GLOBAL INVESTMENT COMMITTEE / COMMENTARY
On the Markets
MICHAEL WILSON
Chief Investment Officer
Morgan Stanley Wealth Management
TABLE OF CONTENTS
Ready for Reflation
2 Deflation is over, and were repositioning
for a pickup in inflation.
Growth Later, Rate Hike Sooner
4 We have accelerated our forecast of the
Fed rate hike to December from March.
Still Bullish on Global Stocks
5 On a valuation basis, equities remain
attractive.
Investing With Impact
7 Integrating environmental, social and
governance concerns into your portfolio.
Playing the Inflation Game
8 US and global inflation-protected bonds
are a good start, but theres more.
With Munis, Patience Is a Strategy
9 Dont chase the market on the way in or
out. Wait, and it may come your way.
The Liquidity Conundrum
10 Can the bond market handle a potential
spike in fund redemptions?
Q&A: Janus Funds Carmel Wellso
11 The research director/fund manager
discusses global investment opportunities.
MAY 2015
Dont Get Caught Flat-Footed
Investing is a contact sport. There are times you are going
to get hurt. Still, if you dont play with a purpose, you are
likely to hurt a lot worse. Having a plan can prepare you for
the inevitable ups and downs we experience in our
portfolios. Without one, we are no different than the poor
guy who gets caught standing flat-footed on the field just as
someone else who has a purpose runs him over. I still
remember the words barked by my linebacker coach when I
played high school football: Keep your head on a swivel
and maintain a forward leanor someone is going to knock
you on your butt!
I didnt realize it at the time, but successful investing is not that different. While
things can move in our favor for long periods of time, we must stay focused on what is
in front of us or risk getting run over by the market. That brings us to today, a time
when many market commentators appear to be overly focused on what just happened
rather than what is going to happen. The first-quarter US GDP report is a perfect case in
point. Everyone knew prior to last weeks release that the results would be
disappointing, given the harsh winter weather, collapsing oil prices impact on capital
spending and the strong dollars drag on exports. Nevertheless, the official numbers
came in even worse than the already low expectations. What does that mean for the
future?
Typically, when growth surprises are extreme to the upside or downside, they are
inevitably reversed. We think the first-quarter US results fit that bill. In fact, much like
last year when the first quarter was also hit by harsh weather and other temporary
factors, we think the seeds for recovery are already being sown by the reversal in the US
dollars strength. That strength set the stage five or six months ago for the first quarters
weakness and, somewhat ironically, led to better growth outside the US than within.
This means a potential catch-up in US equities is likely as we enter the middle part of
the yearsome of which will be the result of weaker international performance, mainly
in Europe. Ultimately, however, we think this is all part of our global rebalancing
thesisone that we believe should lead to solid global equity performance for the
entirety of 2015.
ON THE MARKETS / STRATEGY
Ready for
Reflation
ANDREW SHEETS
Chief Cross-Asset Strategist
Morgan Stanley & Co.
M organ Stanley & Co.s (MS & Co.)
economists see global growth
broadening, with reacceleration in the US,
upward revisions to Euro Zone forecasts
and an intact Japanese recovery. They see
inflation for the G3 economies bottoming
imminently and then picking up, as growth
improves and unusually large distortions
from oil prices roll out of the year-over-
year comparison. MS & Co.s forecast for
global inflation has slightly increased
since the 2015 outlook was first published,
to 3.1% from 3.0%; the 2016 CPI forecasts
are materially above consensus in the Euro
Zone and Japan (see table). Together,
these trends support a shift in market focus
toward inflation and away from deflation
as the year progresses.
Broader growth and better inflation
present a constructive backdrop, although
one thats not without risks. With the new
growth and inflation profile, it also
appears that the Federal Reserves rate
hike will be earlier, in December 2015,
rather than in March 2016. Asset
valuations are not cheap. Emerging market
economies still need to adjust and
corporate America is getting more
aggressive. Liquidity in many corners of
the market is dreadful.
For now, however, we see these risks as
manageable and see both risk premiums
and our economic story supporting a
reflationary theme. We remain
overweight equities versus bonds, believe
higher inflation and low term premiums
will lead to steeper yield curves and expect
spreads to tighten. Many of our micro
themes, from being overweight financial
and energy stocks globally to expecting
Please refer to important information, disclosures and qualifications at the end of this material.
some of the best risk-adjusted credit
returns in floating rate assets, also grow
out of this view.
Lets start with better growth, which
admittedly has long seemed just over the
horizon. Our expectation of a stronger
second half has several drivers. US
growth, which stumbled in the first quarter
due to a strong dollar and heavy energy
disinvestment, should improve as these
headwinds moderate. Euro Zone growth is
tracking better than our previous forecasts,
with a weaker euro and improving loan
growth still working through the system.
Japan is on track for its strongest nominal
growth since 1991, and Chinas recent
easing measures in the local housing
market could help to support consumer
demand in the second half.
As growth recovers, so should inflation.
Part of this is simple math. Energy
accounts for some 11% of headline
inflation in Europe and 7.5% in the US
and, by late autumn, it should no longer be
falling substantially on a year-on-year
basis. A big negative number falling out of
an average helps to raise whats left. In our
view, G3 government bond yields,
breakeven inflation and Fed funds futures
currently price in little inflation premium.
The financial media was happy to trumpet
the deflation narrative in the first quarter
despite much of it being oil related. We
Global Growth and Inflation Set to Pick Up Into 2016
Real GDP Annual Percent Change
2014 2015E 2016E
Global 3.4 3.3 3.9
US 2.4 2.5 2.7
Euro Zone 0.9 1.4 2.2
Japan 0.0 1.0 1.9
Note: Inflation is headline inflation.
Source: MS & Co. Research, IMF as of April 12, 2015
suspect the story will reverse as headline
inflation starts to move higher.
Whats more, the rise isnt all about oil.
In Europe, wage settlements and capacity
utilization are rising, while services
inflation has begun to tick higher. US
wages should be rising at a faster pace by
September. Wage growth in Japan is
running at its strongest levels since 1998,
and should continue to climb (on our
forecasts) as the labor market tightens
further. Markets excel at extrapolation,
and this sounds like a good enough excuse.
A Change to Our Fed Call
Having long assumed that the Fed
would wait until 2016 to raise rates, we
now expect the first hike in December.
This is roughly in line with market pricing
and puts the start of the hiking cycle firmly
in this calendar year. Once the Fed starts,
we expect an alternating series of hikes
and reductions in mortgage-backed-
securities holdings at each meeting, for a
total of 150 basis points of hikes between
now and year-end 2016.
Are markets prepared? We think the
answer varies. US investment grade, high
yield and emerging market credit have
given up all spread tightening since late
2013. Currency volatility is back above its
long-run average. US stocks have gone
nowhere in four months. Moreover, the
history of previous hiking cycles is
anything but conclusive. US credit rallied
into the 1994 hike and sold off after, but
did the opposite in 2004. Looking at three
Fed hiking cycles since 1986, credit,
equity and Treasury total returns before
and after the hike are mixed (see table,
CPI Annual Percent Change
2014 2015E 2016E
3.5 3.1 3.4
1.6 0.1 1.8
0.4 0.2 1.6
2.6 0.6 1.5
May 2015 2
page 3). On average, however, returns
before the first rate hike have been
positive more often than negative.
Hiking cycles are hardly harbingers of
doom, and it is notable that MS & Co.s
interest rate strategists see the US having
one of the best-behaving rate markets
through year end. Conversely, we see
emerging markets as more exposed versus
prior cycles, which is one reason we
remain cautious on their currencies and
stocks.
A Cycle Intact
We continue to expect that this cycle
will be a long oneperhaps the longest
global expansion in recent memory. It
should be unusually long because it has
been unusually weak, followed an
unusually severe downturn, and is
unusually unsynchronized on a global
basis. More tangibly, we do not think it yet
possesses the level of optimism or hubris
wed associate with late cycle behavior,
which is a message we see borne out in
our cycle indicators. The disjointed nature
of the current cycle makes it easy to find
indicators that make conditions look
particularly good (or bad), depending on
ones point of view. We think the most fair
and least emotional approach is to focus
on a broad array of measures. Our cycle
Morgan Stanley & Co. Cycle Indicators Point Toward
Both US and Developed Market Growth
100 %
Morgan Stanley US Cycle Indicator
90 Morgan Stanley Developed Market Cycle Indicator
80
70
60
50
40
30
20
10
0
1980 1987 1994
Source: MS & Co. Research, Bloomberg as of April 12, 2015
Please refer to important information, disclosures and qualifications at the end of this material.
Historical Percentage Change in Various Markets
Before and After the Feds First Rate Hike in a Cycle
1986 1994 2004
Before (%) After (%) Before (%) After (%) Before (%) After (%)
MSCI World N/A N/A 10.0 0.1 2.0 10.1
S&P 500 2.5 20.6 4.7 -1.8 2.9 5.6
MSCI Europe 7.9 24.8 19.2 -1.1 0.4 16.5
US 10-Yr. Treasury 5.5 -2.6 3.3 -4.1 0.6 4.0
US Investment Grade 6.7 -0.4 0.0 -2.0 0.6 5.1
US High Yield N/A N/A 5.6 -2.7 1.2 9.3
Source: MS & Co. Research, Bloomberg, RIMES, The Yield Book Software and Services.
2015 Citigroup Index LLC. Data as of April 12, 2015
indicators are designed for this, and have been leveled for several years, they
neither the cycle nor the broader measure need to be addressed. Specifically, how far
that incorporates Europe and Japan is at has recent central-bank policy pushed
extremes (see chart). valuations from their 20-year averages?
Yes, US mergers-and-acquisitions Look at the past 20 years, and most are in
volume is near previous-cycle highs, but the middle of the range. Price/earnings and
other measures, from US consumer price/book ratios for the MSCI All
confidence to corporate loan growth, are Country World Index (MSCI ACWI) are
far more normal. Global activity, below their 20-year medians, while the
meanwhile, is still well short of the same measures for the S&P 500 have been
intensity that made the downturns of 2000 richer about 40% of the time over the same
and 2008 so severe. All contribute to our period. Credit spreads in US investment
view that the global expansion has further grade and high yield credit are pretty
to go. average over this range. Government bond
valuations, in contrast, look highly
Valuation: How Extreme? distorted by central bank policy, which is
Levels of activity may not be extreme, one reason we are underweight.
but what about valuations? Asset prices We continue to believe that the market
are routinely described as being could melt upthat is, trade to richer,
manipulated and inflated by central more ill-advised valuationbefore it
bank policy and, although these charges melts down. The upside left in our cycle
indicators is one reason for this, as is the
gap between US nominal growth and bond
yields, a measure frequently cited by our
currency strategists. When long-term rates
are below nominal GDP, growth-sensitive
assets are attractive relative to their
financing costs, and asset booms are
common. We saw that in the 1997-to-1999
and 2003-to-2007 periods, which ended at
valuations higher than those of today.
2001 2008 2015
May 2015 3
ON THE MARKETS / ECONOMICS

