT), the
fast-growing network connectivity of
everyday items enabled by the pervasive
integration of semiconductors, mobile
communication and Big Data/Analytics.
A MS & Co. Blue Paper earlier this year
discussed a range of potential applications
from smart meters that enable better
management of power and water to
precision agriculture that provides
farmers with data analysis and real-time
recommendations, potentially changing the
way farms operate and producing more
food with fewer resources. (For an
abbreviated version of the report, see the
May 2014 On the Markets.) Additionally,
in factories, the growing use of robotics
and automation is leading to both
improved efficiency and reduced energy
usage. Lastly, for consumers, smart
lighting in residences, connected cars with
increased semiconductor content and
wearable devices reflect the way that the
IoT permeates our daily lives.
For a play on the IoT, we favor
automation product makers, agricultural
companies that could benefit from
increasing productivity and commodity
yields, tech companies that make
semiconductors and mobile brand leaders
that provide wearable devices. n
Energy Efficiency Is Key Driver for Replacing Lighting,
HVAC and Building Controls

Source: AlphaWise, Morgan Stanley & Co. Research as of Sept. 24, 2013
How Retailers Are Protected from Online Competition

*Stock-keeping units, inventory turns and average selling prices
Source: AlphaWise, Morgan Stanley & Co. Research as of J une 23, 2014
67
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40
50
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Energy Efficiency
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(1-3 ranked best to worst) (1-3 ranked best to worst)



ON THE MARKETS / FIXED INCOME



Please refer to important information, disclosures and qualifications at the end of this material. September 2014 7
JONATHAN MACKAY
Market Strategist
Morgan Stanley Wealth Management
JOHN DILLON
Chief Municipal Bond Strategist
Morgan Stanley Wealth Management
ne of the biggest surprises of the year
has been the drop in global bond
yields. Ten-year US bond yields are at
their lowest level in more than a year and
are down more than 60 basis points since
the start of the year. In hindsight, some of
the reasons for the drop in rates are
obvious: weak GDP in the first quarter, the
conflicts in Eastern Europe and the Middle
East, concerns about growth in China and
liability-driven investors like pension
funds seeking to de-risk their portfolios.
Finally, due to the declining budget deficit,
the net issuance of Treasuries is projected
to be down roughly 50% from 2013 and
significantly lower than 2012 and
2011.Yet, it is the persistence of low rates
that has been the real surprise.
Economic data in the second quarter
has been consistently stronger than the
first quarter, with GDP rebounding to a
4% annualized rate from -2.1% and the
unemployment rate dropping to 6.2% from
close to 7% at the beginning of the year.
The ISM manufacturing and nonmanu-
facturing surveys, well-followed indicators
of economic activity, are approaching a
reading of 60, which in the past has been
associated with very strong underlying
growth. On top of this rebound in growth
has been the fast-approaching end to the
Feds tapering process, expected to
conclude in October, which means the
Federal Reserve will no longer be making
net new purchases of assets and will only
be reinvesting interest and principal
payments. On the surface this seems like a
recipe for higher rates. So whats holding
US Treasury rates down?
BLAME THE BUND. We believe the
primary culprit is Europe. Germanys 10-
year Bund yield is below 1% and has been
on a downward trajectory along with other
core European ratesFrance and Finland,
for examplesince the middle of 2013.
The spread between the yield on the 10-
year US Treasury and the 10-year German
Bund is currently 145 basis points; thats
more than two standard deviations above
the long-term average of 40 basis points
(see chart). The rest of Europe is no longer
providing much yield pick-up either, with
Spanish, Portuguese and Italian 10-year
yields at 2.25%, 3.01% and 2.47%,
respectively.
Can European rates stay at these levels?
We believe they can, but they could also
drop further in the short term. Recent
economic data has been soft even in the
core of Europe, and inflation expectations
are falling. The market seems to be
making the wager that European Central
Bank President Mario Draghi, after talking
the talk for the past two years, will
actually have to walk the walk and move
forward with a Fed-like Quantitative
Easing program. Draghis speech at the
recent J ackson Hole conference was quite
dovish as he specifically highlighted the
recent drop in forward inflation
expectations in the Euro Zone.
US RATES ATTRACTIVE. For investors
with a global mandate, US rates look
relatively attractive versus the core of
Whats Holding Down
Global Interest Rates?

O
The Spread Between US and German Yields Moved Toward Its All-Time High

Source: Bloomberg as of Aug. 25, 2014
145
169
-200
-150
-100
-50
0
50
100
150
200
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Spread, 10-Year US Treasury to 10-Year German Bund
Highest Spread
Basis Points




Please refer to important information, disclosures and qualifications at the end of this material. September 2014 8
Europe, and as an added bonus, the US
dollar is on a strengthening trend versus
the euro. This doesnt mean US rates
cannot move higher; they can. But if
German yields stay ator go below
current levels, we believe this will act as a
restraint on any rise in US 10-year yields.
In our view, the real risk for bond
investors is a move higher in short rates,
which will be driven by expectations for
Fed rate hikes. And unlike the yield
difference between the 10-year Treasury
and the 10-year Bund, the difference
between the two-year US Treasury and
two-year German Bund is only 50 basis
points. We believe the US yield curve will
flatten as we move through this rate cycle,
with short rates moving proportionately
higher than long-term yields, similar to
what happened in the 2004-to-2006 and
1994 cycles.

