January 30, 2013

This investment commentary will focus on some of the asset allocation opportunities we
currently see, including a view on how one can build a truly balanced portfolio, one that
includes real assets such as commodities, in the face of current market uncertainties.
-Ben Nastou, a portfolio manager, MFS

The global financial crisis has led to unprecedented valuation displacements across asset
classes, particularly in regard to stocks versus bonds, as well as across markets, especially
within equities. Current allocations suggest that investors are investing for a tail event with
a low probability, one that assumes a very disorderly world unfolding.

We present analyses based on historical data that suggest investors would do well to
reconfi gure their asset allocation to shift assets from fi xed income into equities and, within
equities, to increase allocations to non-US developed and emerging market equities. The
large valuation discrepancies we currently observe point to numerous highly attractive
investment opportunities.

Although we do not see infl ation on the horizon at present, it is a risk down the road. Given
this, we suggest investors adopt a truly balanced portfolio approach that includes real assets,
particularly commodities that act as an infl ation hedge and capitalize on stable and rising
long-term demand. We demonstrate the performance benefi ts of this approach using a
model portfolio.

It is unfortunate but true that crises of all kinds — fi nancial, economic, political — are the
jarring events that create the conditions for investment opportunities. It is no less true today
than it was in John D. Rockefeller’s day, when he said, “The way to make money is to buy
when blood is running in the streets.” Crises create large valuation distortions across asset
classes, which in turn lead to investment opportunities. In times like these, investors typically
abandon risky asset classes, driving down prices, and pursue perceived safe-haven asset
classes, driving up these prices. The global fi nancial crisis is no exception. We currently
see enormous valuation displacement between major asset classes, stocks and bonds in
particular, and we also see these valuation discrepancies across markets within each asset
class, especially equities.


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