appreciation remain a threat to external

Growth a Little Later, demand for US manufactured goods.
Consumer Spending. Lower energy

Rate Hike a Little Sooner costs have lifted consumer liquidity this
year but have also raised the personal
savings rate, as consumers are using much
of their savings to pay down debt.
ELLEN ZENTNER Jobs. Labor market improvement seems However, we expect the savings rate to
Chief US Economist in train to deliver full employment by the gradually drift back to its previous trend of
Morgan Stanley & Co. around 5% during our forecast horizon.
fourth quarter of 2015 as unemployment
A dverse weather, West Coast port
disruptions, caution by budget-
conscious households and an earlier-than-
falls to an average 5.1% in our forecast.
We expect average wage growth to climb
Demand for consumer revolving credit has
strengthened, and improving wage
to an average 2.5% this year from last growthalong with higher aggregate
expected start to cuts in energy capital income from job gainsshould provide
years 1.9%. The housing recovery
spending appear to be locking in a slower support for consumer spending. A
remains sluggish, but we see demographic
first half than we had previously persistently higher savings rate poses the
trends, coupled with rising employment
anticipatedthus reducing our outlook for greatest risk to our outlook.
and wages, resulting in higher household
economic growth. In this forecast round, Dollar Impact. The impact of the
formation. We look for home-price
the quarterly growth profile has changed dollar's rapid appreciation has led us to
appreciation of 4% to 6% and housing
with a stronger back half versus front half revise our expectation for net trade wider
starts of 1.2 million to 1.3 million in 2015.
of the year. We have taken down our 2015 this year, while continuing to point to
Capital Spending. The hit to energy
fourth-quarter-to-fourth-quarter GDP further downside to core inflation, as
capital spending we had expected in the
forecast to 2.3% from 2.8% for 2015 (see measured by the personal consumption
second half has come through earlier and
chart). expenditure price index, in coming
is much larger than expected. The result is
Even so, the economy continues to months. Looking ahead, our currency
a drop in oil and gas investment that
show strength in many areas, notably the strategists expect further dollar
shaves an additional percentage point from
labor market, which is a particular focus at appreciation, but at a more moderate pace;
our growth estimate for business fixed
the Federal Reserve. At its March meeting, in addition, we expect core inflation to fall
investment. We are optimistic on
the Federal Open Market Committee further but stabilize during the summer
nonresidential investment, though the
(FOMC) revised its expectation for this before turning up in the fall.
cumulative effects of rapid dollar
years growth and inflation significantly
lower, yet policymakers did not indicate
the expected timing of the first rate hike
MS & Co.s US Economic Forecast: Downward
would be in 2016. Thats a strong message Revisions for 2015, Upward for 2016
rates will go up this year and implies that New Forecast Previous
it would take a sizable negative surprise to 4Q/4Q Percent Change 2014 2015 2016 2015 2016
alter that course. As such, we have brought Real GDP 2.4 2.3 2.5 2.8 2.1
forward our rate-hike expectation by one Final Sales 2.4 2.5 2.5 3.0 2.3
quarter to December 2015 from March Final Domestic Demand 2.9 2.6 2.6 3.2 2.3
2016, and we expect a cautious FOMC is PCE* 2.9 2.7 2.3 3.2 2.3
likely to allow the first hike to be digested Business Fixed Investment 6.2 2.3 3.9 3.6 4.1
before it hikes a second time. Our forecast Residential Fixed Investment 2.5 8.5 7.2 11.8 5.2
includes another 25-basis-point rate hike Exports 2.4 3.2 4.0 3.9 5.6
in March. From there on, we expect the Imports 5.6 3.5 4.1 4.9 4.9
Fed to tighten policy with a blend of hikes Government 0.8 1.3 1.7 1.4 0.5
and tapering of reinvestments in its CPI 1.2 0.5 2.1 0.3 2.3
mortgage-backed securities. Core PCE 1.4 1.2 1.8 1.2 1.8
Heres how the economy is looking as Unemployment Rate** 5.7 5.1 4.9 5.1 4.8
we approach midyear: *Personal consumption expenditures
**Four-quarter average
Source: Bureau of Economic Analysis, Bureau of Labor Statistics, MS & Co. Research as of
April 12, 2015

