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FOR 2018



AUM $284BN1 $101bn $127bn $64bn AUM and Committed Capital

PROFESSIONALS2 223 156 130
Global/EAFE Global Investment Grade Private Equity: Alternative Credit:
U.S. Value/Core/Growth Global Non-Investment Grade – Primaries – Private Credit
Emerging Markets Emerging Markets – Co-Investments – Residential Loans
FUNDAMENTAL Regional EM, China Opportunistic/Unconstrained – Secondaries – Special Situations
– Specialty Strategies
Socially Responsive Investing Municipals Hedge Funds:
– Minority stakes in
Income Strategies: Specialty Strategies: alternative firms/DYAL – Multi-Manager
– MLP – CLO Mezzanine – Equity Long/Short
– REITs – Currency – Credit Long/Short
– Corporate Hybrids – Event Driven

Global Risk Premia

Emerging Markets Global Macro
Custom Beta Commodities

Integration of Environmental, Social and Governance Factors


FUNDAMENTAL Global Relative and Absolute Return QUANTITATIVE Risk Parity

Income Focused Global Tactical Asset Allocation
Inflation Management
Liability Aware

As of September 30, 2017. Firm assets under management (AUM) includes $100.6 billion in Equity assets, $127.2 billion in Fixed Income assets and $56 billion in Alternatives assets.
Alternatives “AUM and Committed Capital” includes assets under management for non-Private Equity businesses and Committed Capital since inception for the Private Equity and Private
Credit businesses. Committed Capital since inception reflects all contractual commitments, and those still in documentation, to fund private equity and credit investments, including those
that have since been realized, advised by NB Alternatives Advisers LLC and its affiliates or predecessors since 1987.
As of November 1, 2017.
FOR 2018

TEN FOR 2018

The heads of our investment platforms identified the key themes they anticipate will guide investment
decisions in 2018. These 10 themes are summarized below and discussed in more detail in the
CIO Roundtable beginning on page 5.

Macro: Global Inflection Point Nears Risks: Clouds Gather as the Year Progresses

1 3

“Goldilocks” Gives Way to Something
More Complicated Geopolitical Climate Remains Unsettled
Though the strength of global economic momentum is unde- Though 2017 mostly failed to deliver the electoral fireworks of
niable, a confluence of factors—including tightening central 2016, elections this year in Italy, Mexico, Brazil and the U.S.—
bank policy, plateauing economic growth and rising market in addition to ongoing disrupters like North Korea, special
volatility—suggests that conditions are unlikely to remain investigations, Brexit, etc.—could upset the current order.
“just right” for all of 2018.

2 Both Monetary and Fiscal Policy are in

Motion Globally
As major central banks wind down unprecedented levels of
China Accelerates Structural Reforms
An emboldened Xi will be more aggressive in reducing
monetary stimulus, their efforts are being met—and poten- leverage and re-orienting China’s economy toward more
tially complicated—by expansionary fiscal policy and reform sustainable, high-quality development, to the potential
initiatives taking root in a number of countries. detriment of near-term growth.

Fixed Income: The Chase Continues Equities: Two-Way Markets Return

5 7
Market Momentum Could Present
No End to the Search for Yield Opportunities to Reduce Beta Exposure
Biased higher but still low, long-term interest rates continue Strong earnings growth could fuel equities in early 2018,
to send investors into less-familiar corners of the fixed providing investors with chances to trim holdings in
income markets in the hunt for yield, with high valuations high-valuation stocks and redeploy into more attractive
leaving little cushion to absorb a volatility shock. risk-adjusted exposures.

6 8

Credit Drivers Begin to Change Active Management Positioned to Shine

Continued low default rates suggest global credit Market dynamics continue to shift in favor of active
spreads likely will be impacted less by fundamentals management, which could extend the comeback
and more by technical developments such as hedging mounted by stock pickers last year after a period of
costs, LDI-related flows and regulatory changes. underperformance.

Alternatives: Finding Opportunities Amid High Valuations

9 10

Low-Vol Strategies for a More Volatile World Sharpen Quality Focus in Private Assets
Market-neutral and relative-value hedge funds may Given high private equity valuations, investors can help
help investors earn returns with lower volatility. mitigate risk by targeting experienced private equity
sponsors with a history of adding operational value or by
moving up the capital structure to first-lien private debt.

FOR 2018








With the end of 2017 near, the leaders of our investment platforms gathered to talk about the evolution of the
investment environment over the past 12 months and what they expect for 2018.

Joe Amato: The optimism of the “reflation trade” that ended 2016 gave Erik Knutzen: I think all this makes 2018 a particularly challenging
way to a “Goldilocks” environment over the course of 2017, fueling the year to forecast, especially from a full-year perspective. Though I expect
rise of risk assets of all types and geographies. We remain in that “just the positive impulse to extend into the early part of 2018, obstacles
right” state as we enter the new year, with synchronized global growth ratchet up significantly as the year progresses, moving us away from
for the first time in a decade, low inflation and low volatility. Goldilocks into something more complex.

Tony Tutrone: The economic momentum is undeniable. All 45 countries We anticipate monetary tightening will really start to be felt about
tracked by the OECD are expected to expand in 2017, which has only midyear, when year-over-year growth in G-4 central banks’ balance
happened three times over the past 50 years. The U.S. is running above sheets is expected to turn negative. Obviously, the Fed is furthest along
3% and nearing full employment. Euro zone growth has broadened in terms of normalization. December’s hike brought the upper bound of
beyond Germany and the Netherlands, and the region is finally keeping the fed funds rate to 1.5%, and the Fed is forecasting three more hikes
pace with the U.S. Japan’s in the midst of its longest quarterly growth in 2018. While its balance-sheet reduction has been uneventful so far,
streak in more than 20 years. China continues motoring along even as the runoff accelerates in 2018 and will reach its monthly maximum
Beijing pushes toward sustainable long-term reforms. of $50 billion by the fall. The European Central Bank plans to halve


7% 6.7% 6.8%
5% 4.3%

4% 3.6% 3.7%
3.0% 2.9% 3.2%
3% 2.5%
2.2% 2.3% 2.1% 1.9% 2.1% 2.2%
2% 1.5% 1.8% 1.5%
1% 0.7%

