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trading partners. This portfolio shift in positioning is happening but, in our view, is in its early stages. We have moved from a "get paid to wait" core portfolio theme to a more cyclical and value- oriented theme in multi-asset and all-equity portfolios primarily due to increased business and consumer confidence, which should lead to higher earnings than originally expected. ° Therefore, we have raised our exposure to equities versus fixed income to a moderate overweight and our new tactical asset allocation view is overweight equities versus its strategic benchmark. ° We are now further underweight fixed income versus equities, underweight versus its strategic benchmark rather than neutral, and have lowered cash to neutral from overweight. Within the asset classes, we have made a number of changes consistent with our view from earlier this year and one that has accelerated post-election. ° We are now moderately overweight U.S. small capitalization equities and neutral non-U.S. developed markets. ° We maintain our preference for U.S. high-quality large caps and continue to overweight emerging markets. ° We continue to favor value over growth and more cyclical areas (such as financials and consumer discretionary) versus defensives (such as utilities and consumer staples). In fixed income, we have moved from a balanced view to a larger underweight versus the strategic benchmark. ° However, fixed income still represents an important portfolio diversifier—and a volatility dampener in unforeseen worst-case scenarios—and should be viewed primarily as a cash flow producer versus a total return asset, given the expectations for higher yields. ° In addition, we have lowered Treasuries to a further underweight but maintain our neutral rating on high yield and underweight on international fixed income. ° Municipal bonds have corrected to levels that are becoming attractive again, and we are still favorable on investment grade corporate credit. ° We maintain our neutral rating on real estate and commodities, but we prefer metals and oil to gold. In addition, the pro-cyclical improvement has started to break down the elevated correlation among and within asset classes since earlier in 2016. We expect this adjustment to continue in 2017 as economic volatility picks up and asset class volatility follows suit. Transitions to late-cycle phases tend to invite a higher level of volatility as inflation rises and central bank policies shift to nudging short rates higher. In this environment, alternative investments, namely hedge funds, should outperform industry benchmarks, in contrast to recent underperformance. For investors able to withstand a higher allocation of illiquid assets in their portfolio, we prefer timberland for its long term-growth prospects and low correlation to financial assets. Paul V. Morris Managing Director | The Morris Group Private Banking & Investment Group Merrill Lynch, Pierce, Fenner & Smith, Inc. Bank of America Tower | One Bryant Park (28) New York, NY 10036 fs . PRIVATE BANKING & Merrill Lynch =| InvESTMENT GROUP HOUSE_OVERSIGHT_014530