Please refer to important information, disclosures and qualifications at the end of this material. May 2015 4
ON THE MARKETS / EQUITIES
Still Bullish
On Global Equities
JONATHAN GARNER
Chief Asia and Emerging Market Strategist
Morgan Stanley & Co.
ADAM S. PARKER, PhD
Chief US Equity Strategist
Morgan Stanley & Co.
GRAHAM SECKER
European Equity Market Strategist
Morgan Stanley & Co.
R ather than moving to the sidelines as
the cycles first Fed hike approaches,
we remain bullish on global equities. We
see the greatest upside to base-case targets
in Europe, Japan and the US, and the least
in the emerging markets (see table).
However, the dispersion in upside
targets is considerably less than when we
issued our year-ahead outlook late last
year, with the least downside risk apparent
in the US. Our 2015 earnings-per-share
(EPS) forecasts are above the bottom-up
consensus for Europe, Japan and the US,
in line for Asia Pacific ex Japan and below
for the emerging markets. We expect a
modest derating in the forward
price/earnings ratio (P/E) in Europe and
Japan, and a P/E rerating in the US versus
current consensus valuations, with those
elsewhere essentially unchanged. Our
expectation of P/E expansion in the US is
consistent with dollar strengthening.
On a valuation basis, global equities
still appear attractive. The trailing
price/book valuation of the MSCI ACWI
is 2.2 versus the long-run average of 2.5.
MS & Co. Price Targets for Major Regional Equity Market Indexes
Region Index
Japan Topix
US S&P 500
Europe MSCI Europe
Asia/Pacific ex Japan MSCI APxJ
Emerging Markets MSCI EM
Source: MSCI, RIMES, MS & Co. Research as of April 30, 2015
Please refer to important information, disclosures and qualifications at the end of this material.
Valuations typically move higher as the
cycle matures. More important, at 12%,
return on equity (ROE) at the global
leveldespite intense macro debates such
as Euro Zone breakup, China hard lining
and the US government shutdownhas
been stable by historical standards, and on
our forecasts is likely to remain so. Simply
put, we feel companies are better managed
today, not least through the use of
technology and outsourcing/offshoring
models that are more flexible than at any
stage in recent history.
Heres how our strategists assess the
global equity outlook by region:
Japan
We remain bullish on Japanese equities,
although the upside potential to our
revised base-case target of 1,740 on the
Topix is now around half of what it was at
the time of our year-ahead outlook in
December. We see few near-term positive
catalysts on the horizon, unlike the snap
election or additional Quantitative Easing
(QE) last year, for example. Moreover,
buying by the Government Pension
Investment Fund (GPIF) has accelerated
significantly and contributed to the recent
rally. We estimate that the GPIFs
weighting in equities has now risen to
around 23%, within sight of the
benchmark-neutral target of 25% and
Forward Price Target for March 2016
Base Case Bull Case
Price Change (% ) Price Change (% )
1,740 9.2 2,044
2,275 9.1 2,600
1,730 13.0 2,010
535 4.3 631
1,050 0.2 1,245
versus around 12% one year ago.
That said, the most recent earnings
season has seen the ninth straight quarter
in which Japanese companies have beaten
consensus expectations. Consensus EPS
continues to be revised higher, unlike in
other major regions. We expect year-over-
year EPS growth of 15.9% in calendar-
year 2015 and 11.2% in calendar-year
2016. We also continue to document
important changes in corporate behavior
with a focus on ROE, increased buyback
activity and enhanced dividend payouts.
Emerging Markets
For the broad emerging market (EM)
universe, our base-case target is cut to
1,050 from the previous 1,067. We have
also reduced our top-down earnings
forecast. This is due to a significantly
lower trajectory of delivered EPS, our
economists downward revisions to GDP
growth forecasts and our currency teams
forecast of additional EM weakness. We
expect year-over-year EPS growth of just
1.6% in 2015, rising to 10.0% in 2016.
The upside to our revised EM target
continues to be lower than for the other
major regions, albeit the gap is
significantly narrower than at the time of
our year-ahead piece. ROE for the EM has
now fallen below that of developed
markets for the first time since 2001 and
continues to decline during our forecast
horizon. However, we may now be closer
to a cathartic phase of macro adjustment,
perhaps associated with the Fed tightening
cycle and/or Chinas ongoing deleveraging
and structural reforms.
Bear Case
Price Change (% )
28.3 1,148 -27.9
24.6 1,700 -18.5
31.3 1,200 -21.6
23.0 342 -33.3
18.8 643 -38.6
May 2015 5
Asia Pacific ex Japan
We remain more constructive on Asia
Pacific ex Japanforecasting higher
upside than for EM and preferring China,
India, Taiwan and Australia to Korea and
the Southeast Asia countries. This regions
economies generally have demonstrated a
greater monetary-policy autonomy than
Europe/Middle East/Africa or Latin
Americaand they are cutting rates. At
the same time, reform agendas are
relatively more advanced. Thus, the
earnings outlook should remain more
resilient than for the emerging markets.
Europe
Much has changed in just four months.
At the end of last year, sentiment toward
Europe was depressed and expectations for
economic growth and European Central
Bank (ECB) action were low. Now, there
are strong inflows coupled with rising
growth expectations and signs that ECB
policy is gaining traction. It is plausible
that European equities take a breather, but
we see a positive macro backdrop.
For starters, MS & Co.s economics
team just raised its GDP growth forecasts
significantly for the Euro Zone for 2015
and 2016, while European earnings
revisions have just turned positive for the
first time since 2012. We think the
ongoing depreciation in the euro will
provide a fertile background for EPS
upgrades through the rest of the year.
Equally important is the ECBs aggressive
monetary policy. We cannot find a prior
period in which European net earnings
revisions havent turned positive while the
ECB was in an easing mode.
Whats more, while inflows have
rebounded strongly, we believe the global
investor base is underexposed to the region
and will add funds if the economic
recovery continues. Domestic investor
exposure to equities also remains modest.
For example, EU hedge funds net
exposure is 45% currently, in the middle
of its two-year range of 30% to 60%.
Finally, though European equities look
expensive on current earnings, they trade
at their long-run average on normalized
valuation metrics. While government bond
Please refer to important information, disclosures and qualifications at the end of this material.
yields are very low or even negative, the
dividend yield is modestly below its long-
run average and also trades at an all-time
high relative to European credit yields. All
told, our new base-case 12-month price
target for the MSCI Europe Index is 1,730.
This is predicated on EPS growth of 12%
this year and 9% in 2016, and we apply a
target 12-month P/E ratio in 12 months
time of 15.5, down from the current 16.4.
US
Our S&P 500 target for the end of the
first quarter of 2016 is 2,275, offering
about 9% potential upside from todays
price, based on 4% earnings growth in
2015, 6% growth in 2016 and modest
further multiple expansion to just over 17
times forward earnings.
Our thesis is that we are in the middle
of a long US expansion that may last until
2020. Economic factors such as consumer
confidence, financial obligations and
delinquencies are all improving. In
addition, the consumer may be more
insulated than investors think from a back-
up in yields, given 75% of their financial
obligations are in mortgages, close to 90%
of all mortgages are 30-year fixed and the
mortgage is termed out at the lowest rate
ever. Corporate behavior also may lead to
a long expansion. Capital spending
remains constrained, inventory levels look
under control, hiring remains muted and
mergers-and-acquisitions (M&A) activity
has a different makeup as deals are
immediately accretive and thus embed less
risk than in the past. Furthermore, credit
metrics dont look late cycle in many
cases. Financial obligations have been
pushed out several years, and the interest-
bearing portion of todays loans looks
quite manageable given high interest
coverage. All told, we generally think it
pays to remain sanguine.
That said, the biggest risk to our view
would be a dramatic shift in the US
economic growth rate. A run of bad data
would leave us staring at less liquidity and
less growth, likely instilling some
incremental fear of an earnings plateau or
decline. A second riskone that may
emerge later this yearis that the pace of
Fed rate hikes post the first one becomes a
concern if the economy accelerates into
the second quarter and remains relatively
strong. Given our view that the Feds first
action isnt until December, we think we
will have some time to observe Fed
commentary on pace. The third risk could
be a continued deterioration in Greece
and/or a corresponding material further
strengthening of the US dollar. Consumer
staples, machinery, chemicals, select
technology and select health care are most
impaired by a strong dollar, and we are not
overweight any of these groups. Lastly, we
find few investors are asking about China
so far this year, despite the apparent
slowdown there. A couple of years ago
fear of a China hard landing was a
commonly cited risk, yet as economic
conditions have weakened, the fears have
abated, at least among US investors. We
are hoping that our underweight in
industrials will help mitigate risk in the
event that China fears grow.
In addition, we c believe that small-cap
stocks will outperform. After lagging the
mega caps through early last fall, small
caps have modestly outperformed recently.
The potential for an increase in M&A,
particularly tender offers for small-cap
stocks, more margin-expansion potential
and better relative revisions drive our
preference for small caps. As for style, we
are balanced on growth versus value. In
running simulations on portfolios derived
from alpha models, we do not see style as
a large differentiator for subsequent
performance today. On the other hand,
quality is an important differentiator. Our
bias is toward high-quality small-cap
stocks.
Our main change in todays work is to
upgrade the financial sector. Reasons for
the upgrade include high growth in
shareholder return post generally
successful regulatory reviews, limited
historical exposure to a strengthening
dollar and our expectations of reasonable
risk-reward related to the slope and level
of the yield curve. We are also overweight
the energy and consumer discretionary
sectors. Our underweights are consumer
staples, industrials and telecoms.
May 2015 6
ON THE MARKETS / EQUITIES
Investing With
Impact
KATY ZHAO
Equity Strategist
Morgan Stanley Wealth Management
Building a sustainable futureone that
meets the needs of people today
without compromising future
generationsis an immense undertaking,
and a crucial one. Consider that the world
population is projected to exceed 9.5
billion by 2050. Thats a 36% increase
from today, which will inevitably lead to
strains on water, food and other resources.
We believe integrating environmental,
