1. society
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3. unemployment

Dear Client:
Please find the following items included:
1. Quarterly market letter written by your Windhaven Portfolio
Management Team
2. New thematic thought piece written by Christian Menegatti &
Liz Ann Sonders – Ride the Liquidity Wave
Thank you,
Windhaven Investment Management, Inc.
Quarterly Market Letter
First Quarter, 2015
The first quarter of 2015 was characterized by a variety of economic, financial and geopolitical
developments. These included the slowdown of the U.S. economy courtesy of a harsh winter and a strong
dollar, an improvement in economic activity in the Eurozone (EZ) amid renewed fears of a Greek exit
from the union, rising uncertainty around the Chinese economy and its financial sector, and renewed
global geopolitical risks in particular in the Middle East. These developments have been met by
unprecedented action by several central banks around the globe. The European Central Bank (ECB) in
particular stands out for having initiated an extremely aggressive quantitative easing program.
Additionally, a number of central banks around the world have cut interest rates, including into negative
territory. Even the tone of the U.S. Federal Reserve (Fed), which is moving towards the first rate hike
since 2006, has turned more dovish.
During this volatile first quarter, Windhaven’s globally diversified strategies* had positive returns. Gains
were widespread across domestic and international equities, domestic and international real estate and
domestic fixed income. Losses came mainly from hard assets.
There are three major themes that continue to drive asset class pricing across the globe, as well as our
modeling, thinking and positioning:
1. Central banks remain in the driver’s seat: Unprecedented monetary policy divergences have
contributed to increased volatility across global asset classes. Investors are searching for yield
and growth in a low growth world—where low and even negative yields abound globally.
2. Interest rate risk: The Fed is moving towards its first rate hike since 2006; it is most likely to
take place in the second half of this year.
3. Financial fragility and geopolitical uncertainty: Risks of a Greek exit from the EZ and
geopolitical turmoil, concentrated in the Middle East, remain on investors’ radar.
Unprecedented easing by the ECB has given a boost to EZ equity markets, while the euro has taken a hit.
In Japan, the joint coordination between the Bank of Japan (BoJ) and the Government Pension Investment
Fund (GPIF) has pushed the Nikkei to a 15-year high, and caused the yen to depreciate over 50% since
late 2012 when Abenomics was conceived. Economic fundamentals are important and eventually
markets catch up (or down) with them however, the display of power by global central banks remains a
leading driver of investor sentiment and market performance. We continue to follow and model the
impact of these moves.
The Fed is navigating towards its first rate hike since 2006. While this should be good news as it suggests
the U.S. economy might have reached its potential growth rate, investors are worried about the impact on
their portfolios and in particular, on their domestic fixed income positions. Maintaining exposure to U.S.
fixed income is important when attempting to manage risk in a portfolio given that U.S. Treasuries tend to
be a safe haven destination at times of heightened risk aversion, global deflation and financial stress.
Much of the international market narrative since the third quarter of last year has been about Greece and
its clash with creditors. Fears of a Greek default and potentially even an exit from the EZ may remain
front and center in the first half of 2015. On the geopolitical front, the latest spark spooking markets has
been the beginning of a regional war lead by Saudi Arabia in Yemen. However, geopolitical risk remains
elsewhere—including Europe, the Russia/Ukraine conflict, the Islamic State of Iraq and Syria, and Asian
tension between China and Taiwan, or China and Japan—just to name a few.
For a deeper analysis of the macroeconomic and market environment, the main themes, and Windhaven’s
positioning please refer to our thematic thought piece – Ride the Liquidity Wave.
Our goal is to generate attractive investment returns over full market cycles while managing downside
risks throughout. Please contact your Charles Schwab Investment Professional if your investment
objectives or circumstances have changed such that a review of your Windhaven investments might be
necessary, or if you have any specific questions about how your account is managed.
Windhaven’s Portfolio Management Team
* This statement is based on the composite performance numbers for accounts that have been fully invested for the entirety of the stated time
period. Individual account performance will vary. Past performance is no guarantee of future results.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions.
© 2015 Windhaven Investment Management, Inc. All rights reserved. (0415-3185)
Ride the Liquidity Wave
April 2015
Christian Menegatti, Ph.D.