U.S. Euro Area Japan Canada Australia China Emerging Markets World

2016 GDP Growth Rate 2017 Projected GDP Growth Rate 2018 Projected GDP Growth Rate

Source: International Monetary Fund. Note: IMF projections as of October 31, 2017.

its monthly asset purchases beginning in January, and it may look to higher now than it was a year ago. Meanwhile, the seven-member Fed
move its policy rate off zero later in the year. The Bank of Japan may be board of governors is understaffed, with three vacancies currently and
slower to act given its multi-decade battle against deflation, but it will two more coming in 2018.
become increasingly difficult for the BOJ to defend open-ended stimu-
Knutzen: The Fed isn’t the only place with job openings. Trump has
lus measures with the Fed and ECB heading in the opposite direction.
had a hard time filling the seats in his administration, at both the
Brad Tank: In general, I think that the synchronized global growth will cabinet and sub-cabinet levels. Only about one-third of the key posi-
transition to a synchronized global plateauing in 2018. The business tions in the administration requiring Senate confirmation have been
cycle is aging rapidly, and the tighter conditions Erik mentioned could filled; two-thirds of the Treasury’s positions remain open and half are
start to weigh on its ability to persist. That said, I don’t expect a U.S. open at Commerce. While part of this can be attributed to Democratic
recession in 2018, though 2019 and 2020 are viable possibilities. Chi- stonewalling, a lot is due to a lack of qualified candidates willing to
na’s continued deleveraging, which may accelerate in 2018 behind an serve. And it’s troubling that some of the most capable members of
even more powerful Xi Jinping, will also play a role in dampening the the administration—people like Cohn and Tillerson—don’t seem like
global economic acceleration. Less liquidity and slowing but reason- they’ll be around much longer.
ably strong economic growth combined with high valuations should
Tank: I think we can agree that Washington in general seems like
result in renewed volatility across financial markets.
it has the potential to be a source of market headwinds in 2018.
I also see signs that inflation may pick up globally in 2018. In fact, I It looks like the Mueller special investigation will continue to make
think conditions are more hospitable for an increase in inflation than headlines, whether or not the president ultimately is implicated in
they have been in years. The output gap in the U.S., for example, any collusion with the Russians. And it’s safe to expect a conten-
has closed completely, and rising productivity should pressure wages tious midterm election season in 2018. There’s a very real chance
higher. Producer prices in China have climbed sharply in the past two that the Democrats take back the House in 2018—if they do, that
years, which should ultimately be felt in consumer prices in many may increase the chances that Trump could be impeached in 2019.
markets. On top of this, many countries are intent on introducing With Republicans likely to keep hold of the Senate, the possibility of
expansionary fiscal policy and reform initiatives. The U.S. passed a Trump’s removal is remote, though a divided Congress would result
$1.5 trillion tax cut. French President Macron has turned out to be in political gridlock. Come June and July people will start looking
as pro-business as advertised; in just a few months in office he has toward the polls to see how these races are trending, which may
liberalized labor laws and cut the deficit, and we expect more reform rattle markets.
in 2018. Japan’s recent budget calls for growth-oriented fiscal policy.
Tutrone: We managed to get through last year’s slate of Europe-
Brazil is looking to trim pension costs in an effort to get its public
an elections relatively unscathed. This year Italy is the only major
debt under control.
country up for grabs, with parliamentary elections taking place in
Should these efforts spur a meaningful acceleration of inflation, central March. Italy is still the third-largest economy in Europe, though it
banks may be forced to act more quickly than they had planned to— also has the second largest debt-to-GDP ratio and a recovering
and more quickly than markets expect. banking system. Polls suggest that there’s a possibility that an an-
ti-establishment, anti-Europe party, like the Five Star Movement,
Amato: It’s really an unprecedented—and precarious—time for cen-
could rise to power there.
tral banks as they manage the unwind of years of extraordinary accom-
modation. We’re basically in uncharted territory, and the Fed has a new There are some interesting emerging markets political races coming up
hand at the tiller in Jay Powell. He’s been a Yellen ally since he joined in 2018. Mexico elects a new president in July. The poll leader there—
the board in 2012, and I expect his approach will be consistent with Andres Obrador, a left-wing populist—has been outspoken about his
the groundwork she laid. That said, the degree of difficulty is certainly distaste for NAFTA. Should he win, trade negotiations with the U.S.

could grow even more contentious. In Brazil, the runaway leader in subsectors where meaningful upside potential is still available, and
the polls is a former president who was caught up in the Petrobras then seeking to extract that upside potential in more sophisticated,
corruption scandal and may be facing prison time. risk-controlled ways.

On top of potentially disruptive elections, you have the usual sources

of geopolitical discord. North Korea continues to lob missiles and is
always unpredictable, as is the potential U.S. response to any provo- Tank: While the Fed’s slow-and-steady approach to the normaliza-
cation. Brexit talks continue in Europe, and while there’s been some tion of its target fed funds rate has successfully pushed up the short
progress, a final accord appears far off. end of the Treasury yield curve, longer-term rates have remained
anchored. There are three primary reasons for this, in my view: per-
sistently low inflation, the tethering effect of low global rates on U.S.
rates and the disconnect between the Fed and the market in terms of
the terminal fed funds rate. I see all three of these pressures easing
March October as 2018 progresses, which suggests that longer-term Treasury rates
Italian general election Brazilian general election may be biased higher.
July November
That said, I believe interest rates across the Treasury curve likely will
Mexican general election U.S. midterm elections
remain well below historical levels in 2018 and beyond. And though
Source: Neuberger Berman.
the amount of bonds offering negative yields worldwide seems to
have peaked, it remains substantial at about $6 trillion. As a result,
yield-hungry investors may continue to look to other areas of the mar-
Amato: In contrast with the wild cards Tony mentioned, there’s much kets, with varying degrees of risk, in search of increased yield potential.
less uncertainty in China after Xi cemented his leadership following the
most recent Communist Party congress. As a result I think Xi may be For example, we continue to see a ton of inflows into U.S. credit
more aggressive than most people expect when it comes to promoting markets from non-U.S. investors; this may become a problem, as non-
economic and financial reforms and risk containment. China typically U.S. investors are vulnerable to a pause in economic growth, rising
doesn’t announce its GDP growth target until March, but it wouldn’t rates and rising hedging costs. This last point may be the key risk for
be surprising to see it again set at 6.5% for 2018. While it beat that credit at the moment, as interest-rate differentials between the U.S.
bogey easily in 2017, this year will be more of a challenge should dollar and other developed markets are pushing the cost of hedging
Xi follow through on aggressively reining in credit and cutting excess back to euros or Japanese yen ever higher, complicating the regional
industrial capacity. relative-value decision and threatening to debase the appeal of U.S.
credit for non-U.S. investors.
Knutzen: At the end of the day, we need to acknowledge the pos-
itive economic context in which we will be making our investment Real rates in the emerging world have continued to attract capital
decisions. In short, strong macroeconomic fundamentals and corporate flows as well, and emerging markets have delivered solid returns over
earnings are real and underscore the case for remaining exposed to the past 12 months. Reflation and an upward bias on global bond
growth. The challenge for investors is to do so in a prudent way, with yields can pose a risk to the performance of EMD assets. However, a
risks skewed as far as possible in their favor. buffer is likely to come from the consolidation of the cyclical improve-
ment in a large majority of emerging economies and ongoing reforms
Asset allocation becomes more challenging in a world of high val- in key markets.
uations, a maturing economic cycle and shallow, short-lived market
dips. From a multi-asset class investment standpoint, our approach
for 2018 must be predicated on finding those asset classes and


