(As of March 31, 2014)

Performance Summary
The Macro Allocation Fund outperformed its benchmark indices, the BofA Merrill Lynch 3-Month U.S. Treasury Bill Index and the Long-Term Comparative Index, for the first quarter1. Both the Market and Currency portions of the portfolio performed well during the quarter. The performance of the Market strategy was positive with contributions coming from long exposure to Italian and Spanish equity as well as relative positioning in terms of style (long value/short growth) and size (long large cap/short small cap) within U.S. equity. Within fixed income, short exposure to global safe-haven sovereign markets detracted from performance and was offset somewhat by contributions from long exposure to U.S. credit-oriented spreads. Market strategy changes were focused first on a continued reduction in risk in the early part of the quarter and then on taking advantage of opportunities later in the quarter in select emerging markets (Turkey and Russia). Positive Currency strategy performance was driven by long exposures to the Indian rupee and Indonesian rupiah, both of which appreciated, and were offset somewhat by short exposures to the Australian dollar and New Zealand dollar, both of which appreciated.

Fund Positioning & Outlook
Notwithstanding the quarter’s movements, the forward-looking investment opportunity, captured by the aggregate dispersion of prices from fundamental value, has declined with respect to equity and bond markets in the last year; hence, our recent strategy changes in these asset classes have mostly been to reduce risk exposure.

Market strategy is positioned net long of equity, with effective exposure of about 41% at quarter-end compared with about 52% long at the beginning of the quarter. This change in exposure was a result of reduction to broad developed European equity and emerging markets small cap equity (focused on Taiwan and China) in January. Later in the quarter, Turkey and Russia both presented opportunities to sell options where implied volatility was expensive. A small long position was introduced to Russia.

Market strategy is positioned net short of government bonds and the first quarter ended with a -25% net exposure compared with  14% at the beginning of the quarter. The increase in net short exposure was due to an introduction of a short position in French government bonds at the beginning of the year as well as a reduction in U.S. government bond exposure later in January. Credit spread exposures were materially unchanged for the quarter, with long exposure to the U.S. high yield spreads at 4%, U.S. MBS spreads at 15%, U.S. investment grade spreads at 12%, and to local currency emerging markets debt at 1%.

As the opportunity within markets has declined, the opportunity within currencies has contrastingly increased (more exchange rates have moved away from fundamental value than toward it). We responded to these increasingly attractive fundamental signals at the end of February with broad-based increases in currency risk exposures.  Further, viewed from an overall portfolio context, based on the typically low correlation between currencies and markets we expect that our active currency risk will act as a significant diversifier.

Beyond the realm of fundamental valuation, financial markets have been increasingly influenced by geopolitical and macro-thematic developments during the first quarter. We have used the second stage of our investment process (understanding why prices are different from values) extensively in this environment. Specifically, this stage was meaningful in our analysis of events in Ukraine (where we deployed our game-theoretical framework to better shed light on market influences) and also in approaching the so-called “Fragile Five” (a macro-thematic influence that has built up in market consciousness, and revolves around the dependence on external financing for the growth of Brazil, South Africa, Indonesia, Turkey, and India). We regard gaining this type of understanding about these developments as vital, because it concerns making investment decisions about to which (valuation-based) opportunities we wish to respond and those we may wish to avoid.

We have analyzed the situation in Ukraine as being a theater of strategic bargaining between four major players: Russia, the United States, the eurozone (proxied by Germany), and China. We consider Russia’s aggregate power to be the greatest among the four players in this situation, which was corroborated by its occupation of Crimea being met with relatively little push-back beyond targeted sanctions. We find it unlikely that Crimean annexation by Russia will be the end-game, but Russia will probably consolidate its “victory” in this regard before any next move. Our strategy response—coming directly out of our analysis—is therefore to be reactive to opportunities that events like this cause in markets. Russian equity, in particular, has been very attractive from a valuation perspective for quite some time. But we took our first (small) long exposure to this market only in March after Russia’s aggressive move into Crimea and the eurozone’s and United States’ relatively passive reaction, which further increased the attractiveness of Russian equity. We made an additional move following the secession referendum in Crimea (viewed as illegitimate by the West), selling a small notional put option exposure on Russian equity after a sharp rise in implied volatility (a short put exposure is also a bullish directional stance, and portfolios benefit from selling volatility when it is high). Thus, from an investment perspective, initial restraint followed by a tactical increase in risk aptly characterizes our approach.