Chief Investment Strategist
Liz Ann Sonders
Chair of the Investment Committee
Key Points:

There are three major themes that continue to drive asset class pricing across the globe, as well as our
modeling, thinking and positioning:
1. Central banks remain in the driver’s seat: Consistent with the output of our model, we continue
to ride the liquidity wave produced by the European Central Bank (ECB) and Bank of Japan (BoJ)
with exposure to those equity markets (partially hedging for currency risk). We are also
maintaining exposure to Indian and Hong Kong equities to obtain exposure to a region with
stronger relative growth.
2. Interest rate risk: By studying past interest rate hike cycles we noted that the yield curve flattens
in nearly all of those episodes (i.e., short term yields move up more than long term yields).
Therefore, we recently adjusted the fixed income maturity profile of our strategies by adding
exposure to longer maturity securities, while maintaining an overall underweight to interest rate
sensitivity (duration).
3. Financial fragility and geopolitical uncertainty: Financial risk, with Greece at the forefront, has
helped our gold holdings. Other commodities remain under the pressure of vast supply and
relatively weak global growth; however in the past our commodity positions have acted as a buffer
in episodes of heightened geopolitical risk and commodity supply fears.

The current environment presents opportunities, in particular given central bank actions outside of the
United States, self-sustained growth in the United States and investors’ search for growth. However, it is
important to be positioned for bouts of risk aversion, financial fragility and volatility. We believe that
requires remaining globally diversified over full market cycles and being dynamic with our reallocations to
seize opportunities; this also means dedicating a portion of the portfolio to assets commonly considered
safe haven such as U.S. Treasuries and gold, even if that could imply giving up some of the upside while
attempting to protect from a potential downside.
No Boredom in Financial Markets
The U.S. economy has slowed down significantly in the first quarter of 2015, after growing 4.6% and 5.0%,
respectively in the third and fourth quarters of 2014. Culprits were: one of the harshest winters on record,
the shutdown of West Coast ports, and a strong U.S. dollar which plagued multinational U.S. companies.
Much like the rebound after 2014’s negative first quarter, we believe the U.S. economy should rebound back
toward trend in subsequent quarters this year. A continued bright spot in the economy has been job growth
with the unemployment rate continuing to tick down, job growth healthy and strong downside momentum in
unemployment claims.
Largely as a result of better employment conditions, the U.S. Federal Reserve (Fed) turned the light off on
quantitative easing (QE) last fall, and is contemplating interest rate hikes beginning sometime later this year.
But the world is a study in contrasts with the ECB taking the Eurozone (EZ) to a new era of monetary
stimulus weakening the euro significantly and sending the growth assets sky high. Equity indices for the four
largest EZ countries (Germany, France, Italy and Spain) soared with double digit gains in the first quarter (in
local currency). A large number of central banks around the world have eased monetary conditions and even
pushed policy rates into negative territory to reduce safe haven inflows and prevent their currencies from
strengthening. Monetary policy divergence has been a major theme we have been emphasizing at
Windhaven.
1
A change in government in Greece has brought back fears of a Greek exit from the EZ, which dominated
much of the market narrative in the first quarter of this year. Oil prices may have found a floor at around $43 1
per barrel for West Texas Intermediate (WTI), after the rig count plunged by about 700 out of about 1500
rigs operating at the beginning of this year. In addition to the lower rig count, other leading indicators of a
bottoming process in oil suggest the process has begun. But oil price bottoms have historically been affairs
spread over a few months and we believe record-high crude supplies globally will likely keep a lid on prices
for some time.
Since oil is priced in U.S. dollars in the global market, oil and the dollar typically move inversely. The tradeweighted dollar has soared and is now flirting with 100 – the strongest level in 12 years. In fact, as seen in
the chart below, the year-over-year gain in the dollar is the largest in about 30 years.
Fig 1: Largest year over year spike in the U.S. dollar in the last 30 years
(U.S. dollar index, DXY, y/y % change)
Source: Factset as of 3/31/2015
A stronger U.S. dollar is generally good for the U.S. economy, given its consumer-orientation, but short-term
extreme spikes can cause near-term problems. U.S. exports, the energy sector, and multinational earnings
have all taken it on the chin given the surge in the dollar and the crash in oil prices. Think of it as too much of
a good thing in too short a period of time. On the other hand, the EZ’s economies are more export-oriented
than in the United States, so the depreciation in the euro has lent a hand to their economies. The
combination of stark global policy divergences, a strong dollar and a weak first quarter has contributed to a
rise in U.S. equity market volatility. The first quarter of 2015 had more days with swings larger than 1% (up
or down) than any quarter since the second quarter of 2012.