As of November 30, 2017

% Negative
1 2 3 4 5 6 7 8 9 10 10+ Yielding
Switzerland 59%
Germany 64%
Japan 55%
Finland 49%
Denmark 55%
Netherlands 58%
Belgium 36%
France 49%
Sweden 43%
Austria 50%
Italy 21%
Norway 0%
U.K. 0%
U.S. 0%

Source: Bloomberg Barclays.

In terms of fixed income positioning for 2018, it may be an opportune Knutzen: From an asset allocator’s perspective, cash is in the discus-
time to take a bit of credit risk off as a way to de-risk the whole port- sion for the first time in years, at least for U.S. dollar investors. The risk-
folio as spreads become more two-way and range-bound. Basically, adjusted return outlook on cash now competes with investment grade
we’ve entered a new zone for fixed income. The cyclical market is over. credit while also offering the liquidity and optionality to grasp value
Yields could go lower over the next 12 months, but the secular bull opportunities that may result from any sell-off in risk assets.
market has already ended. It doesn’t really feel that way thanks to
Tank: I’d add TIPS to the category of investments that may see renewed
low correlations among fixed income markets, which have buffered
interest in 2018. With breakeven inflation rates tracking well below
fixed income investors during recent bouts of trouble. But given narrow
2%, TIPS currently present an attractive opportunity for investors who
credit spreads and low rates, the lifeline of low correlations is unlikely
agree with our assessment that inflation will perk up over the course
to persist. In fact, I think the chance of a broad, cross-markets selloff is
of 2018.
higher today than it has been for years.

EQUITIES: TWO-WAY MARKETS RETURN Non-U.S. equities also should present investment opportunities, in
Amato: I think equity market momentum will continue in early 2018, many cases offering exposure to potential growth catalysts at lower
driven by strong economic and earnings growth. As we discussed pre- valuations. In terms of developed markets, both Europe and Japan are
viously, however, clouds are gathering on the horizon; these risks com- seeing consistent economic growth for the first time in many years,
bined with already-extended valuations suggest the beta-driven returns buoying corporate earnings growth. Brad spoke earlier about how
delivered by stock markets in recent years may give way to something emerging markets debt has benefitted from the fundamental improve-
more nuanced and two-way. While I wouldn’t advocate trying to time ments and ongoing reform across the emerging markets complex, and
markets, strong positive momentum in the new year would present an we foresee a similar tailwind for its equities.
opportunity to shift equity portfolios to a more defensive posture. Knutzen: Options strategies are another possibility to consider. Equity
In the U.S., we envision a rebound from the smaller, more cyclical com- index put-writing strategies historically have captured more upside
panies that have lagged. Larger, higher-quality companies and growth than downside from equity markets over the long term, with lower
stocks outperformed to an extraordinary degree in 2017; for example, volatility.1 Such strategies may be particularly attractive for equity mar-
while the Russell 1000 Growth Index was up nearly 30%, the Russell ket investors concerned about downside risk.
2000 Value Index rose a pedestrian 6%. We heard a lot about the Amato: I’d note that I believe the stage is set for active management
market leadership of “FANG” stocks in 2017, and such narrowness of to do well in 2018 after a solid 2017. Our analysis of Morningstar
sentiment historically has not been a good sign for equity markets. It data shows that in 2017 50% of active U.S. stock funds beat their
could be an indication that investors are chasing winners rather than benchmarks net of fees and transaction costs, compared to only 25%
investing for more broad-based growth—a phenomenon typical of in 2016.2 One reason for the rebound in stock picking has been the
late-cycle behavior. Some catch-up from smaller companies and cyclicals collapse in the correlation between stocks. For the S&P 500, for example,
would be reassuring. The tax bill should help, as smaller companies correlation has gone from around 0.60 at the beginning of 2016 to
would disproportionately benefit from a lower statutory tax rate given less than 0.10 today. Similar trends can be seen in a variety of equity
their higher current effective rates. markets globally.


Cumulative Indexed Price Performance

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
S&P 500 Index MSCI ACWI ex-US

Source: Bloomberg.

