3rd 2017 - Bremer Bank

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A select group of technology stocks led the market, with Facebook, Apple, Amazon, Microsoft and Google up 25% on average
A QUARTERLY NEWSLETTER FROM

BREMER ASSET MANAGEMENT

Global Markets Continue Upward March Equities advance with little volatility in Q2

Investing with Purpose Use what you have to create the future you want

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3rd

2017

INVESTMENT MANAGEMENT UPDATE

JOEL REIMERS, CFA CHIEF INVESTMENT OFFICER

ROB MOUNTS SENIOR PORTFOLIO MANAGER

If you or someone you know could benefit from our services, please contact a Wealth Management Advisor at 800-908-BANK (2265). Ask about Wealth Management, or visit the Wealth Management tab on Bremer.com.

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FOREIGN MARKETS OUTPERFORM DOMESTIC PEERS By Joel Reimers, CFA

Global equity markets surged higher second quarter, driven by an improved economic and profit growth outlook and supported by low interest rates and low inflation. U.S. equities, as measured by the S&P 500, rose 3.09% for the quarter; International markets performed even better, with the MSCI EAFE Index up 6.12%. The Federal Reserve raised short-term interest rates second quarter, and another hike is expected sometime this year. Markets have exhibited a historically low level of volatility, as investors have become complacent with current conditions.

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Slow and Steady The equity market’s impressive run continued second quarter, with steady performance signaling another win for investors. During a calm first half, Joel Reimers says global stocks have become this year’s big story, and explains why it is not too late to get on board, page 2.

On Strategy They say to achieve anything in life you must first know what you want. Investing is no exception. On page 6, Rob Mounts explains why our most successful clients have a clear purpose – and sync their investment strategies with their life goals.

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GLOBAL MARKETS CONTINUE UPWARD MARCH Equities advance with little volatility in Q2 By Joel Reimers, CFA

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Global equity markets pushed higher in the second quarter, largely driven by a reacceleration in earnings growth and supported by low interest rates and low inflation. In the U.S., large company stocks delivered their best first half return since 2013, with the S&P 500 up 9.3%. A select group of technology stocks led the market, with Facebook, Apple, Amazon, Microsoft and Google up 25% on average. So far this year, large company stocks have significantly outperformed small cap stocks. Where has volatility gone? The U.S. is now in its second longest postwar economic expansion, with equities in the ninth year of a bull market. The S&P 500 has posted positive returns for seven straight quarters and 17 of the last 18 quarters. One striking characteristic of equity markets in recent months has been a very low level of volatility. During the past 50 years, S&P 500 volatility was at or below our current level only twice – in the mid-1960s and in 1994. Another measure of volatility, the CBOE Volatility Index (VIX) has been Contact us

below 10% only 11 days in the past 20 years, and seven of those days have been since mid-May 2017. So far, the largest drawdown (decline from a peak to a trough) in 2017 is -2.8%, which is also unusual. Over the last 67 years, the historical average drawdown in any given calendar year has been -13.5%. As a result, there has not been a significant correction in 16 consecutive months.

The U.S. is now in its second longest postwar economic expansion, with equities in the ninth year of a bull market. It is reasonable to expect volatility to “revert to the mean” over time, however, we don’t know when it will happen. Also, given the rise in equity valuations, it is fair to assume returns will likely be lower in the future compared to the recent past. The S&P 500 is currently valued at 17.5 times expected profits in 2018, slightly higher

U.S. and international equities at inflection points

Global growth is improving and is the best we have seen in six years. Many countries are experiencing renewed growth, so now it is not just the U.S. economy leading the way.