Fig 2: S&P 500 volatility – percentage of trading days
2
Source: Factset as of 3/31/2015
Market Themes
There are three major themes that we believe will continue to drive asset class pricing across the globe, as
well as our modeling, thinking and positioning:
1. Central banks remain in the driver’s seat: Unprecedented monetary policy divergences have
contributed to increased volatility across global asset classes. Investors are searching for yield
and growth in a low growth world—where low and even negative yields abound globally.
2. Interest rate risk: The Fed is moving towards its first interest rate hike since 2006, most likely in
the second half of this year.
3. Financial fragility and geopolitical uncertainty: Risks of a Greek exit from the EZ and
geopolitical turmoil, mainly in the Middle East, remain on investors’ radar.
Central banks remain in the driver’s seat
Unprecedented easing by the ECB has given a boost to EZ equity markets, while the euro has taken a hit. In
Japan, the joint coordination between the BoJ and the Government Pension Investment Fund (GPIF) has
pushed the Nikkei to a 15-year high and caused the yen to depreciate over 50% since late 2012 when
Abenomics was conceived. In the United States, the latest statement on economic projections and interest
rate expectations by the Federal Open Market Committee (FOMC) were very successful in removing market
concerns that the Fed would tighten too soon, providing relief to nervous investors. As you can see in the
chart below, in each of the last three FOMC meetings which included fed funds rate forecasts, the Fed
lowered its estimates of the likely path of interest rates, although they remain above the market’s own
estimates.
Fig 3: Market’s expectations way under Fed’s
Source: FOMC=Federal Open Market Committee. Source: Bloomberg, Federal Reserve as of 3/31/15
In today’s world, economic fundamentals are important and eventually markets catch up (or down) with
them. However, the display of power by global central banks remains a leading driver of investor sentiment
and market performance. The United States seems to have achieved self-sustained growth status
notwithstanding the weak first quarter, hence the slow regime shift towards removal of monetary policy
accommodation. However, across the other three largest economies in the world—the EZ, Japan and
China—policy makers continue to stimulate economic activity. Their efforts are an attempt to create positive
wealth effects until growth and inflation objectives have been achieved, and until the structure and reforms of
those economies can lead to sustainable growth.
Windhaven positioning: Consistent with the output of our model, we continue to ride the liquidity wave
produced by the ECB and BoJ with exposure to those equity markets. However we are partially hedging for
currency moves in an attempt to reduce volatility in the strategies that can result from monetary policy
divergences. We are also maintaining exposure to Indian and Hong Kong equities. In India the new
economic regime promoted by a reform-minded government and a credible central bank is likely to push the
country through 7% gross domestic product (GDP) growth in 2015, becoming the fastest growing country in
Asia2. We also maintain exposure to U.S. equities, given the relative health of the U.S. economy and the
potential acceleration ahead after shrugging off a weak first quarter. With the exception of some emerging
market positions, our global equity and real estate positions have benefited from low rate and easy monetary
policy environment, and we expect that to continue into the second quarter of this year.
3
Interest rate risk
The Fed is navigating towards its first interest rate hike since 2006. While this should be good news, as it
suggests the U.S. economy has reached its potential growth rate, investors are worried about the impact on
their portfolios, and in particular on their domestic fixed income positions. We believe maintaining exposure
to U.S. fixed income is important when attempting to manage risk in a portfolio given that U.S. Treasuries
tend to be a safe haven destination at times of heightened risk aversion, global deflation and financial stress.
Raising interest rates can put domestic fixed income positions under stress; it is important to note that a
dovish Fed continues to signal that it will be data dependent and rate hikes will be slow to make sure that the
recovery does not get derailed.
Windhaven positioning: By studying past interest rate hike cycles we noted that the yield curve flattens in
nearly all of those episodes (i.e., short rates move up more than long rates). Therefore, we recently adjusted
the fixed income maturity profile of our strategies by adding exposure to longer maturity securities, while
maintaining an overall underweight to interest rate sensitivity (duration). Specifically we added a small
sleeve of longer maturity securities. It might appear counterintuitive to increase the average maturity in the
strategies when the Fed is on the verge of hiking interest rates. However, given the analysis of past interest
rate hike cycles, and the flattening of the yield curve in nearly all of those episodes, maintaining a small
exposure to longer-term maturities in a diversified portfolio that contains U.S. fixed income can help contain
the downside as short term rates rise and the yield curve flattens – which we believe could happen again
when this next interest rate hiking cycle begins.