As measured by the CBOE S&P 500 PutWrite Index versus the S&P 500 Index.
Based on analysis of all actively managed U.S.-domiciled open-end equity funds data from Morningstar. Performance is based on fund’s oldest share class relative to
its primary prospectus benchmark.
The tenets of capitalism suggest that correlations should go down very idiosyncratic risks, uncorrelated strategies have little to no correla-
when the capital allocation process is driven by company-specific tion with broader financial markets. They also tend to exhibit low cor-
factors rather than the macroeconomic influences that have prevailed relation with traditional hedge fund strategies and can be combined in
in recent years. The 2017 rebound in actively managed portfolios is a well-balanced portfolio to further enhance the overall risk-adjusted
a timely reminder that these relative performance trends have long return profile. While these strategies have struggled at times during the
been cyclical, not structural. We think the cycle may have turned in risk-on/risk-off markets that have characterized the post-crisis years,
favor of active. they have the potential to be a source of incremental return in the face
of a fading beta trade and hazy forward market direction.
Looking at the private markets, with valuations rich and more and more
deals coming on line, investment discipline is more important than ever.
Tutrone: Hedge fund performance was vastly improved in 2017 and One way to exercise discipline is by targeting general partners who have
the industry is on track to deliver its best performance since 2013, a history of both sourcing high-quality private equity deals and creating
though it continues to lag broader equity markets. We think the shift value in these businesses through operational improvements. This track
to a higher interest-rate environment and the emergence of more record should be long enough to capture multiple market cycles, not
volatile, two-way markets could result in an expanded opportunity merely the post-crisis bull market.
set for hedge fund managers, particularly those who seek to identify
market-agnostic trading opportunities. This would include uncorrelated Moving up the capital structure to the debt of private equity-backed
strategies like market-neutral and relative-value hedge funds, which companies is another way to help mitigate risk in private equity while
historically have delivered returns similar to traditional hedge fund cat- attempting to capture illiquidity and complexity premiums. We believe
egories (long/short equity, for example) with less volatility. By hedging going to the top of the capital structure to focus on senior secured
out all market beta and focusing exclusively on alpha generation via first-lien debt offers perhaps the best relative value at this time.


Below we take a quick look at how our predictions for 2017 fared.

Macro: A Sea Change for Economies and Markets Fixed Income: Normalization Resumes

1. The Rise of Nationalistic Self-Interest Continues to 3. Real Interest Rates in the U.S. Continue to Push Higher
Upset the World Order
What we said: Expectations for higher growth and inflation are
What we said: After political upheavals in the U.K. and U.S. during likely to drive higher Treasury yields and a steeper curve, though we
2016, French and German voters will be among those in 2017 to don’t anticipate a break from the global rate tether.
test the persistence of anti-establishment/anti-globalization trends.
What we saw: While three increases in the federal funds rate in
What we saw: While mainstream political forces returned to primacy 2017 pushed short rates higher, longer bond yields were flat and
in 2017, the geopolitical climate remains unsettled. the curve flattened considerably as a result.

2. Central Bank Impact Fades 4. Credit Still Holds Appeal


What we said: Global central banks appear to have reached an in-

 What we said: The credit cycle is mature, but it doesn’t appear

flection point and will likely drive an increase in interest rates, inflation ready to turn just yet; when it does, more supportive fundamentals
expectations and market volatility, and a stronger U.S. dollar. are likely to help absorb the impact.

What we saw: Monetary policy globally remained highly accom-

 What we saw: The credit cycle has life in it yet; credit spreads

modative in 2017, and we witnessed a return to the familiar low- drifted tighter in 2017, and their narrow levels suggest risks in
growth, low-rates, low-volatility “Goldilocks” environment of the credit are skewed to the downside.
post-crisis years.

Equities: Back to Basics Emerging Markets: Both Winners and Losers Emerge

5. Pro-Growth Trump Administration Fuels Outperformance 7. Economic Orientation Counts

of U.S. Equities

What we said: In our view, fears that U.S. policy will drag down
What we said: A more business-friendly environment—characterized the entire emerging world are overblown; improved global growth
by lower taxes, loosened regulations and robust fiscal spending— should be generally supportive, though countries likely will be
could provide a tailwind for corporate earnings and stock markets in differentiated based on their key economic drivers—manufacturing
the U.S. vs. commodities vs. domestic.

What we saw: While the anticipated pro-growth legislation has What we saw: Buoyed by synchronized global growth combined
been slow to materialize, robust corporate earnings growth drove with fundamental improvements and ongoing reforms, emerging
U.S. equity indexes higher—though no faster than the pace of markets equities and debt delivered strong returns in 2017.
many non-U.S. markets.

8. China Risks Remain Significant

6. Alpha—and Active Managers Able to Generate It—
May Stage a Comeback
What we said: The world’s second-largest economy faces a number
of ongoing issues—from asset bubbles to currency management—
What we said: The removal of artificially low interest rates could
 that require a particularly deft touch from Beijing.
result in individual stock performance once again being differenti-
What we saw: China’s need to bolster its financial stability hasn’t
ated by company fundamentals, to the benefit of high-conviction,
abated, and policy measures to accomplish it have contributed to
fundamental investors.
volatility in the country’s stock and bond markets.
What we saw: Intra-stock correlations collapsed over the course

of the year, creating a better environment for stock pickers and a
sharp improvement in active managers’ performance relative to
their benchmarks.

Alternatives: Helping Narrow the Return Gap

9. Volatility Can Work for Investors 10. Private Debt Remains Attractive


What we said: We anticipate that the difference between long- What we said: Despite the potential re-emergence of banks as liquidity
term investor needs and what can be generated from traditional providers, it is unlikely that they will rebuild the infrastructure
sources of beta is likely to persist, highlighting the value of alter- required to compete in similar, less-liquid credit. In addition, increased
native risk premia and volatility-capture strategies. M&A activity will likely keep the private debt market well stocked
with opportunities.
What we saw: Though volatility has yet to re-emerge, the demand
for alternative sources of returns and diversification continues, What we saw: The private debt market continued to attract significant
buoyed by the consistent attractive performance of strategies like capital in 2017, and the resulting competition for attractive invest-
equity put writing. ment opportunities has led to the emergence of pricing pressures.

FOR 2018



Neutral Outlook
Below Normal Above Normal
Outlook Outlook


Global Bonds

Investment Grade Fixed Income

U.S. Government Securities
Investment Grade Corporates
Agency MBS
Municipal Bonds
High Yield Corporates
Emerging Markets Debt


Global Equities
U.S. All Cap
U.S. Large Cap
U.S. Small and Mid Cap
Developed Markets—Non-U.S. Equities
Emerging Markets Equities
Public Real Estate


Lower-Volatility Hedge Funds
Directional Hedge Funds
Private Equity

As of 1Q 2018. Views shown reflect near-term tactical asset allocation views and are based on a hypothetical reference portfolio. Nothing herein constitutes a
recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. See “Additional Disclosures” at the end
of this presentation for additional information regarding the Asset Allocation Committee and the views expressed.  



