Throughout 2017, our meetings and conversations with clients very frequently focused on the topic of risk. With the market doing so well for so many years, we all knew that downward volatility would eventually manifest, but we didn’t know when, or to what extent. In February, just days before publishing this report, it happened; the S&P 500 Index fell into correction territory, and no one can say for sure if the market will rebound or decline further in the coming weeks and months. We decided several months ago to focus this year’s Annual Outlook report on risk. While February’s volatility did not materially change our asset allocation views, it reinforced to us the importance of a comprehensive discussion about how we think about risk and how we manage it. We tackle the topic of risk in several different ways throughout this report. We describe the current investment landscape as one that offers both risk and opportunity; our current asset allocation model seeks to balance the two. Although we focused on risk in this year’s report, we note that our current investment outlook is cautiously constructive, and in several ways improved since our last comprehensive report a year ago. Economic growth and corporate earnings across the world improved notably throughout 2017, led by an acceleration in Europe, a rebound in emerging markets and improved sentiment in some U.S. sectors due to the recent tax law overhaul. However, alongside these positive fundamental trends we also see potential causes for concern—valuation risk, to be sure, but also macroeconomic and geopolitical risks. Rising interest rates, the potential for inflation, heightened tension among nations (particularly along fault lines that threaten global trade volumes)—all of these factors are worthy of discussion, particularly in light of elevated valuations. The volatility in February is an indication of the market’s sensitivity to news about any of these risk factors. In short, today’s investment landscape offers reasons for optimism and reasons for caution. As always, we want to avoid skewing portfolios toward a specific market scenario, because we can’t accurately predict which scenario will come to pass. Instead, we try to build portfolios that offer the best chance of success in the medium term (two to three years) and the long term (10-plus years), over the widest range of potential market outcomes. As we described in last year’s report (and as summarized in the centerfold section on pages 15–18 of this report), we use long-term assessments of various asset classes to set a target range (i.e., a maximum and minimum percentage) that serves as a boundary for our ongoing allocation to each asset class. Since last year’s report, these long-term assessments have not changed very much, and as a result, our boundary ranges are also largely the same as last year. We then use medium-term scenario analysis to weigh pros and cons in each asset class and settle on a desired target allocation for each. Based on our current scenario analysis, we seek to mitigate the sensitivity of our portfolios to rising interest rates, tighter central bank policy and rising political tensions. We also want to reduce exposure to potentially “overheated” markets (for example, exposure to China’s fast-growing credit markets), and markets that could be hurt by protectionist policies, while favoring markets with comparably attractive current valuations and economic momentum. These views have led us to reduce exposure to large-cap U.S. equities, high-yield bonds and traditional fixed income, and increase exposure to European equities, lower-duration fixed income strategies and private investments. We discuss our general outlook and our portfolio stances in more detail in the “Investment Landscape” section. We explain our general approach to evaluating risk, and how it impacts our decisions. Portfolios are subject to several types of quantifiable risk: The risk of a short-term drawdown in portfolio value The risks posed by illiquid investments The risk of insufficient growth (i.e., the risk that a portfolio won’t grow quickly enough) The risk of permanent capital impairment In addition to these quantifiable risks, all investors are prone to behavioral risk. Fear and greed constantly tempt all of us to make decisions that go against our best interests. In this report, we will discuss each of these risks, and how they all interact with each other to affect asset prices in the short term and portfolio growth in the long term. Finally, we will demonstrate how we put all of this theory into practice, then describe some of our key medium-term and long-term asset allocation decisions from recent years through the lens of this risk framework. For example, our medium-term decision to shift slightly away from U.S. equities and toward European equities is directly aimed at reducing drawdown risk without accepting additional risk of insufficient growth. Likewise, our decision to shift capital from hedge funds and to invest additional capital in private equity, private credit and real estate is rooted in our long-term views regarding illiquidity risk and the rewards that investors can reap by accepting illiquidity in portfolios.* Finally, we review the specific risk scenarios that, in our view, have the greatest potential to meaningfully impact portfolios over the next two to three years. Our asset allocation process accounts for a wide range of potential outcomes over the next 18–36 months. As noted in our centerfold discussion, our model is anchored around a moderately optimistic base-case scenario, but we also want the model to be resilient in the face of negative scenarios that may be unlikely but still could occur. In this publication, we will drill down into five specific risk scenarios—four that could pose a danger to risk assets, and a fifth that could pose a danger if clients are underexposed to risk assets: Interest rates rise significantly China’s “credit bubble” bursts Protectionism vanquishes global trade North Korean tension escalates into military conflict “Upside risk” that stock valuations shift even higher Note that with the exception of a rising interest rate scenario, we think that there is a low probability that any of these outcomes will play out. However, we can still take steps in portfolios to mitigate exposure to these potential scenarios, while also maintaining an overall stance that embraces long-term growth. One final note: We present a number of