social and governance (ESG) factors into
ones investment process can help mitigate
sustainability issues.
What we call sustainable investing is
not a departure from traditional investment
principles. It simply integrates ESG into
the investment process. Hence, ESG is one
measure of sustainability, and at no point
do the objectives sacrifice returns for ESG
input or vice versa. Sustainable investing
is also one of the fastest-growing asset
Sustainable and Responsible Investing Up Sharply
$7 Trillion
6 actively participate in and/or generate
Sustainable and Responsible Investing in the US,
Assets Under Management
5 solution that benefits or contributes to one
4 themes. These themes were leveraged
3 Responsible Research investing
2
1
0
1995 1997 1999 2001 2003 2005 2007 2010 2012 2014
Note: No data collected between 2007 and 2010
Source: US SIF Foundation of Dec. 31, 2014
Please refer to important information, disclosures and qualifications at the end of this material.
investment categories, with $6.6 trillion in
assets in 2014, up from just $3.5 trillion in
2012, according to the US SIF Foundation
(see chart). By employing ESG factors in
the process, sustainable investment
practitioners attempt to limit risk by
finance at the London Business School,
minimizing harm to people and planet, and
to invest in companies working toward
productive and sustainable outcomes.
returns. To us, this makes perfect sense:
USING ESG FACTORS. In practice,
Morgan Stanley Wealth Managements
Equity Model Portfolio Solutions team
already employs stringent governance
diligence on all of our holdings given our
which include fair remuneration, business
belief that strong management is the
backbone of any successful company. In
and child-labor policies. In our view, every
addition to evaluating managements
experience and execution records, we also
consider executive compensation,
independence of the board, leadership
diversity and the selection of independent
external auditors ratified by shareholders.
Environmental criteria can be more
sector specific, but broadly we focus on
determining if a company is tracking its
environmental footprint and how it
measures cost savings or impact as a result
of these practices. Having policies in place
for water quality, waste reduction and
biodiversity is the first step in
demonstrating sustainability integrity, in
our view. We then evaluate how
companies are realizing those objectives
and performing against their peers.
Social criteria generally relate to labor
practices. This is highlighted by a 2011
study by Alex Edmans, a professor of
which shows that higher employee
satisfaction can lead to better stock
Happier employees drive elevated morale,
collaboration and productivity. For
companies that outsource labor, we
examine supply-chain-level practices,
ethics, human rights, equal opportunity
large multinational company should
adhere to human rights, equal opportunity
and child-labor policies at a minimum.
These should be standards, not exceptions
to ESG transparency.
INNOVATIVE SOLUTIONS. Our
Sustainable Impact Model Portfolio, for
instance, not only seeks individual
companies that demonstrate strong ESG
criteria, which we call "good actors," but
also "solution providers"companies that
revenue from producing a product or
of the portfolios seven sustainability
from MS & Co.s Sustainable +
framework and include climate change,
water scarcity, food availability, waste
management, health & wellness,
improving lives and aging population. We
recommend investors put capital behind
companies that demonstrate a
consciousness toward creating a better
future.
May 2015 7
ON THE MARKETS / FIXED INCOME
Playing the
Inflation Game
JON MACKAY
Market Strategist
Morgan Stanley Wealth Management
L ast year, markets were fixated on
deflation, which played out in the
bond market with prices climbing and
yields sinking to once-unimaginable
levels. This year, we believe inflation is
making a comebacknot to the punishing
inflation of the 1970s, but into a period of
rising prices that is the natural outgrowth
of stronger global growth, rising wages in
the US and Japan, bottoming oil prices, a
slower pace of US dollar strengthening
and very aggressive monetary policy in
Europe, Japan and China. As evidence,
market-based measures of inflation
expectations have responded and are rising
(see chart). Still, we do not believe the
pickup in inflation is fully priced into the
market, and therein lies an opportunity.
TIPS AND WIPS. The most direct way to
play the inflation game is with Treasury
Inflation-Protected Securities (TIPS) in the
Indicator Points to a Pickup in Global Inflation
55
Morgan Stanley Inflation/Deflation Indicator
50
45
40
35
30
Source: Bloomberg, MS & Co. as of May 1, 2015
Please refer to important information, disclosures and qualifications at the end of this material.
US, and World Inflation-Protected
Securities (WIPS), which are issued by
non-US governments. If inflation fears
have bottomed, as we expect, then these
securities should do well as central banks
maintain aggressive monetary policies to
give their economies time to heal. In
Europe and Japan, that means a
10-year Japanese government bond versus
continuation of the Quantitative Easing
(QE) programs. In the US, which has
already run through five years of QE, the
Federal Reserve is watching inflation
and is likely to raise rates this year.
Still, the pace of rate hikes could be
slow and measured as we move through
2016. The Global Investment Committee
(GIC) recently increased its recommended
weighting in inflation-linked securities to
5% from 0% and believes a 50%/50%
combination of short-duration TIPS and
duration-neutral WIPS is a good way to
help position portfolios for rising inflation
(see Strategic & Tactical Asset Allocation
Changes, April 16, 2015).
RISING RATES IMPACT. Rising
inflation and inflation expectations should
mean higher interest rates. MS & Co.s
target for the US 10-year Treasury bond is
2.40% by the end of 2015 versus the
current 2.12%. Although a 28-basis-point
rise in yield does not seem that dramatic, it
would leave investors with a negative
1.4% total return. This compares with a
positive return on the 10-year Treasury of
more than 10% in 2014. The forecasted
move in European bond yields is even
more dramatic with a target of 1.0% for
the 10-year German bund, versus the
current level of 0.40%, and 1.10% on the
the current level of 0.35%.
Based on this, the GIC favors short-
duration over long-duration bonds. It also
prefers equity like parts of the bond
market such as high yield and leveraged
loans to the more rate-sensitive parts of the
market like US Treasuries and US agency
securities. Thats because, as growth
improves and rates move higher, investors
are typically more likely to take on credit
risk. Better growth should lead to tighter
spreads in the high yield market, which
should mitigate the negative headwind of
rising rates. Leveraged loans pay a floating
rate of interest and thus demand for these
securities should rise the closer we get to
the onset of Fed rate hikes.
High yield, leveraged loans and ultra-
short investment grade corporate bonds
were the only fixed income asset classes
that generated positive absolute returns in
2013, a year in which the yield on the 10-
year US Treasury rose nearly 130 basis
points. While the move higher in rates is
unlikely to be that dramatic this year, even
a small move to the upside could once
again result in outperformance by short-
duration, high yield, leveraged loans and
inflation-protected securities.
May 2015 8
ON THE MARKETS / FIXED INCOME
In the Muni Market,
Patience Is a Strategy
JOHN DILLON
Municipal Strategist
Morgan Stanley Wealth Management
Back in March, Federal Reserve
policymakers notably removed the
word patience from their comments
about when they might initiate the first
interest rate hike of the cycle. Municipal
bond investors, however, should keep the
word front and center. Patience is what
investors will need to navigate the current
muni market volatility, whether they are
trying to buy bonds for income or sell for
liquiditys sake.
Of course, theres a reason for the
volatility. The US Treasury bond market,
which typically has set the tone for the
muni market, has been range-bound since
late January, with the benchmark 10-year
swinging between 1.67% and 2.23%.
Given a wide trading band and the
attendant volatility, investors have had
numerous opportunities to sell vulnerable
positions during rallies or purchase bonds
Relative-Value Ratio Remains High Even as
Muni Bond Fund Flows Rebound
1,400
1,200
1,000
800
600
400
200
0 state-level appropriated paper and, in
-200
-400 Muni Bond Fund Flows (million dollars, left axis)
Five-Year Relative-Value Ratio (percent, right axis)
-600
Source: Thomson Reuters MMD as of May 1, 2015
Please refer to important information, disclosures and qualifications at the end of this material.
on weakness, provided they wait for the to outperform, both of which were the case
opportune entry and exit points. in late April. That weakness in Treasuries
could endure if the economy continues to
MUNI HEADWINDS. Even without
Treasury market movements, the muni
market has been dealing with its own
strengthen, but it could also be tempered
by continued Quantitative Easing by the
European Central Bank. Ellen Zentner,
headwinds. They include the seasonal
MS & Co.s chief US economist, recently
outflows that come as investors sell
pulled forward the firms expectation for
shorter-maturity munis and/or muni
the first rate hike to December 2015 from
mutual funds to settle up their income
March 2016. Investors will probably look
taxes and a low level of bond redemptions,
beyond the weak first-quarter GDP-growth
which results in less demand for
report as it is likely to be the worst of the
reinvestment. With this confluence of
year. Indeed, Matthew Hornbach, MS &
factors, the muni market was unable to
Co.s head of global rate strategy, holds a
keep pace with Treasury price gains, thus
year-end target of 2.40% for the 10-year
rendering municipals attractive on a
US Treasury. Absent a downturn in US
relative-value basis (see chart).
equities, an offsetting global development
Depending on market momentum and
or even just dour sentiment, we see yields
investor sentiment, these muni headwinds
moving moderately higher this year,
could reverse during the summera time
providing attractive entry points for patient
when redemptions usually rise and supply
buyers.
typically plummets. An optimal entry
CASH AND CARRY. The current
point for prospective purchases may occur
environment warrants a premium on both
during the coming two months if Treasury
portfolio flexibilitythat is, keeping cash
weakness is prevalent and munis are slow
on handand carry in the form of high-
quality municipal bonds with above-
market coupons. In addition, we are
100 widening our focus maturity range to 10 to
20 years, while maintaining both cash and
floating-rate notes. We utilize a tiered
90
approach to local general-obligation (GO)
and revenue bonds, with mid-A rated for
locals and mid-BBB rated for essential-
80
service revenue bonds. We remain
comfortable with all state-level GOs and
70
general, expect muni credit quality to
plateau.
60
May 2015 9
ON THE MARKETS / FIXED INCOME