Municipals
Going into the summer, the municipal
bond market faced two primary risks that
could have upset matters: the prospect of
rising interest rates and the potential for
outsized volatility from ongoing fiscal
troubles in Puerto Rico, one of the muni
markets largest issuers. Instead, rates
have rallied strongly, and Puerto Rico
anxieties have diminished on the back of
recent credit developments. The net result
has been an overwhelmingly positive
summer for municipal bonds, with the
Barclays Municipal Bond Index now
sporting a year-to-date total return of 7.4%
(as of Aug. 28).
These risks, however, have not been
removed, just delayed. Despite mildly
improving US economic data, US
Treasuries have rallied on troubling
geopolitical headlines. And as for Puerto
Ricos credit problems, the most recent
fixes appear temporary.
REDEMPTIONS DROP. Still, September
is usually a quiet time for municipal
bonds. While June, July and August are
typically the three months with the largest
redemptions, September often sees
declines of more than 60% in the amount
of cash in need of reinvestment. On the
supply side, issuance is historically
subdued, too, and helps investors gird for a
jump in October, a month in which
issuance typically sees increases of more
than 30%. If evidence of a larger October
primary supply surfaces by mid-
September, it could be a catalyst for
market weakness and lead to lower prices
and better entry points for investors.
Given these developments, we are
removing the constructive outlook we
initiated in mid-April in favor of adopting
a more cautious view. We may be early on
this call, as the muni market shows few
signs of weakness at the moment and
could indeed trade sideways for weeks to
come on scant new-issue supply,
remaining redemption money on the
sideline and muni fund inflows (see chart).
BEST OPPORTUNITIES. We favor
above-market (5% or higher) coupon
structures in the steep four-to-nine-year
maturity range. Continuing our credit-
over-rates theme, we also recommend
extensions on the credit curve into A-
rated general obligation bonds, state
housing finance authorities, higher
education issuers and airports. We also
favor AA-rated hospitals and BBB-rated
water, sewer and public power revenue
bonds. n

Even as Yields Fall, Muni Bond Inflows Continue

Source: Thomson Reuters Municipal Market Data, The Bond Buyer as of Aug. 21, 2014
2.0
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
-1,500
-1,300
-1,100
-900
-700
-500
-300
-100
100
300
500
700
900
Jan '14 Feb '14 May '14 Jun '14 Aug '14
$
%
Weekly Muni Fund Flows (millions, left axis)
10-Year AAA Muni Yield (right axis)



ON THE MARKETS / FIXED INCOME



Please refer to important information, disclosures and qualifications at the end of this material. September 2014 9
MATTHEW RIZZO
Head of Investment Strategy & Content
Consulting Group Investment Advisor Research
Morgan Stanley Wealth Management
STEVE LEE, CFA
Senior Manager Research Analyst
Consulting Group Investment Advisor Research
Morgan Stanley Wealth Management
raditional fixed income strategies
benefitted greatly from the three-
decade decline in US interest rates. While
these strategies remain critical to
diversified portfolios, they may leave
investors open to losses when interest rates
are rising. In contrast, mutual funds
following nontraditional strategies have
shown the ability to offer current income,
relatively low correlation to traditional
investments and the potential to better
withstand interest rate increases. An
intermediate-term bond fund can shorten
maturities in the face of rising rates, but
only within the limits of its mandate;
nontraditional bond funds have greater
flexibility to adjust to a changing
environment.
OPPORTUNISTIC STRATEGIES.
Opportunistic funds may invest in high
yield bonds, international bonds, emerging
market debt, bank loans, convertible
securities and even preferred stocks. Some
strategies may also include smaller
allocations to equities, commodities and
foreign currencies. Opportunistic strategies
may employ various investment
techniques including bottom-up security
selection, top-down global macro analysis
and sector rotation. Allocations can shift
significantly over time, resulting in
changing risk/return profiles.
Duration* positioning varies widely.
Many opportunistic managers try to adjust
duration based on interest rate forecasts,
benefitting from correct projections while
mitigating principal loss when rates rise.
And while greater exposure to credit-
sensitive sectors may result in less rate
sensitivity, it also increases the correlation
to equities. In addition, the dynamic,
unconstrained method adds significant
volatility. In a portfolio context, most
opportunistic strategies may be used as
complements to core fixed income
strategies and not as substitutes.
Utilizing nontraditional fixed income is
complex as this label encompasses a wide
range of strategies. Such strategies also
entail higher credit, duration and other
risks relative to traditional fixed-income
strategies. Consulting Group Investment
Advisor Research differentiates the
nontraditional bond strategies as either
opportunistic or absolute return.
ABSOLUTE-RETURN STRATEGIES.
Absolute-return strategies seek positive
total return in all types of markets as
opposed to benchmark-relative returns.
They mostly target cash-plusthe 90-
day T-bill rate plus an additional return.
The strategies also attempt to reduce
volatility and avoid sizable drawdowns.
But to achieve these objectives, absolute-
return managers may utilize derivatives
such as forwards, options, futures and
swap agreements more extensively than
opportunistic strategies. And to prevent
exposure to swings in rates or equity
markets, these strategies often use shorting
or leverage, which results in a risk-return
profile that we believe qualifies some of
these products as alternative mutual funds.
Because absolute-return strategies aim
for cash-plus returns, they tend to target
lower levels of volatility and possess much
lower correlations to equities than
opportunistic strategies. As such, investors
may substitute them for traditional fixed
income strategies.
How well have these strategies done?
For opportunistic funds, we use
Morningstars multisector fixed-income
category as a proxy (see table). For the 20
years ending J une 30, 2014, opportunistic
funds outperformed the Barclays US
Aggregate Bond Index during quarters in
which interest rates rose and those in
which equities appreciated. Morningstars
nontraditional fixed income category, a
proxy for absolute-return funds, also
outperformed in rising interest rate
periods. As interest rates are expected to
normalize in coming years, we expect
nontraditional fixed income to become
important to many investors portfolios. n
*For more about the risks to duration
and alternative strategy mutual funds,
please see Risk Considerations beginning
on page 15.
Taking the Nontraditional
Approach to Fixed Income