Turning to the “Fragile Five,” we added this emergent theme to our macro-thematic framework of modeling themes as risk factors. These five large emerging economies—Brazil, South Africa, Indonesia, Turkey, and India—have been grouped together in market conventional wisdom because of the economic fundamentals they have in common: current account deficits that have grown in recent years and growth that has faltered. The election landscape serves as a backdrop to the analysis of a number of emerging countries. We believe a central issue pervading this landscape is the likelihood of reform-minded politicians and political parties winning power in 2014. This view of reform-driven election results manifests itself within the Fragile Five as most likely where opinion polling indicates the loss of power to long-standing incumbents (India and Indonesia), and less likely where power will be retained by dominant incumbents (Turkey, South Africa, and probably Brazil).

Thus, in comparing the relative “fragility” of the five, we discern that India and Indonesia fare much better than the others, and that the market’s grouping of all five into a thematic influence is changing, or will change further. We find it interesting that the Indian rupee and Indonesian rupiah have also been punished by market participants more heavily than the other three currencies, such that they currently provide stronger valuation signals. Correspondingly, our Currency strategy reflects our thematic analysis in addition to the valuation opportunities—we have significant overweight exposure to the Indian and Indonesian currencies in portfolios, but have so far set aside the (smaller) positive valuation signals coming from the Brazilian real, South African rand, and Turkish lira.

Performance cited represents past performance. Past performance does not guarantee future results and current performance may be lower or higher than the data quoted. Investment returns and principal will fluctuate with market and economic conditions and you may have a gain or loss when you sell shares.

1The Long-Term Comparative Index is comprised of the following indices: 40% Barclays U.S. Aggregate Index, 30% MSCI All Country World Index (net), and 30% Bank of America/Merrill Lynch 3-month U.S. Treasury Bill Index. The Index is unmanaged, does not incur fees or expenses, and cannot be invested in directly.

For the most current month-end performance information, please call 1-800-742-7272, or visit our Web site at www.williamblairfunds.com.

Information about the Fund's holdings should not be considered investment advice. There is no guarantee that the Fund will continue to hold any one particular security or stay invested in any one particular sector. Holdings are subject to change at any time. Top ten holdings are shown as a percentage of total net assets.

The Fund involves a high level of risk and may not be appropriate for everyone. You could lose money by investing in the Fund. There can be no assurance that the Fund’s investment objective will be achieved. The Fund is not a complete investment program and you should only consider the Fund for the alternative portion of your portfolio. Separate accounts managed by the Advisor may invest in the Fund and, therefore, the Advisor at times may have discretionary authority over a significant portion of the assets invested in the Fund. In such instances, the Advisor’s decision to make changes to or rebalance its clients’ allocations in the separate accounts may substantially impact the Fund’s performance. The Fund is designed for long-term investors.

The Fund may use investment techniques and financial instruments that may be considered aggressive—including but not limited to the use of futures contracts, options on futures contracts, securities and indices, forward contracts, swap agreements and similar instruments. Such techniques may also include short sales or other techniques that are intended to provide inverse exposure to a particular market or other asset class, as well as leverage. These techniques may expose the Fund to potentially dramatic changes (losses) in the value of certain of its portfolio holdings.

Investments are subject to a number of other different types of risk, including market risk, asset allocation risk credit risk, commodity risk, counterparty and contractual default risk, currency risk, and derivatives risk. For a more detailed explanation and discussion of these risks, please read the Fund’s Prospectus.

Please carefully consider the Fund’s investment objectives, risks, charges, and expenses before investing. This and other information is contained in the Fund’s prospectus, which you may obtain by calling 1-800-742-7272. Read it carefully before you invest or send money.

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