Markets in perspective – November 2015 in review

As of November 30, 2015. Sources: U.S. Equity: Russell 3000® Index; Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index; Emerging Markets: Russell Emerging Markets Index; U.S. Bonds: Bloomberg U.S. Aggregate Bond Index; Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index; Commodities: Bloomberg Commodity Index Total Return; Hypothetical balanced portfolio: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities. Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Key points on global market themes

The global economy continued to grind slowly forward in November 2015. Global macroeconomic news was mixed for the month, resulting in an essentially flat 10-year U.S. Treasury yield and Russell 3000^® Index. Central bank divergence continued as the European Central Bank approved further stimulus and the likelihood of an interest rate hike in December by the U.S. Federal Reserve becomes increasingly likely. Following is Russell Investments’ Chief Investment Officers’ views of the key themes affecting market performance in November 2015. All data is as of November 30, 2015. Sources and indexes used to represent asset classes can be found in the disclosures section.

EQUITIES

1. Markets moved sideways

Developed markets moved little over the month with the U.S. large cap market barely producing a positive return. The dispersion across market segments was limited with value stocks underperforming growth stocks by approximately 1% on a global basis. There was little difference between dynamic and defensive stocks during the month, while small cap rose ahead of large cap and stocks with momentum continued to outperform. With the U.S. stock market trading at higher than normal valuations, our outlook is somewhat cautious.

2. Rate sensitive sectors lagged

With the prospect of rising rates many rate sensitive sectors like utilities, REITs and telecommunications lagged the broad market while financial services stocks came to life. Information technology and industrial sectors did better as the negative outlook continued for energy and materials stocks.

3. Emerging markets sold off

As we have come to expect with a strong dollar, emerging markets sold off close to 3% during the month and underperformed developed markets. While sentiment towards the asset class continues to be negative, we believe valuation is attractive, with the biggest opportunities in emerging Asia.

FIXED INCOME

1. Short-term Treasury rates rose

Although the U.S. 10-year Treasury yield remained flat, short-term rates rose. This was driven by the market expectations of a Fed rate hike in December. European government bond yields were lower as the ECB delivered their stimulus, while Japan and emerging markets were broadly flat.

2. Flight to quality

The anticipated rate hike drove investors to seek out quality assets. As a result, lower quality U.S. credit underperformed in November. Commodity-sensitive issuers were hit the hardest for the month.

3. USD strengthened

With continued central bank monetary policy divergence and a stronger dollar, the euro weakened meaningfully after the expected ECB stimulus.

ALTERNATIVES

1. Commodities trended lower on strong USD and weak global demand

Commodities fell 7.2%, led by oil price declines and a strong U.S. dollar. However, tactical trading hedge funds gained from currency trades and short commodities positions. Commodities sentiment remains bearish heading into year-end, with investors focused on USD strength and weak supply-side fundamentals. Infrastructure declined 4.4% as crude oil prices fell almost 10%. This also caused a decline in the pipelines sector by a similar amount. 2.     Interest rates diverged globally The spread between U.S. and Eurozone 2-year yields was the widest it’s been since 2006, reflecting ongoing global central bank divergence. Interest rate sensitive utilities sectors and listed infrastructure were down marginally, but outperformed the broader S&P Global Listed Infrastructure benchmark. Event driven and credit sensitive hedge fund managers with high yield positions were hurt. 3.     Global economy ground slowly forward REITs had negative 2.2% performance, slightly lagging overall equities. U.S. and emerging markets REITs held up well while other regions declined. We continue to see strong REIT cash flow and earnings results underpinned by solid property fundamentals; supply remains constrained for most property types, while demand is generally healthy. Some equity-oriented hedge funds were hurt by increased idiosyncratic risk in crowded equity trades. Commodities demand data may take a front seat in 2016 as markets will require a reasonable level of global economic growth to help balance markets amid continued bearish headwinds.

Asset Class Dashboard – November 2015

The November reading of the Asset Class Dashboard reflects the slow forward progress of most asset classes based on 12-month returns ending November 30, 2015. Only Commodities and Global Infrastructure have experienced performance that falls below their respective historically typical ranges. The remaining asset classes have hovered at the low end of their historically typical ranges for quite some time now. Looking ahead, Russell Investments’ strategists and portfolio managers are keeping an eye on how much of the likely upcoming Fed interest rate hike is already priced in – and its associated impact on the emerging markets and commodities outlook. Our positioning is roughly neutral on the U.S market. We continue to see opportunities in European equities and high yield. We also expect the U.S. dollar to continue its appreciation. Large cap U.S. equity: Russell 1000® Index, Large cap Defensive U.S. equity: Russell 1000 Defensive Index, Large cap dynamic U.S. equity: Russell 1000 Dynamic Index, Small cap U.S. equity: Russell 2000 Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Global equity: Russell Developed Large Cap Index, Emerging markets: Russell Emerging Markets Index, Commodities: Dow Jones – UBS Commodity Total Return Index, Global infrastructure: S&P Global Infrastructure Index, Global real estate: FTSE EPRA/NAREIT Developed Index, Cash: Citigroup 3-Month U.S. Treasury Bill Index, Global high yield bonds: Bank of America Merrill Lynch (BofAML) Global High Yield Index, Emerging markets debt: JP Morgan Emerging Markets Bond Index Plus, U.S. bonds: Bloomberg U.S. Aggregate Bond Index. How do I read this chart? This dashboard is intended as a tool to set context and perspective when evaluating the current state of a sample of asset classes. The ranges of 12 month returns for each asset class are calculated from its underlying monthly index returns. The stated inception date is the first full month of an index's history available for the dashboard calculation. Here is how to read the graphic on this page: FOR EACH INDICATOR, THE HORIZONTAL BAR SHOWS FOUR THINGS A GRAY BAR shows the full range of historical rolling 12-month returns for a sample of asset classes. A BLUE COLOR BAND represents the typical range (one standard deviation away from the mean, i.e. 68% of historical observations) of rolling 12-month returns for these asset classes. AN ORANGE MARKER represents the most recent 12-month return of the asset classes. A WHITE LINE within the blue bar represents the mean of the historical observations.

Corresponding indexes/sources by section:

Equities

• Developed markets represented by Russell Developed Large Cap Index • Sectors represented by Russell 1000® Index Utilities, REITs, Telecommunications, Financials, Information Technology, Industrials, Energy and Materials sectors • Emerging markets represented by Russell Emerging Markets Index

Fixed Income

• Investment grade bonds represented by Bloomberg U.S. Corporate Investment Grade Index and Bloomberg Euro-Aggregate: Corporates Index

Alternatives

• Commodities represented by Bloomberg Commodities index • Oil represented by WTI crude prices • Hedge fund strategies data as observed across third party managers by Russell Investments • REITs represented by FTSE EPRA/NAREIT Developed Real Estate Index • Infrastructure represented by S&P Global Listed Infrastructure Index