T
Nontraditional Bond Funds Under Various Conditions

Rising Rate
Quarters
Declining Rate
Quarters
Rising Equity
Quarters
Declining Equity
Quarters
Multisector Fixed Income 1.5% 1.7% 2.4% -0.3%
Nontraditional Fixed Income 1.7 0.9 2.3 -0.8
Barclays US Aggregate
Bond Index
0.2 2.4 1.2 2.2
Note: Based on Morningstar mutual fund categories for 20 years ending J une 30, 2014.*
Rising/declining rate quarters based on interest rate movements of the 10-year US Treasury
yield. For equities, rising/declining markets based on the S&P 500 total return. Indices are
unmanaged and not available for direct investment. Index returns, unlike fund returns, do not
reflect any fees or expenses. Past performance does not guarantee future results.
Past performance is not indicative of future returns. Investment returns will fluctuate so
that an investors shares when redeemed may be worth more or less than the original
cost. Please note, current performance may be higher or lower than the performance data
shown. Investors should carefull y read the fund prospectus which includes information
on the funds investment objectives, risk as well as charges and expenses along with
other information. Investors should review the information in the prospectus carefull y
before investing.
Source: Morningstar, CG IAR as of J uly 15, 2014



ON THE MARKETS / Q&A



Please refer to important information, disclosures and qualifications at the end of this material. September 2014 10
aster limited partnerships* (MLPs)
have enjoyed quite a rally over the
past five years amid a renaissance in the
US energy industry. But J erry Swank,
managing partner at Cushing Asset
Management and portfolio manager of
MainStay Cushing Funds, notes that the
US is still early in a multidecade build-out.
Indeed, the Global Investment Committee
(GIC) believes MLPs are a good way to
invest in US energy due to their growing
cash distributions and to long-term
contracts, which allow many MLPs to
operate as relatively insulated, utility-like
business models. Swank recently spoke
with Mike Wilson, chief investment
officer of Morgan Stanley Wealth
Management, about his outlook on energy
and MLPs. The following is an edited
version of their conversation.