underlying liquidity of the daily priced

Bond Market Faces fund. A recent bond market study by the
International Monetary Fund (IMF)

Liquidity Issues examined the liquidity risk by saying that,

historically, all high yield funds could
easily meet the seven-day statutory limit
for fund redemptions. However, given the
LISA SHALETT doneand another 10% to 15% is reduction in bank balance sheet capacity,
Head of Investment and Portfolio Strategies expected during the next two years. the IMF suggested it could take as long as
Morgan Stanley Wealth Management 50 to 60 days to liquidate an average high
During the same period, companies
A nticipating the Feds first rate hike in
more than nine years, policymakers
turned to the capital markets rather than
bank lending for funding. In the credit
yield fund during a period of heightened
redemptions. Further, ETFs could
have been sounding the warning bells on compound the liquidity mismatch in a
market, borrowers could get more
the potential that a pickup in interest rate period of panic selling, as their passive
generous terms from yield-hungry
volatility could challenge market liquidity. nature can exacerbate momentum and
investors than they could from banks. The
A recent joint study by MS & Co. and intramarket correlation.
MS & Co./Wyman study shows that
industry consultant Oliver Wyman, The Thus, the question is, if investors rush
credit-market issuance is 2.4 times greater
Liquidity Conundrum: Shifting Risks and to cash out of their fixed income holdings,
than in 2005 and, within this, assets held in
What It Means (March 19, 2015), will the market be able to accommodate
daily redeemable vehicles like mutual
examines the magnitude of the risks. them? The MS & Co./Wyman study,
funds and exchange-traded funds (ETFs)
LESS MARKET-MAKING. According to which examined asset managers with
have grown at a 10% annual rate and now
the report, rules and regulations greater than $3 trillion in assets under
sit at some 76% above the 2008 level.
implemented since the financial crisis have management, found that these firms are
Relative to the size of the market, mutual
driven a severe reduction in sell-side focused on the liquidity preparing for more
funds now hold about 20% of credit
balance sheets and banks ability to market volatility. Current cash holdings at
issuance, which is nearly double the share
provide liquidity. The balance sheets of mutual funds are in the 4%-to-7% range,
of a decade ago. Bond ETFs have grown
the wholesale banks that support traded which historically has been a good buffer.
even faster, at a 28% compound annual
markets have decreased by 40% in risk- The report noted that the worst bond-fund
rate since 2008, and also account for about
weighted asset terms and 20% in total outflow was in 1994, with an industry-
20% of the credit outstanding.
balance sheet since 2010, while aggregate wide 5% outflow in the worst three-month
DIVERSE HOLDINGS. Along with the
dealer inventories have been sliced by period and 13% in the worst 12-month
growth has come larger diversity in the
more than two-thirds. Whats more, the period (see chart). Furthermore, industry
kinds of securities these funds hold, many
report found that balance sheet reductions data have shown that managers respond
of which may not have the same
at the large wholesale banks are not yet quickly to stress events and have typically
increased cash levels as much as fourfold
Industry-Wide Redemption Levels in Crisis Periods
during periods of extreme market
Industry Average Flow volatility. However, regulators may
Crisis Time Asset Class Net Flow Bottom Quartile*
require capital reserves and stress testing
Black Monday Q4 '87 Equities, FICC -3% -18%
Fed Rate Hikes Q4 '94 FICC -5 -17
that would add cost and compliance
Mexico Debt* Q1 '95 Emerging Markets -1 -9 burdens.
Emerging Markets Q3 '97 Emerging Markets 0 -18 INDUSTRY IMPACT. The report also
Accounting Scandals Q3 '02 Equities -2 -12 looks at the liquidity conundrums
Financial Crisis Q4 '08 Equities, FICC -4 -21 potential impact on the financial services
Run on Money Market Funds** Sept. '08 Money Market Funds -10 -25
industry. Not surprisingly, the business
*Excludes Dec. 20 through Dec. 31, 2014, which saw -2% outflows **Run on money market
funds covers four weeks. Straight average of outflows for bottom-quartile funds risk has shifted along with the balance
Source: ICI, Morningstar, Oliver Wyman as of March 19, 2015 sheet risk. Wholesale banks are less
Calculated by Morgan Stanley Wealth Management using data provided by Morningstar. (c) exposed, and asset managers more so,
2015 Morningstar, Inc. All rights reserved. Used with permission. This information contained
herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or
especially if increased regulation results in
distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor additional costs.
its content providers are responsible for any damages or losses arising from any use of this
information.