Neutral Outlook
Below Normal Above Normal
Outlook Outlook


U.S. Treasury 10 Year
Bunds 10 Year
Gilts 10 Year
JGBs 10 Year
EMD Local Sovereign
EMD Hard Sovereign
EMD Hard Corporates




Swiss Franc
EM FX (broad basket)

“We respect the economic and market momentum currently driving risk assets, and
express that in our positive views on non-U.S. equities, U.S. small caps, cyclical value
stocks and shorter-duration strategies.”

As of 1Q 2018. Views shown reflect near-term tactical asset allocation views and are based on a hypothetical reference portfolio. Nothing herein constitutes a
recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. See “Additional Disclosures” at the end
of this presentation for additional information regarding the Asset Allocation Committee and the views expressed.


Erik L. Knutzen, CFA, CAIA
Chief Investment Officer—Multi-Asset Class

As every sports fan knows, strategy must be path-dependent. Think about football—the version we Americans insist on
calling “soccer,” which might explain why we failed to qualify for this year’s FIFA World Cup. If you’re a goal down with a
quarter of the game to go, you will end the game on the attack. Go two up in the first half, and while you might substitute a
center forward for a fullback, you’d still seek to ride your momentum. Only once you’ve knocked in a third would you “park
the bus” on the goal line, as my U.K. colleagues put it. As we move into 2018 we are two goals to the good, with synchro-
nized global growth and a big U.S. tax overhaul. It may already be opportune to bring on short-duration fixed income and
low-volatility hedged strategies as a substitute for some corporate credit. But economic and market momentum is still with
us, and we think we can press for a third goal before halftime with inflation-sensitive assets. As we approach the midpoint of
the year, volatility, rising interest rates, a late-cycle slowdown and potential political risks could come back at us, looking for
equalizers; at this point, it could be a good time to use continued market momentum to shift, gradually, to a more defensive
formation. Appropriately enough, in our view, the World Cup year of 2018 looks primed to be a game of two halves. In this
quarter’s Asset Allocation Committee Outlook, we set out our thoughts on a game plan for this environment.

Global equities, as measured by the MSCI World Index, enjoyed high MSCI World ended 2017 trading at 17 times forward earnings and MSCI
double-digit returns through 2017. Emerging markets were up by around Emerging Markets at just 12 times. The S&P 500 Index is at over 18 times
30%. The S&P 500 Index posted a positive total return in every month of forward earnings, which assumes 10 – 11% earnings growth through
2017. Volatility bounced around near its all-time lows for much of the year. 2018—and it is not unreasonable to see half of that coming from U.S. cor-
Conditions like these tend not to last forever. porate tax reform and the other half from nominal GDP growth, before any
other tailwinds are taken into account. These are not extreme valuations.
Against this background, the Asset Allocation Committee (AAC) debat-
Some pockets, such as value stocks and the energy sector, appear still to
ed whether to downgrade its 12-month outlook for global equities from
offer value.
Above Normal to Neutral. In the end we let it stand, and the reason was
well articulated by one AAC member: “Do we want to forego return When it comes to immediate downside risks, we note signs of late-
potential, not because we got worried about rich prices in an environment of cycle behavior, from disappearing high yield bond covenants to parabolic
clear-and-present risks, but because we got worried that nothing looks partic- bitcoin appreciation, but the overwhelming catalysts we see moving into the
ularly cheap in an environment that just seems eerily quiet?” first quarter of 2018 are momentum from synchronized global growth, the
benign inflation and monetary-policy background, and pro-growth policies
Equities are not cheap, but neither are they terribly rich. Even if they were,
such as tax reform in the U.S.
rich or full valuations do not cause market corrections in themselves. Mar-
kets respond to catalysts.
Things could change through the second half of 2018, however. As always, DIVERGENCE IN U.S. AND NON-U.S. EQUITY
precise timing is impossible, but we envision catalysts for higher market VALUATIONS PERSIST DESPITE IMPROVING EARNINGS
volatility becoming more visible as we look later into the year.

First, we expect inflation to reappear, which may encourage central banks

to hike interest rates more quickly than the market currently anticipates. At
the same time, balance-sheet reduction will be gathering pace at the Federal 180 S&P 500 Index
Reserve and the European Central Bank will be advanced in its asset-purchase
tapering. Risk premia may have to adjust especially quickly in Europe.

Then there is the likelihood of further slowing in China’s economy, as conditions 140

tighten around the shadow banking system and the authorities focus on the 120
quality rather than the pace of economic growth. That is likely to have knock-on
effects on commodity prices and other growth drivers in emerging markets, and 100
to soften our global synchronized cycle later in 2018.
Among the more predictable political risks, 2018 brings potentially eventful
elections in Brazil, Italy and the U.S. Markets will start to look at opinion polls
in late summer for any signs that the Democrats might regain a majority in 40
‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17
either house of Congress in November’s midterm elections, which could tie the
current administration’s hands for the remainder of its term. In the meantime,
we have ongoing coalition talks in Germany, Robert Mueller’s special counsel 30%
investigation in the U.S., and of course the Brexit negotiations. 25%

In other words, the AAC expects 2018 to be a game of two halves, and that 20%

makes it a challenge to articulate a consistent 12-month outlook. At this 15%

point, our views still reflect our expectation that strong positive economic 10%
and market momentum can persist into the first half, and we favor remaining 5%
positioned to ride it. Should the first half play out as we anticipate, it would 0%
be opportune to begin using such continued momentum to adopt a more
defensive stance later in the year while remaining ready to act should risks
manifest themselves sooner rather than later. In addition, for some months
already we have identified a few areas of elevated downside risk to avoid,
as well as some areas of potential value. -20%
2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17(e)
S&P 500 EPS Growth, YoY change STOXX 600 Topix
The aspects of our view that express confidence in current positive momen-
tum will be familiar to readers of our 4Q 2017 AAC Outlook.
Source: International Monetary Fund. Note: Projections as of October 31, 2017.
Overall, we retain an Above Normal outlook for global equity returns enter-
ing 2018, and most AAC members prefer non-U.S. over U.S. equities, and In fixed income we still lean toward high yield over investment grade, and
emerging equities over developed. While we have become more Neutral on prefer credit over governments and shorter duration over long.
China, on the whole we still see the emerging world as a beneficiary of
synchronized global growth. We favor U.S. small caps over large caps, and We think current momentum should be respected and favor maintaining expo-
value stocks over growth. The latter overlaps with sector-level preferences sure while also standing ready to adopt a more defensive stance should risks
for financials and energy. manifest themselves sooner rather than later in 2018.