Fig 4: Change in long vs. short rates during Fed hikes (1977 - 2006)
Source: Bloomberg & U.S. Federal Reserve
Financial fragility and geopolitical uncertainty
Much of the market narrative since the third quarter of last year has been about Greece and its clash with its
creditors. Fears of a Greek default and potentially even an exit from the EZ may continue to remain front and
center in the first half of 2015. The negotiations around the next much-needed bailout package are set for
June; if recent negotiations offer any guidance, this summer could turn into a very rocky one for EZ finance
ministers and markets. Fears of financial fragility are not limited to Europe. The Chinese central bank has
recently cut interest rates to ease financial conditions across the economy in the attempt to facilitate the
management of its existing debt burden. On the geopolitical front, the latest spark that spooked the markets
was the beginning of a regional war lead by Saudi Arabia in Yemen. The attempt was to rescue president
Abd-Rabbu Mansour Hadi’s government in Yemen, which fell under the advance of Houthi rebels that took
over the capital Sana’a. However, there remains plenty of geopolitical risk elsewhere—including Europe, the
Russia/Ukraine conflict, the Islamic State of Iraq and Syria, and Asian tension between China and Taiwan,
or China and Japan—just to name a few.
4
Windhaven positioning: As it often happens when financial risk is on the rise, investors seek refuge in gold
and other safe haven assets. Financial risk, with Greece at the forefront, has helped our gold holdings.
Commodities remain under the pressure of vast supply and relatively weak global growth, however our
commodity positions have acted as a buffer in episodes of heightened geopolitical risk and commodity
supply fears; as we saw with oil recently due to the Yemen conflict and the country’s strategic positioning
even though the country only contributed 0.2% to global oil output.
Our U.S. fixed income positioning has benefited from a Fed that is in no rush to increase interest rates as
well as from the positive yield differential between U.S. government securities and other non-U.S.
government securities with comparable credit and liquidity.
Fig 5: Oil jumps over 12% in a week in wake of Saudi-led coalition at war in Yemen
Source: Bloomberg as if 3/31/2015. Oil measured by CLK5 Comdty
Seizing Opportunities While Managing Risk
It is likely that the theme of monetary policy divergence (as the Fed moves in one direction, while other
central banks go the other way) and abundant global liquidity will remain front and center as a driver of price
action. Additionally, Greece and the possible break-up of the EZ will continue to make headlines in the next
few months or until the endgame becomes clearer. The U.S. economy is likely to shrug off the harsh winter
and lead a data-dependent Fed to increase interest rates before the end of this year. Chinese policy makers
will probably continue to need to shore up their economy and avoid financial crisis-like outcomes, which will
be supportive of global sentiment.
The current environment presents opportunities, in particular central bank actions outside of the United
States, self-sustained growth in the United States and investors’ search for growth. It is however important to
be positioned for bouts of risk aversion, financial fragility and volatility. We believe that requires remaining
globally diversified over full market cycles and being dynamic with our reallocation process to seize
opportunities; this also means dedicating a portion of the portfolio to asset classes commonly considered
safe haven assets, even if that implies giving up some of the upside while attempting to protect from
potential downside.
Sources:
1
Bloomberg, 2Bloomberg/Economic Forecasts
Important Disclosures:
The information provided herein is for general informational purposes only and should not be considered an individualized recommendation or
personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment
strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is
obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Past performance is no
guarantee of future results.
Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various
other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other
factors.
International investments may involve additional risks, which could include differences in financial accounting standards, currency fluctuations, political
instability, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.
Windhaven’s risk management process includes an effort to monitor and manage risk, but should not be confused with and does not imply low risk or the
ability to control risk.
Diversification strategies do not ensure a profit and do not protect against losses in declining markets.
Portfolio management for Windhaven Strategies is provided by Windhaven Investment Management, Inc. ("Windhaven"), a registered investment advisor.
Windhaven and Schwab are separate but affiliated companies and subsidiaries of The Charles Schwab Corporation. Please refer to Windhaven’s ADV
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Part 2 for additional information. 4/2015 (0415-3187)