MIKE WILSON (MW): What are your
thoughts on the current US energy
renaissance?
JERRY SWANK (JS): What I want to
impress on people, regarding the impact of
shale drilling and fracking on energy
supply in the US, is that this technology
has changed the oil-and-gas business from
a wildcat business to a manufacturing
process. And the important thing is that the
worlds largest consumer of
hydrocarbonsoil and gasis now also
the cheapest and largest producer.
This is going to cause major disruptions
in the global economic continuum. It's
going to change how energy is traded
*For more about the risks to Master
Limited Partnerships, please see Risk
Considerations beginning on page 15.
around the world and also change
industrial manufacturing and shipping.
After decades of outsourcing
manufacturing, industrial jobs are going to
be brought back home because, with the
exception of the Middle East, the cost of
US natural gas is 25% to 30% less than the
rest of the world. This is a huge advantage.
Weve seen this developing over the
last few years, particularly among MLPs
in what we call the midstream business.
Having found all these new shale
resources, we've had to replumb the
pipelines and the energy infrastructure of
the US. And that spending is going to be
approximately $800 billion over the next
10 years, which is more than the entire
market cap of the midstream industry right
now. From our perch, it became obvious a
couple years ago that there were a lot of
things besides the midstream that are
going to benefitwe've seen it in the
entire energy value chain.
MW: Can you explain what businesses
operate in the different energy channels,
and the relative attractiveness of each?
JS: The upstream business is really the
oil and gas reserves. Besides the
exploration and production (E&P)
companies, there are several upstream
MLPs and some old oil-and-gas royalty
firms. And these guys basically aren't in
the exploration business; they're in the
production business. We have relatively
high current yields at this time, and we see
the companies continuing to buy better,
more stable declining reserves from the
majors [oil companies].
The midstream is the sweet spot. Again,
that's the pipeline and some transportation
businesses, where we have a combination
of nice current yield, and we see many
years of sustainable and physical growth in
the cash flow because of all these projects.
Finally, the downstream is the refineries
and chemicals companies as well as the
shipping people, the barge companies, the
rail companies, all the companies that are
moving the commodities. The users of
natural gas have been the beneficiaries.
Those include the refining industries and
the chemical businesses and the fertilizers,
where there's a couple hundred billion
dollars to be spent in new plants in the US,
as well as in the business of liquefied
natural gas. We never thought the US
would be an exporter, but we will be.
MW: Where is the US with regards to
energy independence, and how far can we
realistically expect to get down the road?
JS: On the natural gas side, we have
complete energy independence. We have
probably 100 years of reserves, and so we
will begin exporting that.
On the oil side, we have increased
production pretty dramatically, but we still
import about 7 million barrels a day.
About 3 million of that is from Canada,
and will never go away. Most of the US
refineries are set up for the heavy
Canadian crude. But of the 4 million that's
leftwe're increasing the production from
fields in the Bakken field (in North Dakota
and Montana) and the Permian Basin and
Eagle Ford in Texas by about a million a
year. So in four years, we're going to be
North America energy independent.
MW: Do you think there could be a tax
on these companies that makes it less
economical or that the environmental costs
are so great that the process itself could be
curtailed?
JS: Not to look at this with rose-colored
glasses, but those just aren't the facts.
When you put in sand and water and some
chemicals you can find underneath your
kitchen sink, it really hasn't been the
drilling and the fracking where there's
been any environmental issue.
MLPs: Getting in on the
US Energy Renaissance

M




Please refer to important information, disclosures and qualifications at the end of this material. September 2014 11
These wells are 7,000-to-9,000 feet
below any water tables. The only
[environmental] issue has been when the
frack fluids come back up and how you
dispose of the water. Five years ago, in
several states, you didn't even have to get a
permit to discharge the frack water. And
now that's pretty tightly regulated, as it
should be.
And the industry, as you can imagine, is
completely dedicated [to operating safely].
Every company that is in the water clean-
up and purification business is getting
increased focus. And I don't hear about a
tax on it at all.
MW: In early August, there was a large
player that decided to consolidate some of
its MLP assets and convert them back to a
C-Corp. Does this activity signal
something that we should be worried
about, or do you feel like the MLP space is
going to be well supported?
JS: One of our themes [over] the last
couple years has been the MLP-ification of
the energy sector. Because of the relatively
efficient tax structure, many companies
have taken their MLP-able assets and put
them in the MLP structure. There were 70
MLPs five years ago; we have 130 or 140
today.
And because there's so much going on
in the US and the midstream area, we
think there will be a lot of M&A activity
as additional companies choose to drop
their qualifying assets into an MLP
structure. I don't think this deal really says
anything about taxes or structure. I think
what it says is that there's a lot of
opportunities.
MW: Does anything concern you about
the MLP category that could throw us for a
loop or force a reset on valuation, other
than individual issues with companies?
JS: J ust like any business, there's
always execution risk. Across the board, I
think the second quarter was the strongest
quarter that we have ever seen. We had a
decent correction, so we're kind of at the
top end of the valuation range. But we still
think the industry is set up for returns in
the mid-teens. You just have to have a lot
more selectivity, because there have been
companies that have benefited from the
renaissance and some that haven't.
And then I think the other most topical
issue is interest rates. The taper tantrum
in May 2013 hit all interest-sensitive
sectors, but MLPs came back the fastest,
and I think it's because people understand
the growth in the distributions. Given a
gradual increase in interest rates, we think
MLPs will do fine.
MW: What are the traits you look for in
an individual MLP that make it one you
want to own?
JS: The key driver of MLP performance
is the growth in the underlying distri-
bution. But we also have had to understand
the overall energy marketplace. The best
example is one of the subsectors, natural
gas long-haul transportation. That used to
be a gold-plated business, shipping natural
gas from the Gulf Coast to New York. But
now with the Marcellus Shale Formation
in the northeastern US, you don't need to
ship that gas from the Gulf Coast. So
you've had dispersions of returns in those
industries. You've got to be very aware of
how these trends are affecting businesses.
Not everybody in the natural gas
processing or crude oil space is a winner.
MW: Within the energy complex, who
are the big losers of the energy renaissance
that you've described?
JS: On the downstream, the companies
that have a big foreign componentwhich
isn't growing a lotare the losers, and the
winners are the companies that have a very
high US domestic concentration.
I think the challenge on the upstream is
the E&P companies that do not have the
shale play and have not been able to find
the sweet spot. And the major integrated
companies have not played this
marketplace well at all. They just weren't
aggressive enough in going out there and
doing it, because it was a science project at
first.
MW: What regions of the world are
going to feel the sting of this energy
renaissance most?
JS: First I'd just say, and I'm not being
tongue-in-cheek, but I think the best
emerging market in the world right now is
between the Appalachians and the
Rockies. The coasts are not benefiting at
allbecause there's no hydrocarbons
produced there. So they're importers.
But I would say that were basically
putting the oil-and-gas refining business in
Western Europe out of business. That's
No. 1. Also, its going to hurt some
manufacturing in China and in Japan and
Korea, because they are paying $16 or $17
[per 1,000 cubic feet] for natural gas and
it's $4 in the US. It's also hurting those
businesses and industries built on cheap
labor, as that advantage is not as big as it
was and the energy cost advantage is
really helping the US.
MW: What do you think about long-
term oil prices, given this renaissance in
the US? And how should people think
about energy costs going forward?
JS: It's kind of a dichotomy, now,
because oil is easily transportable, even
though we can't export oil from the US
yet. But we can export refined products.
We're the only area in the world that is
growing that production.
When you look at the macro picture,
you have slow economic growth and not
really fast demand, so it [the price of oil]
should be weak. Maybe crude should not
be $110 a barrel; maybe it should be $95.
But we have so many geopolitical issues
around the world, from Sudan to Nigeria
to what's happening in Iraq and Iran, that
unless we have another 2008 [and the
economy tanks], I think it will be very
difficult for the bottom to fall out of the oil
market.
MW: So a stable environment for crude,
generally?
JS: Correct. n

