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6.13. - Page 14 of 39 <br />REDWOOD CITY <br />Investment Strategy Outlook <br />For the Quarter Ended September 30, 2019 <br />Outlook <br />• Our strategy as we enter the final quarter of 2019 is to maintain a well -diversified portfolio as we seek to balance portfolio earnings <br />potential with profit-taking in sectors that appear overly expensive. Issue selection has become increasingly important, regardless <br />of sector, as market cross -currents have created both risks and opportunities. <br />• Our outlook for the major investment-grade fixed income sectors is as follows: <br />• Federal agency yield spreads remain very tight. In some cases, agencies offer yields less than those on Treasuries of <br />similar maturity. The U.S. Treasury Department also released an updated housing reform plan that seeks to reduce the role <br />of the Federal Government, but implementation faces many political and practical difficulties. We continue to favor further <br />reductions in agency holdings because their upside is limited. <br />• Supranational yield spreads remain at multi-year lows, and we plan to further reduce allocations. <br />• In the investment-grade (IG) corporate sector, we remain cautiously optimistic. Stable fundamentals, positive earnings <br />growth, and a resilient equity market support the underlying stability of the credit markets; however, in addition to the <br />myriad of geopolitical issues that have yet to be resolved, increased balance sheet leverage translates into somewhat <br />elevated financial risks, especially in light of the narrow spreads currently available. As a result, we plan to reduce "rich" <br />corporate holdings while creating room for new corporate opportunities as they become available. <br />• ABS spreads are near multi-year lows, but underlying fundamentals remain firm. We plan to maintain ABS positions near <br />current levels while seeking to opportunistically reduce allocations to structures inside of one year. <br />• On the heels of two Fed rate cuts in the third quarter, money market investors may see further rate adjustments in the <br />coming months. Short-term credit spreads have widened recently, creating investment opportunities that offset some of the <br />Fed's lower overnight target rate. <br />PFM Asset Management LLC 60 <br />