MORE CAUTIOUS ON CREDIT That combination of short duration and optionality also makes it well-suited to
While we still prefer corporate bonds over governments, corporate credit is one one of our central scenarios: a gradual re-emergence of inflation. That scenario is
place where we have already adopted a more cautious view. also why the AAC’s slightly more conservative outlook for credit risk is balanced by
an upgraded view on inflation-sensitive assets. This view is supported by the fact
The price action during the fourth quarter of 2017—equity markets reaching that these assets tended to be among the few that underperformed during 2017.
new highs while credit struggled to stay flat—showed how corporate bonds
can dislocate from equity at this stage in the cycle. Examples include master limited partnerships (MLPs), which were down some
10% and now yield around 7% despite the fact that oil averaged $43/bbl
We note three things. First, despite defaults remaining historically low overall, during 2016 and $50/bbl in 2017. Our 12-month outlook for commodities
we have seen fundamental earnings deterioration in some high yield names. moved from Neutral to Above Normal this quarter, and this mirrored our pref-
Second, any sign of a growth slowdown would be expected to be credit-neg- erence for the energy sector in equities. In fixed income, as well as preferring
ative, but with spreads as tight as they are, rising interest rates may also cash and shorter duration, AAC members unanimously favor Treasury inflation-
pose a risk from the opposite direction. protected securities (TIPS) over nominal bonds.

And finally, as we discussed in our previous Outlook, interest-rate differen- COMMODITIES LOOK MORE ATTRACTIVE IF INFLATION IS
tials between the U.S. dollar and other developed markets are pushing the EXPECTED TO RISE
cost of hedging back to euros or Japanese yen ever higher. This is perhaps
the key risk at the moment, as the marginal positioning in U.S. credit is today
8% Bloomberg Commodity Index, YoY change (rhs) 80%
dominated by non-U.S. dollar investors. The risk of these investors heading U.S. Headline CPI, YoY change (lhs)
for the exits right now remains low, but forward markets indicate that hedg-
6% 60%
ing costs are set to rise further in 2018, building up the pressure.

Taking all that into account, the AAC is beginning to take the view that the pric- 4% 40%
ing of corporate credit risk is outpacing the fundamentals of corporate earnings,
2% 20%
and that there are other places to get income, albeit with varying degrees of risk,
that appear less vulnerable to interruptions in flows. One such place might be
0% 0%
emerging markets debt, where inflows continue to be steady and positive.
-2% -20%

Another place to look for income and low-volatility returns that are not
-6% -60%
so exposed to the credit and interest-rate risks of corporate bonds might ‘99 ‘01 ‘03 ‘05 ‘07 ‘09 ‘11 ‘13 ‘15 ‘17
be lower-volatility hedged strategies, where we maintain our longstanding
Above Normal 12-month outlook. Source: Bloomberg.

Short-duration fixed income is also beginning to look more attractive. For Summing up, while it would be easy to conclude that our view has become more
some, that might even include the possibility of a cash holding—U.S. dollar defensive over the past quarter, that would not reflect the nuances at play. We
investors, at least, can look forward to the prospect of risk-adjusted returns respect the momentum currently driving both the fundamentals of the economy
from cash competing with investment grade credit in 2018. and the pricing of financial risk assets, and express that in our positive views
on non-U.S. equities, U.S. small caps, cyclical value stocks and shorter-duration
While it does not have the duration to respond positively in the event of strategies. We also anticipate a turnaround in the inflation story. We do think
a substantial sell-off in risk assets and a bid for government bonds, short- the newfound return potential of cash can help investors manage portfolio beta
duration assets do offer the liquidity and optionality to seize the resulting down slightly, and we are also mindful of the asymmetrical downside risks build-
value opportunities. ing in credit. Nonetheless, we expect one or two more AAC quarterlies to see
the light before a genuinely defensive stance is evident in our views.



One Asset Allocation Committee member recalled a time, leading up The loss of these tax exemptions led to a rush of muni-bond
to the financial crisis, when analysts would confidently call the top issuance at the end of 2017—supply hit peaks last seen after the
in corporate profit margins after 20 years of appreciation. The cost mid-1980s tax reform—and that led to technically attractive
of capital couldn’t fall any lower, they said. Neither could the cost of pricing that is likely to dominate trading for the first half of 2018.
labor. In the U.S., there was also the small matter of a much higher That attractiveness, especially against other parts of the fixed
corporate tax rate weighing on many companies’ profits. income market, led us to upgrade our 12-month outlook from
Below Normal to Neutral.
Since then, of course, rates have collapsed, wages have stagnated,
and robots and artificial intelligence have started eating into paid
jobs. The final shoe, U.S. tax reform, dropped at the end of 2017. MUNICIPAL BOND ISSUERS HAVE RUSHED TO MARKET
In previous Outlooks we have noted that smaller, more domestically
oriented U.S. companies stand to benefit more than larger multina-
tionals, simply because they are more exposed to the U.S. corporate Municipal 30-Day Supply Volume (in thousands)
tax rate.
The technology and health care sectors are the least likely to benefit.
Retail may reverse a long period of underperformance.
Capital-intensive businesses and their suppliers are likely to benefit
from the fact that the bill allows for the immediate expensing of as- $20
sets with a life of less than 20 years, a massive shift in incentives for
businesses to make capex investments now. Those incentives should
eventually feed into the wider economy, too.