generalized views on capital markets in this publication, but in daily practice, our recommendations to any given client are highly tailored to that client’s situation. We employ an objective approach to evaluate the risks that all investors face, but in the end, we need to exercise subjectivity as well so that every one of our clients’ portfolios reflect their constraints and aspirations as well as the realities of the market. We hope this discussion is informative and helps advance your understanding of our asset allocation thought process. We welcome your thoughts and comments and look forward to discussing these issues with you throughout 2018. The views expressed are those of the author and Brown Advisory as of the date referenced and are subject to change at any time based on market or other conditions. These views are not intended to be and should not be relied upon as investment advice and are not intended to be a forecast of future events or a guarantee of future results. Past performance is not a guarantee of future performance and you may not get back the amount invested. The information provided in this material is not intended to be and should not be considered to be a recommendation or suggestion to engage in or refrain from a particular course of action or to make or hold a particular investment or pursue a particular investment strategy, including whether or not to buy, sell, or hold any of the securities mentioned. It should not be assumed that investments in such securities have been or will be profitable. To the extent specific securities are mentioned, they have been selected by the author on an objective basis to illustrate views expressed in the commentary and do not represent all of the securities purchased, sold or recommended for advisory clients. The information contained herein has been prepared from sources believed reliable but is not guaranteed by us as to its timeliness or accuracy, and is not a complete summary or statement of all available data. This piece is intended solely for our clients and prospective clients, is for informational purposes only, and is not individually tailored for or directed to any particular client or prospective client. *Alternative investments may be available for qualified purchasers and/or accredited investors only. The following indexes were used throughout this report to represent returns and characteristics of various asset classes and regions:U.S. Equities: The S&P 500® Index represents the large-cap segment of the U.S. equity markets and consists of approximately 500 leading companies in leading industries of the U.S. economy. Criteria evaluated include: market capitalization, financial viability, liquidity, public float, sector representation, and corporate structure. An index constituent must also be considered a U.S. company. Standard & Poor’s, S&P, and S&P 500 are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”), a subsidiary of S&P Global Inc.Emerging-market equities: The MSCI Emerging Markets® Index captures large and mid-cap representation across 23 Emerging Markets countries. With 834 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. European equities: The MSCI Europe Index is designed to represent the performance of large- and mid-cap equities across 15 developed markets. As of December 2017 it had more than 400 constituents and covered approximately 85% of the free float-adjusted market capitalization across European developed-market equity. Japan equities: The MSCI Japan® Index is designed to measure the performance of the large and mid-cap segments of the Japanese market. With 319 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. EAFE equities: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets in Europe, Australasia and the Far East, excluding the U.S. and Canada. With more than 900 constituents as of December 2017, the MSCI EAFE Index covered approximately 85% of the free float-adjusted market capitalization in each country. U.K. equities: The MSCI United Kingdom Index is a free-float weighted equity index. It was developed with a base value of 100 as of December 31, 1969. Europe ex-U.K. equities: The MSCI Europe ex UK Index captures large and mid cap representation across 14 Developed Markets (DM) countries in Europe*. With 343 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across European Developed Markets excluding the U.K. Asia ex-Japan equities: The MSCI AC Asia ex Japan Index captures large and mid cap representation across 2 of 3 Developed Markets (DM) countries* (excluding Japan) and 9 Emerging Markets (EM) countries* in Asia. With 646 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. Latin American equities: The MSCI Emerging Markets (EM) Latin America Index captures large and mid cap representation across 5 Emerging Markets (EM) countries* in Latin America. With 110 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. All MSCI indexes and products are trademarks and service marks of MSCI or its subsidiaries.Short-term U.S. Treasuries: The ICE BofAML U.S. 3-Month Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month that issue is sold and rolled into a newly selected issue. The issue selected at each month-end rebalancing is the outstanding Treasury Bill that matures closest to, but not beyond, three months from the rebalancing date. To qualify for selection, an issue must have settled on or before the month-end rebalancing date.Investment-grade bonds: The Bloomberg Barclays Aggregate Bond Index is an unmanaged, market-value weighted index composed of taxable U.S. investment grade, fixed rate bond market securities, including government, government agency, corporate, asset-backed and mortgage-backed securities between one and 10 years. High-yield bonds: Bloomberg Barclays U.S. Corporate High Yield Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. BLOOMBERG, is a trademark and service mark of Bloomberg Finance L.P., a Delaware limited partnership, or its subsidiaries Morningstar, Inc., Morningstar, the Morningstar logo and Morningstar.com are registered trademarks of Morningstar, Inc. All other Morningstar products and proprietary tools, including Morningstar Category, Morningstar Rating, Morningstar Risk, Morningstar Return, and Morningstar Style Box are trademarks of Morningstar, Inc. Terms and definitions: Price-Earnings Ratio (P/E Ratio) measures a stock’s price relative to its earnings per share. Earnings Growth refers to the growth rate of a company’s net profit.