Please refer to important information, disclosures and qualifications at the end of this material. May 2015 10
ON THE MARKETS / Q&A
Dont Overlook
Overseas Opportunities
H ave the tides turned for international
developed markets? The benchmark
MSCI EAFE Index returned 9.4% in the
first four months of 2015 versus a 1.9%
gain for the S&P 500 Index. Thats a
radical shift from 2014, during which US
stocks beat their overseas brethren by
more than 18 percentage points. Carmel
Wellso, director of research at Janus
Capital, is hopeful. We're focused on
what we're learning on the ground, but
we're starting to see some of the leading
indicators confirm what we're hearing.
Wellso, who also co-manages the Janus
International Equity Fund, believes
economic growth in Europe could surprise
on the upside. She also believes that the
Japanese stock market may be a sea
change. She recently shared her insights
with Morgan Stanley Wealth
Managements Tara Kalwarski. The
following is an edited version of their
conversation.
TARA KALWARSKI (TK): What is your
broad view of markets outside of the US?
CARMEL WELLSO (CW): Quantitative
Easing (QE) is taking place, most
dramatically in Europe, as well as in Japan
and, now, in China. China's relevant
because it drives a lot of the economies in
Asia, including Japan and Australia. We
think there are a lot of opportunities in
these markets, and that people are
underestimating both growth in Europe
and the upside for Japan on stock prices.
In Europe, many growth-related sectors
have outperformed. The value sectors, the
more cyclical sectors, have been left
behind, and valuations there are still
attractive. Because of the weak euro, we
believe there's going to be upside, not only
Please refer to important information, disclosures and qualifications at the end of this material.
in the economy broadly but in many
sectors, such as industrials, where growth
is likely to be higher and margins stronger
than anticipated. We expect that to start in
the second half of this year.
In Japan, we think growth will not be
greatpicking up, but still sluggishbut
that doesn't mean the equity market isn't
going to work. The yen has dropped a lot,
so input costs are down. For the first time,
the government is incentivizing companies
to think about return on assets, return on
equity and using capital efficiently. There
are companies with large amounts of
excess cash and capital, and they're
starting to do buybacks and spin off
underperforming divisionsa sea change
for that market.
TK: What is the consensus for growth
for these markets?
CW: In general, Japanese consensus
estimates for GDP growth are 1.3% to
1.5%, and we agree with that range.
Consensus expectations for real 2016 GDP
growth for the EU are in the range of 1.5%
to 1.8%. For 2016, were seeing more in
the 1.7%-to-1.9% range. We believe there
will be much stronger numbers coming
through, particularly in the second half of
2015.
If you look at the economic indicators,
it started with a turnaround in the
peripheryIreland, Portugal, Spain. Now
it has spread more widely, and were
seeing a pickup in Germany and France as
well, though France is slower because it
hasn't had structural reform.
A lot of the evidence at this stage is
anecdotal, but some of the leading
indicators that many brokers publish are
confirming what we're hearing on the
ground that companies are starting to
apply for capital-expenditure loans
which is new. Loans for the corporate
sector have been picking up on the
working-capital side, but we haven't seen
actual investment in their businesses.
That's a positive sign for long-term
sustainable growth. Non-listed firms,
especially small and midsize companies in
places like Italy, tell us they're seeing their
growth pick up.
TK: What are you hearing from
companies with regards to the QE that
kicked off in Europe?
CW: In the first round of [the European
Central Banks] targeted longer-term
refinancing operation (TLTRO), the banks
couldn't give the credit away. This time,
you saw them come in and take more of
the money from the EU, because they had
a place to put it. Again, the small and
medium corporates, which is where they're
supposed to be focusing the TLTRO
lending, are much stronger than they were
even three months ago.
TK: Positive signs aside, what are the
risks for Europe? What could go wrong?
CW: First is Greece. A small repayment
is due in May, and large payments are due
in June and July. They're already
borrowing from local governments to fund
salaries for civil employees, and I've seen
estimates that they may have just one to
two weeks worth of money to meet the
payroll. Greece is in pretty dire straits.
Even if it doesnt default, it's highly likely
we have a regime change. Hopefully, it'll
swing back towards a more conservative
approach, but we don't know. So that's
certainly a risk.
Secondly, [theres] the election in the
UK. I dont place a lot of faith in the polls
but they are implying a close race,
possibly a hung Parliament. A Labour-led
coalition would be bad for markets. We're
keeping a little bit of dry powder to buy
some of the stocks that we like that have
already had fairly good runs. Those are the
two most obvious risks to market upside.
Then, there's always geopolitical risk,
especially if some of the Middle East
May 2015 11
tensions start to affect countries like
Turkey, or if there's any sort of attack in
any of the other markets.
TK: What is your outlook for China, and
how might Europe and Japan be affected?
CW: Ive been getting questions on
what China is trying to do. Whereas other
countries have very few instruments they
can use in monetary policy, China has a
lot. Chinas more like a surgeon as
opposed to someone using blunt tools. I
think they're trying to ease liquidity in
certain parts of the economy, and there
will be beneficiaries. I would expect bank
margins to rebound dramatically. At
current rates, if banks lower the base rate
enough, I think we'll even see credit
demand start to flow again.
There are a number of companies, from
Australia to the UK, that are heavily
exposed to any pickup in infrastructure
spending in China. So we're sending
people over to China to get a sense of
what's really happening with all the
changes in the various policies that have
occurred in the last month.
We don't know yet if we'll play it
through China or look toward global
companies that supply the resources for
the building we anticipate will come.
TK: Looking at the past 12 months,
what has been most surprising?
CW: It's more a degree of magnitude
than outright unexpected numbers. The
uptick in Europe was lower than we
expected. With oil prices having dropped
so much, we thought we'd start to see
growth pick up faster than it did.
TK: Where are you seeing the most
attractive investment opportunities?
CW: We're starting to look at Japanese
companies that I don't think weve even
considered buying for at least10 years:
older large-cap companies that, if they
start to deploy capital [more efficiently]
and think about return on invested capital,
I think they will be fairly interesting
companies. Now that they are selling
poorly performing assets, they can focus
on products that are going to make them
money going forward.
Please refer to important information, disclosures and qualifications at the end of this material.
We've also started shifting some US
industrial exposurecompanies where
margins are at peakto similar European
companies whose margins are closer to
mid range. With falling euro costs against
US dollar revenues, there's opportunity for
earnings upgrades.
And we're looking at European
financials, which were left behind in this
rally. There are many financials, especially
banks, where industry consolidation
creates a significant potential for increases
in returns.
TK: What are you avoiding?
CW: We're still hesitant on exploration
and production energy stocks. We don't
know which way oil's going to go in terms
of pricing, and we're not going to make a
big call on that.
A lot of scenarios would make us less
excited about oil. Not yet seeing a cut in
production in the US is probably the key
one, although we believe it will slow
down. We would become more bullish if
some geopolitical event caused oil prices
to go much higher.
Greece deciding to leave the Euro Zone,
or just a default, and seeing that spread
across Europe, basically offsetting any
structural reform they've had, would be
very negative for that market.
TK: If one of those scenarios played
out, how might your strategy change?
CW: Were always testing the current
environment, and all the stocks we like,
against those scenarios. If oil drops to X,
what's the impact? If oil rises to X, what
should we own?
We can't get out of Europe entirely, but
we would shift to more large-cap, stable,
slow-growth companies less likely to be
affected by changes in the macro
environment, and shift out of periphery
names because those would come under
the most pressure if the Greek situation
were to escalate.
TK: How has the strengthening dollar
affected investment opportunities?
CW: In terms of US companies, or
global companies with a lot of non-US
earnings, the translation effect is hurting
thempharmaceuticals, for example. The
strengthening dollar obviously helps the
European and Japanese companies that
export to the US. The companies or
countries hurt the hardest are in the
emerging markets that have issued so
much debt in US dollars recently but do
not have US dollar revenues. That debt is
expanding in local currency terms and will
be increasingly hard to service.
TK: What do you think it will take for
the emerging markets story to turn around?
CW: The pessimism is probably
overdone in China, and things will start to
turn around there soon. We've already seen
a stabilization in Russia, where I believe
theres still a geopolitical risk, so I think
the stabilization may be only a temporary
issue. The official Petrobras audited
accounts are supposed to be released in
Brazil, and if that comes through and we
dont see a lot of indictments of
politicians, we could potentially get more
upside from that market.
The other Asian markets are still highly
dependent on China, with a few
exceptions. India, which I think will make
progress on structural reform, will
continue to be a good market.
Otherwise, most emerging markets are
not that cheap right now; their currencies
have come under pressure. Many of their
currencies are trading close to where they
should in terms of purchasing power
parity. It doesn't strike me as any of the
smaller emerging markets are heavily
undervalued, but if we start to see global
growth pick up, and the US dollar starts to
ease a bit, then those markets will pick
upbut we are not finding a lot of stocks
that are undervalued in the emerging
markets right now.
Carmel Wellso is not an employee of
Morgan Stanley Wealth Management.
Opinions expressed by her are solely her
own and may not necessarily reflect those
of Morgan Stanley Wealth Management or
its affiliates.
May 2015 12
Global Investment Committee
Tactical Asset Allocation
The Global Investment Committee provides guidance on asset allocation decisions through its various model
portfolios. The eight models below are recommended for investors with up to $25 million in investable
assets. They are based on an increasing scale of risk (expected volatility) and expected return. Hedged
strategies include hedge funds and managed futures.
CONSERVATIVE >>> MODERATE >>>

MODEL 1 MODEL 2 MODEL 3

2% Commodities 2% Commodities 2% MLPs
1% MLPs
6% High Yield 2% Emerging Markets 1% Emerging 6% Hedged Strategies
4% Hedged Strategies 1% Emerging
Fixed Income Markets Fixed and Managed Futures
and Managed Futures Markets Fixed
6% Inflation- Income 6%
Income
Protected Securities Cash
6% High Yield 11% 5% High Yield
Cash
14% US
5% 20% US
Equity
6% Inflation- Inflation- Equity
30% Cash Protected 27%
56% Protected
Securities 38% Securities Investment
Investment
Grade Fixed Investment 12% Grade Fixed
Income Grade Fixed International Income
Income 19%
Equity International
Equity
5% Emerging
Markets Equity 7% Emerging
Markets Equity