International picture improving Perhaps an even bigger story this year is the resurgence of the equity markets outside the U.S. So far in 2017, international developed equities as measured by the MSCI EAFE Index have risen 14%, with emerging markets up almost 19%. Global growth is improving and is the best we have seen in six years. Many countries are experiencing renewed growth, so now it is not just the U.S. economy leading the way. As a result, we have seen a rise in corporate profit growth supporting higher equity prices. Contact us

Jun. 30, 2017 P/E (fwd.) = 17.5x

P/E 20 yr. avg. Div. Yield 20 yr. avg. 2.1% 2.0% 2.9%

300 250 International

than the average of 16 times forward earnings, and we are now at a 15-year high. It is worth pointing out that low yields and low inflation support higher valuations.

MSCI All Country World ex-U.S. and S&P 500 Index Dec. 1996 = 100, U.S. dollar, price return

350

200

-49%

+106%

Jun. 30, 2017 P/E (fwd.) = 14.1x

-57%

+101%

150

+258%

-62% -49%

100

+106%

+216%

+48% 50 '97

'99

'01

'03

'05

'07

'09

'11

'13

'15

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Source: MSCI, Standard & Poor's, FactSet, J.P. Morgan Asset Managment. Forward price to earnings ratio is bottom-up calculation based on the most recent index price, divided by consensus estimates for earnings in the next twelve months (NTM), and is provided by FactSet Market Aggregates. Returns are cumulative and based on price movement only, and do not include the reinvestment of dividends. Past performance is not indicative of future returns. Dividend yield is calculated as consensus estimates of dividends for the next twelve months, divided by the most recent price, as provided by FactSet Market Aggregates. Guide to the Markets – U.S. Data are as of June 30, 2017.

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Global Markets Continue Upward March

Unlike the last several years when global diversification did not benefit U.S. investors, international equity markets have provided significant benefits over the past year. U.S. investors also are benefitting from a weaker dollar, which has translated into higher returns from foreign investments. In addition, correlations between international and U.S. equities are now the lowest they have been since 2004, providing added diversification benefits.

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Looking back to the post-financial-crisis period starting in 2009, international equities have posted a +106% cumulative return compared to a +258% return for U.S. equities. Although international equity markets have outperformed the U.S. this year, this has not been the case in recent years. Looking back to the post-financial-crisis period starting in 2009, international equities have posted a +106% cumulative return compared to a +258% return for U.S. equities. From a valuation standpoint, international equities as measured by the MSCI All Cap World Index currently trade at 14.1 times next year’s earnings, multiples close to their 15-year average. Contact us

A deeper look into the opportunity for international equities is highlighted in the chart on page 5. When you compare growth in earnings per share of U.S. companies versus those abroad, U.S. profits are currently 30% above pre-financial-crisis levels and international profits are still 30% below. During this time period,

the S&P 500 has returned 210%, more than twice as much as international stocks as measured by the MSCI All Cap World Index. A strong case can be made that the gap between profit and equity performance is beginning to close and will favor international equities over the U.S. going forward. Trailing 12-month earnings per share (in USD), indexed to pre-crisis peak in %

Many investors are likely wondering if they have missed the boat on international equities given the strong relative performance this year. We don’t think that is the case, and that international equities could be in the early stages of a multi-year trend of favorable relative performance. From a strategic standpoint, we still remain U.S.-centric in our portfolios, yet currently allocate 36% of our equities to the international markets. Cheaper valuations, faster earnings growth and added diversification benefits provide a solid case for international equities going forward.

40 20 0 -20 -40 -60 2005

2007

S&P 500 MSCI ACWI ex-US

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2009

2011

2013

2015

From a strategic standpoint, we still remain U.S.-centric in our portfolios, yet currently allocate 36% of our equities to the international markets.