Jerry Swank is not an employee of
Morgan Stanley Wealth Management.
Opinions expressed by him are solely his
own and may not necessarily reflect those
of Morgan Stanley Wealth Management or
its affiliates.




Please refer to important information, disclosures and qualifications at the end of this material. September 2014 12
Global Investment Committee
Tactical Asset Allocation
The Global Investment Committee provides guidance on asset allocation decisions through its various model
portfolios. The eight models below are recommended for investors with up to $25 million in investable
assets. They are based on an increasing scale of risk (expected volatility) and expected return. Hedged
strategies include hedge funds and managed futures.

Note: Hedged strategies consist of hedge funds and managed futures.


MODEL 1

MODEL 2

MODEL 3





MODEL 4

MODEL 5

MODEL 6


AGGRESSIVE


MODEL 7 MODEL 8


53%
Investment
Grade Fixed
Income

29% Cash
3% Emerging Markets
Fixed Income

1% Inflation-
Linked Securities

14% High Yield

3% Emerging
Markets Equity

36%
Investment
Grade Fixed
Income
15%
International
Equity

12% US
Equity

14%
Cash

6% Hedged Strategies
and Managed Futures
8% High
Yield

2% REITs

2% MLPs
1% Emerging
Markets Fixed
Income

6% Emerging
Markets Equity

18%
International
Equity

16% US
Equity

9%
Cash

9% Hedged Strategies
and Managed Futures
2% Commodities
6% High
Yield

2% REITs

1%
Emerging
Markets
Fixed
Income

8% Emerging Markets
Equity

22%
International
Equity

20% US
Equity

4%
Cash

11% Hedged Strategies
and Managed Futures
3%
Commodities
3% REITs

5% High
Yield

11% Emerging Markets
Equity

26%
International
Equity

24% US
Equity

3% REITs

4% High
Yield

12% Hedged Strategies
and Managed Futures
3%
Commodities
2%
Cash

1%
Cash

28% US
Equity

31%
International
Equity

12% Emerging
Markets Equity

21% Investment
Grade Fixed Income

11% Investment
Grade
Fixed Income

2%
Investment
Grade Fixed
Income

2%
High Yield

3%
REITs

13% Hedged Strategies
and Managed Futures
4% MLPs
32% US
Equity

31%
International
Equity

12%
Emerging
Markets
Equity

3% REITs

4%
Commodities
14% Hedged Strategies
and Managed Futures
3% Cash

14% Hedged Strategies
and Managed Futures

4%
Commodities
3% REITs

26% US
Equity

35%
International
Equity

14% Emerging
Markets
Equity

CASH
GLOBAL FIXED INCOME
GLOBAL EQUITIES
ALTERNATIVE INVESTMENTS
KEY
MODERATE
CONSERVATIVE MODERATE
>>>

>>>

>>>

>>>

>>>

28%
Investment
Grade Fixed
Income

1% Commodities 3% MLPs
3% MLPs
4% MLPs

4%
Commodities
4% MLPs
4% MLPs




Please refer to important information, disclosures and qualifications at the end of this material. September 2014 13