The disallowance of tax deductibility on interest payments in ex- $10

cess of 30% of EBITDA will punish excessively leveraged business
strategies, but companies with debt-to-EBITDA ratios of less than
approximately 4.0, or with an interest coverage ratio greater than
3.3, are likely to be unaffected, and will benefit from the headline
corporate tax cut. 3/15 7/15 11/15 3/16 7/16 11/16 3/17 7/17 11/17

The changes are particularly important for the U.S. municipal bonds
Source: Bloomberg.
market. They effectively eliminate “advance refunding” of tax-
exempt bonds. This is when, in order to lock in low interest rates,
a trust is created to pay the interest on higher-coupon municipal Finally, the AAC debated the potential impact of repatriating over-
debt that is not yet callable, and new, lower-coupon debt is issued seas profits on the U.S. dollar. A lot depends on how much of the
to fund the trust. estimated $3.5 trillion is brought home and how much is held in
That debt has represented some 50% of total annual new-issue non-dollar currencies. Estimates range from 20% to as high as
volume over recent years. The bill also eliminates tax exemption for 40%. On the whole, the AAC concluded that repatriation may
private-activity bonds, and could push up the cost of borrowing by present some short-term upside risk, but that central-bank policy
as much as a third for many colleges, hospitals and airports, to name and inflation dynamics will likely be the more important determi-
a few typical issuers. nant of dollar strength over the medium term.



Despite synchronized global growth and falling unemployment, GLOBAL FIXED INCOME
inflation remained muted during 2017. U.S. Core CPI even declined U.S. Government/Agency: The AAC maintained a Below Normal outlook.
over the summer. In 2018, the Federal Reserve expects to hike rates three more times and will
That inspired a lot of commentary about potential structural down- continue reducing its balance sheet. The Fed expects two rate increases each
ward pressures on inflation, from globalization and online shopping in 2019 and 2020. The cost to investors of hedging U.S. dollar exposures
to the robotization of the workforce. We believe this is premature. is likely to rise further due to the reduction in the Fed’s balance sheet, as
Falling unemployment coexisted with low inflation for some years interest rate differentials between the dollar and other currencies widen,
during the early 1960s, after all, immediately before a 20-year peri- and as investment banks’ reserves decline. That may reduce the relative at-
od of inflation shocks. tractiveness of U.S. investment grade securities for non-U.S. dollar investors.

We can identify a number of signs of incipient rising inflation today. U.S. Municipal Bonds: The AAC upgraded its outlook to Neutral from
The U.S. output gap has closed, suggesting that any pickup in Below Normal. Under the proposed tax reforms, certain tax-exempt bonds
growth from here would be inflationary. China’s Producer Price Index may be disallowed after 2017 (advance refunding, private activity bonds and
has risen fast since 2016. As many finished goods bought by Amer- tax credit bonds). That led to a substantial increase in supply to the market
ican consumers originate or pass through China’s manufacturing in the weeks leading up to the end of the year, creating a short-term value
sector, we would expect that to feed into U.S. CPI soon, as it has opportunity. Supply is expected to be lower under the new tax rules.
done historically.
Developed Market Non-U.S. Debt: The AAC maintained a Below Normal
Bureau of Labor Statistics data show that, while low-wage jobs have outlook on concerns around valuations in the European bond market. While
accounted for almost 41% of U.S. jobs growth since 2007 and high- it is expected to remain accommodative, the European Central Bank will
wage jobs only 25%, it is also true that the low-wage sector has begin reducing monthly asset purchases in January, which could cause rates
seen the biggest jump in year-on-year wage growth during 2017.
to move higher. The Bank of Japan continues with its yield-targeting strategy
Other indicators, such as the Employment Cost Index and the Atlanta
at the long end of the curve.
Fed Tracker, also show signs of a pickup in labor’s pricing power.
Officialdom is ready to offer support: both Mario Draghi of the Euro- High Yield Fixed Income: The AAC maintained a Neutral view. Within
pean Central Bank and Haruhiko Kuroda of the Bank of Japan have fixed income, high yield is still preferred to investment grade both for its
urged labor unions to increase their wage demands. The declining higher expected return as well as its shorter duration, though tight spreads
savings rate suggests that even with low wage growth, consumers
are a reason for the Neutral outlook overall. The AAC notes that fundamen-
are growing more confident to spend.
tal deterioration in, and outflows from, the telecom sector could pose risks.
Finally, broader data sets than those picked up by traditional infla-
Emerging Markets Debt: The AAC maintained its Above Normal outlook,
tion measures, such as the Underlying Inflation Gauge (UIG) calcu-
lated by the Federal Reserve Bank of New York, tend to show a much as this asset class still appears relatively cheap despite the recent rally. EMD
clearer upward trend in prices, beginning in early 2016. is a large beneficiary of synchronized global growth, low inflation, low rates
and a weak dollar. The asset class could benefit from continued inflows if the
While the AAC’s central scenario is for a benign return to rising global growth environment extends.
inflation globally, to levels approaching central bank’s targets rather
than heights well in excess of them, this was enough to see upgrades
in our 12-month outlooks for inflation-sensitive assets such as
TIPS, MLPs, energy-sector equities and commodities.

The AAC maintained a Below Normal outlook as valuations are full and the
U.S. EQUITIES asset class is less likely to benefit from global growth and late-cycle dynam-
ics than some other risk assets. While listed real estate has performed rela-
The AAC maintained a Below Normal outlook for U.S. large cap and a Neutral
tively well during past rate-hike cycles, rising rates nonetheless pose a risk.
outlook for U.S. small and mid cap. Large caps with multinational operations
are most likely to benefit from dollar weakness and repatriation of cash
under the proposed tax reforms, but small- and mid-cap companies should
benefit more from the current U.S. administration’s policies in general. On The AAC maintained its Above Normal outlook. In Europe, the economy is
tax reform, specifically, many large companies already pay less than the recovering strongly and unemployment rates have declined rapidly. The ECB
headline tax rate. The AAC anticipates style rotation into value stocks from remains accommodative, but risks are attached to the very strong euro as
growth in both U.S. large and small caps, as these are more attractively the central bank begins to reduce asset purchases in January and discusses
valued at the moment, and are also more likely to benefit from tax reform how the QE program will wind down. The forthcoming election in Italy is also
and deregulation. However, markets will take time to distinguish winners a key risk. Japanese equities tend to benefit from a weaker yen flowing
and losers from these dynamics. Large-cap valuations are elevated, but not through to corporate earnings, and the Bank of Japan remains committed
necessarily enough to constitute a timing signal. Risks include geopolitics to propelling the economy forward and its yield-targeting policy. The Com-
(such as tension around North Korea) and the potential for the Fed or ECB to mittee felt that if there were any signs of the current synchronized global
tighten policy too early or too aggressively, as markets are underestimating growth breaking down and slowing, they would be seen first in Japan. The
the importance of the liquidity that the central banks have provided. U.K. has seen some important progress in its Brexit negotiations with the
European Union, but market reactions seem to be isolated to the U.K. for
MLPs the time being.