2017

Sources: UBS, JP Morgan, FCI, Think Advisor: “3 Things Driving Volatility Down”; Todd Asset Management “Minding the Gap”

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INVESTING WITH PURPOSE Use what you have to create the future you want By Rob Mounts

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Why do you invest? To pursue your ideal retirement? Leave a legacy? Provide a secure future for loved ones? Build your net worth? Maybe it is a combination of these, or something else altogether. Whatever your reason for investing, it should sync with your investment strategy. That is why one of the first things we like to learn about our clients – after greetings, handshakes and initial sips of coffee – is their purpose for investing. It is what should drive your entire investment approach. Identify your reasons for investing Our Wealth Advisors can help you define and clarify your reasons for investing. They will start by asking simple questions such as “What would you like to see your wealth accomplish?” “What is your most pressing concern?” “What would you like to do more or less of to make your life more fulfilling?” “Who will use your funds if you do not?” Your answers help us discover how we can best help you. They also help us reduce the number of investors seeking “high returns,” and assuming the risk associated with the corresponding portfolio, without a clear understanding why or what it actually means. Contact us

Align your overall asset allocation After we have identified the purpose and goals of your investment portfolio, we will coordinate your asset allocation across all your investment accounts. If you work with multiple investment advisors, they may initially be able to coordinate allocation strategies, but as markets fluctuate and investment firms’ philosophies shift, your strategies can easily get off track. Most clients find coordinating an allocation strategy across multiple firms an onerous task. We can unify your entire investment portfolio by understanding your current overall asset allocation, determining what it should be, and continually bringing the two into alignment.

If you work with multiple investment advisors, they may initially be able to coordinate allocation strategies, but as markets fluctuate and investment firms’ philosophies shift, your strategies can easily get off track.

One benefit that is difficult to take advantage of when accounts are spread across several firms is optimizing assets based on the tax treatment of the account. There are opportunities to increase your after-tax rate of return based on the type of asset located in each account. Along with simplification and reduced cost, our ability to help our clients be strategic about asset location is one of the most common reasons our clients consolidate their investment portfolios with Bremer. Understand your risk tolerance A common practice in the financial services industry is to have you complete a risk-tolerance questionnaire, and then invest in the corresponding portfolio. While risk-tolerance questionnaires are a useful tool within an overall strategy discussion, they are independent of goals, so they should not be used in isolation. If your portfolio is based solely on risk tolerance and your risktolerance is low, it might delay you from achieving your goal. If your risk tolerance is high, you may see your portfolio value decline after reaching your financial goal. Contact us

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Investing with Purpose

In addition, because your risk tolerance moves with the market, using a risk-tolerance questionnaire in isolation may set you up for taking more risk after markets have gone up and less risk after they have fallen (i.e., buying high and selling low).

An informed investor is better positioned to keep emotions in check when the market moves. How well do you know the risk within your investment portfolio? What do you expect will happen if the stock market moves up or down? What steps will you then take? An informed investor is better positioned to keep emotions in check when the market moves. A method we use to help our clients understand their overall asset allocation is to explain it in terms of “up capture” and “down capture” relative to the stock market (S&P 500 Index). It is not a predictor of the future, but it does break out how an asset allocation strategy performed in good times and in bad over the past 15 years. Being armed with facts helps to avoid the common emotional pitfalls that trap typical investors.

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Monitor progress and reaffirm your purpose Have you taken that dream vacation? Have your family dynamics changed for better or worse? Are you more secure now and feeling more charitablyinclined? Have your priorities changed? These are the best types of reasons to adjust your investment strategy. Short-term market fluctuations should not compel a change in your long-term strategy. Our most satisfied and successful clients are those who have a clear purpose as to why they are investing, have aligned their overall asset allocation to that purpose, are informed and comfortable with the risk-and-return characteristics in their investment strategy, and are able to stay the course to see their wealth enhance their life.

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Products offered through Bremer Trust, National Association are not FDIC insured, are not a deposit or other obligation of, or guaranteed by, the depositing institution, and are subject to investment risk including possible loss of principal amount invested. This report has been compiled using data and other statements of fact derived from sources which we believe to be accurate and reliable. However, such data and other statements of fact have not been verified by us, and we do not make any representations as to their accuracy or completeness. Any opinion expressed herein reflects our judgment at this date and is subject to change. © 2017 Bremer Financial Corporation. All rights reserved. Bremer is a registered service mark of Bremer Financial Corporation. 17DMWM00308