Source: Morgan Stanley Wealth Management GIC as of Aug. 29, 2014
Tactical Asset Allocation Reasoning
Global Equities
Relati ve Weight
Within Equiti es
US Overweight While US equities have done exceptionally well since the global financial crisis, they still offer attractive upside
potential, particularly relative to bonds. We believe the US and global economy continue to heal, making recession
neither imminent nor likely in 2014 or 2015. This is constructive for global equities, including the US.
International Equities
(Developed Markets)
Overweight We maintain our bias for J apanese and European equity markets given the political and structural changes taking
place in J apan and an improving economic outlook in Europe. J apan underperformed in the first half of 2014 due to the
recently enacted consumption tax. We expect the second half to be better as consumption rebounds. Europe
performed well during the first half, but has sold off sharply on concerns about Russia/Ukraine and the ongoing Asset
Quality Reviews (AQRs) and bank stress tests. We believe most of the bad news is priced in and would add on
weakness before the AQRs and stress tests are completed in October.
Emerging Markets Underweight Emerging markets have surprised to the upside this year. However, we believe performance may be ahead of the
fundamentals and remain underweight. Policy remains out of sync with what is necessary for true reform in many
regions. The Feds rate hike cycle, likely to begin early next year, could have a negative impact. We would only add on
pullbacks and favor India, Mexico, China, Taiwan and Korea.
Global Fixed
Income
Relati ve Weight
Within Fi xed
Income
US Investment Grade Overweight We have recommended shorter-duration (maturities) since March 2013 given the potential capital losses associated
with the rising interest rates from such low levels. Yields have risen since then, but not enough for us to change that
advice. However, we recently reduced the size of our overweight in short duration as we expect short-term interest
rates to move higher than the market expects in the next six months. Within investment grade, we prefer BBB-rated
corporates and A-rated municipals over US Treasuries.
International
Investment Grade
Equal Weight Yields are low globally, so not much additional value accrues to owning international bonds beyond some
diversification benefit.
Inflation-Linked
Securities
Underweight We have been underweight inflation-linked securities since March 2013, given negative real yields across all
maturities. Recently, these yields have turned modestly positive but remain unattractive, in our view, due to the longer-
duration characteristics of TIPS.
High Yield Overweight Yields and spreads are near record lows. However, default rates are likely to remain muted as the economy recovers
slowly, keeping corporate and consumer behavior conservative. We prefer shorter-duration and higher-quality (B to
BB) issues and vigilance on security selection at this stage of the credit cycle.
Emerging Market
Bonds
Underweight Similar to emerging market equities, we remain underweight on the basis that the beginning of the Feds rate hike
cycle will likely be a disproportionate headwind for emerging market debt relative to other debt markets.
Al ternative
Investments
Relati ve Weight
Within Alternati ve
Investments
REITs Equal Weight Falling interest rates have led to very good performance from REITs this year. At current levels, we believe REITs are
fairly valued and offer select opportunities. The industrial and commercial segments tend to outperform at this stage of
the recovery. Non-US International REITs should also be favored relative to domestic REITs at this point.
Commodities Equal Weight Commodities have performed much better in 2014 than in the recent past. Poor weather and rising geopolitical risks
have led to higher prices, reminding us that commodities can provide some ballast to a traditional equity/bond portfolio.
There is also a growing appreciation that China is not the only driver of demand for commodities.
Master Limited
Partnerships*
Equal Weight
Master limited partnerships (MLPs) should continue to do well as they provide diversification benefits to traditional
assets and a substantial yield that is valuable in a low interest rate world. Many MLPs are levered to commodity
consumption, which is more predictable than prices.
Hedged Strategies
(Hedge Funds and
Managed Futures)
Equal Weight This asset class can provide uncorrelated exposure to traditional risk-asset markets. It tends to outperform equities
when growth slows and works well in more challenging financial markets.



ON THE MARKETS



Please refer to important information, disclosures and qualifications at the end of this material. September 2014 14
Index Definitions
BARCLAYS MUNICIPAL BOND INDEX This is a
rules-based, market-value-weighted index
engineered for the long-termtax-exempt bond
market.
BARCLAYS US AGGREGATE BOND INDEX This
index tracks US-dollar-denominated investment
grade fixed rate bonds. These include US
Treasuries, US-government-related, securitized
and corporate securities.