The AAC upgraded its outlook from Neutral to Above Normal. Depressed
valuations due to low oil prices earlier this year provide an opportunity for
MLPs to recover; they currently provide an attractive yield relative to fixed TThe AAC maintained its Above Normal outlook. Emerging economies and
income and other dividend yielding assets such as REITs and utilities. MLPs equities should continue to benefit from synchronized global growth, low
also have long-term contracts, take-or-pay contracts and fee-based assets inflation and low interest rates. Balance-sheet adjustments have taken place
that potentially provide a hedge against inflation. across many economies, making them less susceptible to the potential neg-
ative impact of dollar strength as the Fed tightens policy. China’s managed
MLPS ARE ATTRACTIVELY VALUED slowdown remains a key risk, as does any sign of a slowdown in global growth.

14% Alerian MLP Index Spread


The AAC voted to upgrade its outlook from Neutral to Above Normal. Should
inflation pick up due to higher energy prices, pent-up demand and wage
6% increases, commodities could act as a hedge. Oil remains range-bound
as supply, driven by U.S. shale coming back on line and continued OPEC
4% production cuts, is capping the upside in prices.


‘96 ‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16

Source: Alerian, Bloomberg.

HEDGE FUNDS Yen: The AAC maintained its Above Normal outlook. Japan’s economy is enjoy-
The AAC maintained its Above Normal outlook for lower-volatility hedged ing one of the longest expansions since the 1990s, leading to tentative signs that
strategies and its Neutral outlook for directional hedged strategies. As a re- the Bank of Japan is preparing the market for reduced stimulus. Japan also runs
sult of concerns around fixed income valuations, some investors are looking a large current-account surplus. Market participants are short yen despite the
for “ballast” to go into their diversifying and lower-volatility portfolios. At fact that PPP and real exchange rates suggest undervaluation, and that long-yen
the same time a lack of market direction, paired with rising dispersion within remains a valid trade during periods of risk aversion. Risks to this view include
markets, may be improving the picture for the alpha-driven strategies that persistent low inflation and the central bank’s yield-curve targeting, which is ex-
tend to be characteristic of the lower-volatility group. acerbating already wide rate differentials with other currencies and encouraging
the use of the yen as the funding currency for global carry trades.
PRIVATE EQUITY GBP: The AAC upgraded its outlook from Neutral to Above Normal. Sterling
The AAC maintained its Above Normal outlook. Despite elevated valuations, remains undervalued based on PPP measures despite supportive forward-
private equity still looks attractive relative to public equities, especially when looking fundamental data, a rate hike from the Bank of England and progress
taking into account the liquidity premium. Today’s private equity deals are in Brexit negotiations. Risks to the view include some disappointing recent
notably less risky than those of 2007, and one reason for that higher level of economic data, especially on consumer spending, and the ongoing uncer-
quality is the presence of more private companies relative to public, creating tainties of Brexit.
a wider set of opportunities to choose from.
Swiss Franc: The AAC maintained its Below Normal outlook. The franc is
still very overvalued based on PPP measures, and safe-haven flows may con-
CURRENCIES tinue to unwind as Europe’s economic prospects improve and investors use
USD: The AAC has upgraded its outlook from Neutral to Above Normal. In the currency to fund global carry trades. Concerns about low inflation means
the near term we are slightly more bullish, as short-term yield differentials that the Swiss National Bank is likely to lean against any rapid appreciation.
remain supportive, U.S. economic data has been improving, and both tax Risks to the view include Switzerland’s positive current-account balance,
reform and the substantial short held by the market could cause a surprise continued strong growth and the potential for higher inflation. Any uptick in
geopolitical tensions could reignite safe-haven trades.
on the upside. The risks revolve around the still-unresolved U.S. debt ceiling,
subdued inflation, the potential for convergence between ECB and Fed
policies, and the fact that Fed tightening is largely priced in already and the
dollar is moderately overvalued on a PPP basis.

Euro: The AAC has downgraded its outlook from Neutral to Below Normal.
There are signs that the strong euro is causing some concerns within the ECB,
which has fixed a very accommodative policy for the next 10 months, despite
inflationary pressures remaining weak. Market participants are also still long
the euro. The risk to our view is the ECB appears more relaxed on the growth
outlook, which is likely to be boosted by the current synchronized global
growth environment, and which PMIs and business surveys suggest will be
above trend in 2018. The euro zone also runs a large current account surplus.

FOR 2018



Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the
next 12 months on each of the asset classes noted and, through debate and discussion, to refine our market outlook.
The panel covers the gamut of investments and markets, bringing together diverse industry knowledge, with an
average of 25 years of experience.

Joseph V. Amato Andrew Johnson
Co-Chair, President and Head of Global Investment Grade
Chief Investment Officer—Equities Fixed Income

Erik L. Knutzen, CFA, CAIA David G. Kupperman, PhD

Co-Chair, Chief Investment Officer—Multi-Asset Class Co-Head, NB Alternative
Investment Management
Ashok Bhatia, CFA
Senior Portfolio Manager—Fixed Income Ugo Lancioni
Head of Global Currency
Thanos Bardas, PhD
Senior Portfolio Manager, Head of Global Rates Brad Tank
Chief Investment Officer—Fixed Income
Timothy F. Creedon, CFA
Director of Global Equity Research Anthony D. Tutrone
Global Head of Alternatives
Ajay Singh Jain, CFA
Head of Multi-Asset Class
Portfolio Management

This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy,
sell or hold a security. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommen-
dation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Neuberger Berman is not providing this material in
a fiduciary capacity and has a financial interest in the sale of its products and services. Neuberger Berman, as well as its employees, does not provide tax or legal
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The views expressed herein include those of the Neuberger Berman Multi-Asset Class (MAC) team and Neuberger Berman’s Asset Allocation Committee. The Asset
Allocation Committee is comprised of professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset
Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews
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