MODERATE >>> >>>

MODEL 4 MODEL 5 MODEL 6

3% MLPs 3% 3% MLPs 3% 3% MLPs
8% Hedged Strategies
3% and Managed Futures Commodities Commodities 10% Hedged Strategies
8% Hedged Strategies and Managed Futures
Commodities 1% REITs
1% 1% REITs and Managed Futures
Cash 3%
5% High
Yield High Yield
5% High Yield 26% US 30% US
Equity 5% Inflation- 2% 34% US
5% Equity
Protected Inflation- Equity
Inflation- Protected
Securities
Protected Securities
Securities 22% 26%
30%
International International
4% International
Equity 10% Investment Equity Investment Equity
Grade Grade Fixed
19% Investment Fixed Income Income
Grade Fixed Income 8% Emerging Markets 9% Emerging Markets 10% Emerging
Equity Equity Markets Equity

AGGRESSIVE >>>

MODEL 7 MODEL 8
4% MLPs 11% Hedged Strategies 4% MLPs 11% Hedged Strategies KEY
and Managed Futures and Managed Futures
3% 3% 3% Cash
Commodities Commodities
CASH
36% US
2% REITs 40% US 2% REITs Equity
Equity GLOBAL FIXED INCOME
9%
Emerging 10% Emerging
Markets Markets
31% 34% GLOBAL EQUITIES
Equity Equity
International International
Equity Equity

ALTERNATIVE INVESTMENTS

Note: Hedged strategies consist of hedge funds and managed futures.

Source: Morgan Stanley Wealth Management GIC as of April 30, 2015

Please refer to important information, disclosures and qualifications at the end of this material. May 2015 13
Tactical Asset Allocation Reasoning
Relative Weight
Global Equities Within Equities

US Equal Weight While US equities have done exceptionally well since the global financial crisis, they still offer attractive upside potential,
particularly relative to bonds. We believe the US and global economies continue to heal, making recession neither
imminent nor likely in 2015 or 2016. This is constructive for global equities, including the US.

International Equities
(Developed Markets)
Overweight We maintain a positive bias for Japanese and European equity markets given the political and structural changes taking
place in Japan and our expectation for an improving economic outlook in Europe. European and Japanese central
banks are now engaged in much more aggressive monetary policy than the US, while also moving away from fiscal
austerity. This should be relatively more stimulative for growth on a rate-of-change basis and lead to continued
outperformance in these equity markets.

Emerging Markets
Overweight Emerging market (EM) equities have been a mixed bag for the past few years and we expect that to continue. While the
broad emerging market equity asset class remains vulnerable to Federal Reserve Bank tightening and US dollar
strength, emerging market equities have performed better year to date with a more synchronous global economic
recovery and more aggressive central-bank activity outside the US. We think this outperformance can extend further
but recommend a selective approach, focusing on India, China H-shares, Taiwan and Korea.

Relative Weight
Global Fixed Within Fixed
Income Income

US Investment Grade Overweight We have recommended shorter-duration* (maturities) since March 2013 given the extremely low yields and potential
capital losses associated with rising interest rates from such low levels. We have subsequently reduced the size of our
overweight in short duration with short-term interest rates now expected to move higher with the Feds tightening cycle
later this year. Within investment grade, we prefer BBB-rated corporates and A-rated municipals over US Treasuries.

International Underweight Yields are extremely low globally, leaving very little value in international fixed income, particularly as the global
Investment Grade economy begins to recover more broadly. While interest rates are likely to stay low, the offsetting diversification
benefits do not warrant much, if any, position, in our view.

Inflation-Protected Overweight We have been underweight inflation-protected securities since March 2013 given negative real yields across all
Securities maturities. However, with deflationary fears having become extreme in the first quarter of 2015, we believe these
securities now offer relative value in the context of our forecasted acceleration in global growth and rise in oil prices.

High Yield Overweight The sharp decline in oil prices has created some dislocations in the US high yield market. Broadly speaking, we believe
default rates are likely to remain muted as the economy recovers, while corporate and consumer behavior remain
conservative. We prefer higher-quality (B to BB) issues and vigilance on security selection at this stage of the credit
cycle. With energy-related issues, investors should remain selective.

Emerging Market Underweight We remain underweight as the Feds rate-hike cycle will likely be a disproportionate headwind for emerging market
Bonds (EM) debt. Much like EM equities, EM debt exposure should be selective. The GIC recommends US-dollar-based EM
debt with a focus on China, India, Russia, Mexico and Brazil.

Relative Weight
Alternative Within Alternative
Investments Investments

REITs Underweight With our expectation for rising interest rates, we believe REITs are now fairly to slightly overvalued, especially relative to
other high-yielding asset categories. Therefore, we recently reduced our tactical asset allocation. Non-US REITs
should be favored relative to domestic REITs at this point.

Commodities Overweight Most commodities have underperformed in the past few years, with energy leading the charge lower. We believe
commodities are likely to perform better for the remainder of 2015 as global growth reaccelerates and the oil market
comes into better supply/demand balance.

Master Limited Equal Weight Master limited partnerships (MLPs) should do better in 2015 if oil prices recover as we expect. With interest rates still
Partnerships* low and average yields on MLPs close to 6%, significant relative value has been created in this asset category. We
continue to favor midstream assets.

Hedged Strategies Equal Weight This asset category can provide uncorrelated exposure to traditional risk-asset markets. It tends to outperform when
(Hedge Funds and traditional asset categories are challenged by growth scares and/or interest rate volatility spikes. Within this asset
Managed Futures) category, we favor event-driven strategies, given our expectation for increased mergers and acquisitions activity.

Source: Morgan Stanley Wealth Management GIC as of April 30, 2015

*For more about the risks to Master Limited Partnerships (MLPs) and Duration, please see the Risk Considerations section beginning on
page 16 of this report.

Please refer to important information, disclosures and qualifications at the end of this material. May 2015 14

Index Definitions
MORGAN STANLEY CYCLE INDICATOR This is
weighted average of each metrics reading as a
percentile of its own history. The metrics
include employment/unemployment, industrial
production, consumer confidence, the two-
year/10-year yield-curve spread, corporate and
consumer loan growth, announced mergers-and-
acquisitions transactions and capacity
utilization.
MORGAN STANLEY INFLATION/DEFLATION
INDICATOR This is a market-based indicator of
global inflation expectations. It is calculated
using an equally weighted average of annual
growth rates of copper, gold and oil prices;
levels of US and emerging market two-year
breakeven inflation rates; and one-year/two-
year interest rate spreads for the G4 and China.
Please refer to important information, disclosures and qualifications at the end of this material.
MSCI ALL COUNTRY WORLD INDEX This index
captures large-cap and mid-cap representation
across 23 developed markets and 21 emerging
markets.
MSCI ASIA PACIFIC EX JAPAN INDEX This index
captures large-cap and mid-cap representation
across four of five developed market countries
(excluding Japan) and eight emerging market
countries in the Asia Pacific region.
MSCI EAFE INDEX This is a capitalization-
weighted index that tracks the total return of
common stocks in 21 developed market countries
within Europe, Australia and the Far East.
MSCI EMERGING MARKETS INDEX This index
captures large-, mid- and small-cap
representation across 21 emerging market
countries.
MSCI EUROPE INDEX This free-float-adjusted,
market-capitalization-weighted index has large-,
mid- and small-cap representation across 16
developed markets in Europe.
PERSONAL CONSUMPTION EXPENDITURE PRICE
INDEX This a measure of price changes in
consumer goods and services. Personal
consumption expenditures consist of the actual
and imputed expenditures of households. The
measure includes data pertaining to durables,
nondurables and services.
S&P 500 INDEX Regarded as the best single gauge
of the US equities market, this capitalization-
weighted index includes a representative sample
of 500 leading companies in leading industries in
the US economy.
TOPIX (TOKYO STOCK EXCHANGE INDEX) This
free-float-adjusted index tracks all domestic
companies of the exchanges First Section.
May 2015 15
Risk Considerations
MLPs
Master Limited Partnerships (MLPs) are limited partnerships or limited liability companies that are taxed as partnerships and whose interests (limited
partnership units or limited liability company units) are traded on securities exchanges like shares of common stock. Currently, most MLPs operate in
the energy, natural resources or real estate sectors. Investments in MLP interests are subject to the risks generally applicable to companies in the
energy and natural resources sectors, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk.
Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance
on the capital markets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity
volume risk.
The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is
deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for
distribution to the fund which could result in a reduction of the funds value.
MLPs carry interest rate risk and may underperform in a rising interest rate environment. MLP funds accrue deferred income taxes for future tax
liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as
capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP funds after-tax performance
could differ significantly from the underlying assets even if the pre-tax performance is closely tracked.