INSTITUTE OF SUPPLY MANAGEMENT (ISM)
NONMANUFACTURING INDEX An index based on
surveys of nonmanufacturing firms by the
Institute of Supply Management. The ISM
Nonmanufacturing Index monitors employment,
new orders and supplier deliveries. A composite
diffusion index is created that monitors
conditions in national nonmanufacturing
industries based on the data fromthese surveys.





S&P 500 INDEX Regarded as the best single gauge
of the US equities market, this capitalization-
weighted index includes a representative sample
of 500 leading companies in leading industries in
the US economy.





Glossary
CORRELATION A statistical measure of how
two securities move in relation to each other.
This measure is often converted into what is
known as correlation coefficient, which ranges
between -1 and +1. Perfect positive correlation
(a correlation coefficient of +1) implies that as
one security moves, either up or down, the other
security will move in lockstep, in the same
direction. Alternatively, perfect negative
correlation means that if one security moves in
either direction the security that is perfectly
negatively correlated will move in the opposite
direction. If the correlation is 0, the movements
of the securities are said to have no correlation;
they are completely random. A correlation
greater than 0.8 is generally described as strong,
whereas a correlation less than 0.5 is generally
described as weak.

DRAWDOWN This termrefers to the largest
cumulative percentage decline in net asset value
or the percentage decline fromthe highest value
or net asset value (peak) to the lowest value net
asset value (trough) after the peak.

SHORT SELLING The sale of a security that is not
owned by the seller, or that the seller has
borrowed. Short selling is motivated by the belief
that a security's price will decline, enabling it to
be bought back at a lower price to make a profit.
Short selling may be prompted by speculation, or
by the desire to hedge the downside risk of a
long position in the same security or a related
one.

STANDARD DEVIATION This statistical
quantifies the volatility associated with a
portfolios returns by measuring the variation
in returns around the mean return. Unlike
beta, which measures volatility relative to the
aggregate market, standard deviation measures
the absolute volatility of a portfolios return.





Please refer to important information, disclosures and qualifications at the end of this material. September 2014 15
Risk Considerations
Al ternative Strategy Mutual Funds
Alternative strategy mutual funds may employ various investment strategies and techniques for both hedging and more speculative purposes such as
short-selling, leverage, derivatives and options, which can increase volatility and the risk of investment loss. Non-traditional investment options and
strategies are often employed by a funds portfolio manager to further a funds investment objective and to help offset market risks. However, these
features may be complex, making it more difficult to understand the funds essential characteristics and risks, and how it will perform in different
market environments and over various periods of time. They may also expose the fund to increased volatility and unanticipated risks particularly
when used in complex combinations and/or accompanied by the use of borrowing or leverage. The funds prospectus will contain information and
descriptions of any non-traditional and complex strategies utilized by the fund.
MLPs
Master Limited Partnerships (MLPs) are limited partnerships or limited liability companies that are taxed as partnerships and whose interests (limited
partnership units or limited liability company units) are traded on securities exchanges like shares of common stock. Currently, most MLPs operate in
the energy, natural resources or real estate sectors. Investments in MLP interests are subject to the risks generally applicable to companies in the
energy and natural resources sectors, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk.
Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance
on the capital markets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity
volume risk.
The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is
deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for
distribution to the fund which could result in a reduction of the funds value.
MLPs carry interest rate risk and may underperform in a rising interest rate environment. MLP funds accrue deferred income taxes for future tax
liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as
capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP funds after-tax performance
could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.
Duration
Duration, the most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio.
The longer the duration, the more sensitive the bond or portfolio would be to changes in interest rates. Generally, if interest rates rise, bond prices
fall and vice versa. Longer-term bonds carry a longer or higher duration than shorter-term bonds; as such, they would be affected by changing
interest rates for a greater period of time if interest rates were to increase. Consequently, the price of a long-term bond would drop significantly as
compared to the price of a short-term bond.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and
economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets,
since these countries may have relatively unstable governments and less established markets and economies.
Al ternative investments which may be referenced in this report, including private equity funds, real estate funds, hedge funds, managed futures
funds, and funds of hedge funds, private equity, and managed futures funds, are speculative and entail significant risks that can include losses due to
leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack
of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less
regulation and higher fees than mutual funds and risks associated with the operations, personnel and processes of the advisor.
Managed futures investments are speculative, involve a high degree of risk, use significant leverage, have limited liquidity and/or may be generally
illiquid, may incur substantial charges, may subject investors to conflicts of interest, and are usually suitable only for the risk capital portion of an
investors portfolio. Before investing in any partnership and in order to make an informed decision, investors should read the applicable prospectus
and/or offering documents carefully for additional information, including charges, expenses, and risks. Managed futures investments are not intended
to replace equities or fixed income securities but rather may act as a complement to these asset categories in a diversified portfolio.
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to,
(i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events,




Please refer to important information, disclosures and qualifications at the end of this material. September 2014 16
war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence,
technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary
distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.
Physical precious metals are non-regulated products. Precious metals are speculative investments, which may experience short-term and long
term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. If sold
in a declining market, the price you receive may be less than your original investment. Unlike bonds and stocks, precious metals do not make interest
or dividend payments. Therefore, precious metals may not be suitable for investors who require current income. Precious metals are commodities
that should be safely stored, which may impose additional costs on the investor. The Securities Investor Protection Corporation (SIPC) provides
certain protection for customers cash and securities in the event of a brokerage firms bankruptcy, other financial difficulties, or if customers assets
are missing. SIPC insurance does not apply to precious metals or other commodities.
Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk.
Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date.
The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the
maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the
risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk
that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.
Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater
credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives
and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio.
Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax
(AMT). Typically, state tax-exemption applies if securities are issued within one's state of residence and, if applicable, local tax-exemption applies if
securities are issued within one's city of residence.
Treasury Inflation Protection Securities (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation
by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is
linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation.
Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Derivative instruments. Options, futures contracts, options on futures contracts, forward contracts, swaps and structured products are examples of
derivative instruments. Risks of derivative instruments include imperfect correlation between the value of the instruments and the underlying assets;
risks of default by the other party to certain transactions; risks that the transactions may result in losses that partially or completely offset gains in
portfolio positions; and risks that the transactions may not be liquid. Please see the funds prospectus for additional information.

Options are not suitable for every investor. This sales material must be accompanied by or preceded by a copy of the booklet 'Characteristics and
Risks of Standardized Options' (ODD). Investors should not enter into options transactions until they have read and understood the ODD. Before
engaging in the purchase or sale of options, investors should understand the nature of and extent of their rights and obligations and be aware of the
risks involved, including, without limitation, the risks pertaining to the business and financial condition of the issuer of the underlying security or
instrument. Options investing, like other forms of investing, involves tax considerations, transaction costs and margin requirements that can
significantly affect the profit and loss of buying and writing options. The transaction costs of options investing consist primarily of commissions (which
are imposed in opening, closing, exercise and assignment transactions), but may also include margin and interest costs in particular transactions.
Transaction costs are especially significant in options strategies calling for multiple purchases and sales of options, such as multiple leg strategies,
including spreads, straddles and collars. A link to the ODD is provided below: http://www.optionsclearing.com/about/publications/character-risks.jsp.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the
performance of any specific investment.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan
Stanley Smith Barney LLC retains the right to change representative indices at any time.

REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited
diversification and sensitivity to economic factors such as interest rate changes and market recessions.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency,
economic and market risks.





Please refer to important information, disclosures and qualifications at the end of this material. September 2014 17
Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and
market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and
domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied
economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These
risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in
countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

The majority of $25 and $1000 par preferred securities are callable meaning that the issuer may retire the securities at specific prices and dates
prior to maturity. Interest/dividend payments on certain preferred issues may be deferred by the issuer for periods of up to 5 to 10 years, depending
on the particular issue. The investor would still have income tax liability even though payments would not have been received. Price quoted is per
$25 or $1,000 share, unless otherwise specified. Current yield is calculated by multiplying the coupon by par value divided by the market price.

The initial rate on a floating rate or index-linked preferred security may be lower than that of a fixed-rate security of the same maturity because
investors expect to receive additional income due to future increases in the floating/linked index. However, there can be no assurance that these
increases will occur.
The market value of convertible bonds and the underlying common stock(s) will fluctuate and after purchase may be worth more or less than
original cost. If sold prior to maturity, investors may receive more or less than their original purchase price or maturity value, depending on market
conditions. Callable bonds may be redeemed by the issuer prior to maturity. Additional call features may exist that could affect yield.
Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

Credit ratings are subject to change.

Certain securities referred to in this material may not have been registered under the U.S. Securities Act of 1933, as amended, and, if not, may not
be offered or sold absent an exemption therefrom. Recipients are required to comply with any legal or contractual restrictions on their purchase,
holding, sale, exercise of rights or performance of obligations under any securities/instruments transaction.

Disclosures
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This
material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or
other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance.
The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors,
including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors.
Morgan Stanley Wealth Management is involved in many businesses that may relate to companies, securities or instruments mentioned in this
material.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any
security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own
independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision,
including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain
material information not contained herein and to which prospective participants are referred. This material is based on public information as of the
specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or
warranty with respect to the accuracy or completeness of this material. Morgan Stanley Wealth Management has no obligation to provide updated
information on the securities/instruments mentioned herein.
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy
will depend on an investors individual circumstances and objectives. Morgan Stanley Wealth Management recommends that investors
independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and
income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates,
securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. Estimates of future
performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions
may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the
projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any
projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect actual future events.
Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not
materially differ from those estimated herein.




Please refer to important information, disclosures and qualifications at the end of this material. September 2014 18
This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is
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