Duration
Duration, the most commonly used measure of bond risk, quantifies the effect of changes in interest rates on the price of a bond or bond portfolio.
The longer the duration, the more sensitive the bond or portfolio would be to changes in interest rates. Generally, if interest rates rise, bond prices
fall and vice versa. Longer-term bonds carry a longer or higher duration than shorter-term bonds; as such, they would be affected by changing
interest rates for a greater period of time if interest rates were to increase. Consequently, the price of a long-term bond would drop significantly as
compared to the price of a short-term bond.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and
economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets,
since these countries may have relatively unstable governments and less established markets and economies.
Alternative investments which may be referenced in this report, including private equity funds, real estate funds, hedge funds, managed futures
funds, and funds of hedge funds, private equity, and managed futures funds, are speculative and entail significant risks that can include losses due to
leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack
of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less
regulation and higher fees than mutual funds and risks associated with the operations, personnel and processes of the advisor.
Managed futures investments are speculative, involve a high degree of risk, use significant leverage, have limited liquidity and/or may be generally
illiquid, may incur substantial charges, may subject investors to conflicts of interest, and are usually suitable only for the risk capital portion of an
investors portfolio. Before investing in any partnership and in order to make an informed decision, investors should read the applicable prospectus
and/or offering documents carefully for additional information, including charges, expenses, and risks. Managed futures investments are not intended
to replace equities or fixed income securities but rather may act as a complement to these asset categories in a diversified portfolio.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to,
(i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events,
war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence,
technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary
distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

Physical precious metals are non-regulated products. Precious metals are speculative investments, which may experience short-term and long
term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. If sold
in a declining market, the price you receive may be less than your original investment. Unlike bonds and stocks, precious metals do not make interest
or dividend payments. Therefore, precious metals may not be suitable for investors who require current income. Precious metals are commodities
that should be safely stored, which may impose additional costs on the investor. The Securities Investor Protection Corporation (SIPC) provides
certain protection for customers cash and securities in the event of a brokerage firms bankruptcy, other financial difficulties, or if customers assets
are missing. SIPC insurance does not apply to precious metals or other commodities.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk.
Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date.
The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the
maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the
risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk
that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater
credit risk and price volatility in the secondary market. Investors should be careful to consider these risks alongside their individual circumstances, objectives
and risk tolerance before investing in high-yield bonds. High yield bonds should comprise only a limited portion of a balanced portfolio.

Please refer to important information, disclosures and qualifications at the end of this material. May 2015 16
Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax
(AMT). Typically, state tax-exemption applies if securities are issued within one's state of residence and, if applicable, local tax-exemption applies if
securities are issued within one's city of residence.

Treasury Inflation Protection Securities (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation
by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is
linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation.

The initial interest rate on a floating-rate security may be lower than that of a fixed-rate security of the same maturity because investors expect to
receive additional income due to future increases in the floating securitys underlying reference rate. The reference rate could be an index or an
interest rate. However, there can be no assurance that the reference rate will increase. Some floating-rate securities may be subject to call risk.
Principal is returned on a monthly basis over the life of a mortgage-backed security. Principal prepayment can significantly affect the monthly
income stream and the maturity of any type of MBS, including standard MBS, CMOs and Lottery Bonds. Yields and average lives are estimated
based on prepayment assumptions and are subject to change based on actual prepayment of the mortgages in the underlying pools. The level of
predictability of an MBS/CMOs average life, and its market price, depends on the type of MBS/CMO class purchased and interest rate movements.
In general, as interest rates fall, prepayment speeds are likely to increase, thus shortening the MBS/CMOs average life and likely causing its market
price to rise. Conversely, as interest rates rise, prepayment speeds are likely to decrease, thus lengthening average life and likely causing the
MBS/CMOs market price to fall. Some MBS/CMOs may have original issue discount (OID). OID occurs if the MBS/CMOs original issue price is
below its stated redemption price at maturity, and results in imputed interest that must be reported annually for tax purposes, resulting in a tax
liability even though interest was not received. Investors are urged to consult their tax advisors for more information.

Rebalancing does not protect against a loss in declining financial markets. There may be a potential tax implication with a rebalancing strategy.
Investors should consult with their tax advisor before implementing such a strategy.

An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on an
exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in
interest rates and perceived trends in stock and bond prices. Investing in an international ETF also involves certain risks and considerations not
typically associated with investing in an ETF that invests in the securities of U.S. issues, such as political, currency, economic and market risks.
These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established
markets and economics. For specifics and a greater explanation of possible risks with ETFs along with the ETFs investment objectives, charges and
expenses, please consult a copy of the ETFs prospectus. Investing in sectors may be more volatile than diversifying across many industries. The
investment return and principal value of ETF investments will fluctuate, so an investors ETF shares (Creation Units), if or when sold, may be worth
more or less than the original cost. ETFs are redeemable only in Creation Unit size through an Authorized Participant and are not individually
redeemable from an ETF.

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.
Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk,
significant stock price fluctuations and illiquidity.
Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market
volatility than securities of larger, more-established companies.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

The indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the
performance of any specific investment.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes. Morgan
Stanley Smith Barney LLC retains the right to change representative indices at any time.

REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited
diversification and sensitivity to economic factors such as interest rate changes and market recessions.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Investing in foreign emerging markets entails greater risks than those normally associated with domestic markets, such as political, currency,
economic and market risks.

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and
market risks. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and
domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied
economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These
risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in
countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their
business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Please refer to important information, disclosures and qualifications at the end of this material. May 2015 17
Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these
high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

Credit ratings are subject to change.

Certain securities referred to in this material may not have been registered under the U.S. Securities Act of 1933, as amended, and, if not, may not
be offered or sold absent an exemption therefrom. Recipients are required to comply with any legal or contractual restrictions on their purchase,
holding, sale, exercise of rights or performance of obligations under any securities/instruments transaction.

Disclosures
Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This
material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or
other financial instrument or to participate in any trading strategy. Past performance is not necessarily a guide to future performance.
The author(s) (if any authors are noted) principally responsible for the preparation of this material receive compensation based upon various factors,
including quality and accuracy of their work, firm revenues (including trading and capital markets revenues), client feedback and competitive factors.
Morgan Stanley Wealth Management is involved in many businesses that may relate to companies, securities or instruments mentioned in this
material.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any
security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own
independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision,
including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain
material information not contained herein and to which prospective participants are referred. This material is based on public information as of the
specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or
warranty with respect to the accuracy or completeness of this material. Morgan Stanley Wealth Management has no obligation to provide updated
information on the securities/instruments mentioned herein.
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy
will depend on an investors individual circumstances and objectives. Morgan Stanley Wealth Management recommends that investors
independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor. The value of and
income from investments may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates,
securities/instruments prices, market indexes, operational or financial conditions of companies and other issuers or other factors. Estimates of future
performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions
may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the
projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any
projections or estimates, and Morgan Stanley Wealth Management does not represent that any such assumptions will reflect actual future events.
Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not
materially differ from those estimated herein.
This material should not be viewed as advice or recommendations with respect to asset allocation or any particular investment. This information is
not intended to, and should not, form a primary basis for any investment decisions that you may make. Morgan Stanley Wealth Management is not
acting as a fiduciary under either the Employee Retirement Income Security Act of 1974, as amended or under section 4975 of the Internal Revenue
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Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice. Each client
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Please refer to important information, disclosures and qualifications at the end of this material. May 2015 18
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Please refer to important information, disclosures and qualifications at the end of this material. May 2015 19