CLOSER LOOK | DOMESTIC FIXED INCOMEDATA AS OF AUGUST 2016

Presented to: Pennsylvania Association of Public Employee Retirement Systems

Presented by: Ryan Labs Asset Management (Daniel J. Lucey, CFA, Sean McShea, Pawel Krasowski)

Presented on: PAPERS Webcast, September 21, 2016 at 10:30 AM EST

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1. Current Capital Market Themes

2. Credit Cycle Overview

3. Appendix

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TABLE OF CONTENTS PAGE

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CURRENT CAPITAL MARKET THEMES

ECONOMIC DATA POINTS & POTENTIAL IMPACT

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$4.5 Trillion New Treasury Issuance

Federal Funds Target Rate: 50 bps

30 Year US Home Mortgage Fixed Average: 3.65%

US 10 Year 1.54% versus Japanese 10 Year -0.08%

Negative Yields (Signal to lower lending standards)

Inflation: 1.8%

Demographics: In 2020, the 65 to 85 age group will be the largest growing

Crisis in Retirement Infrastructure1. Low Corporate pension funding levels2. Low Municipal pension funding levels3. Low DC savings

FED ASSETS APPROACH $4.5 TRILLION

Ryan Labs Asset Management 5Source: Bloomberg

INTEREST RATES SIT AT LOWEST IN HISTORY

Ryan Labs Asset Management 6Source: Bloomberg

MORTGAGE RATES NEAR LOWEST LEVELS IN HISTORY

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INFLATION SHOWING LITTLE SIGNS OF IMMEDIATE THREAT

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JAPAN 10 YEAR YIELD IS NEGATIVE

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US 10 YEAR YIELDS NOT AS LOW AS YOU THINK

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US 10 Year Yields vs. Japan 10 Year JGBSource: Bloomberg

AGES 65 AND OLDER – HIGHEST GROWING POPULATION SEGMENT

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LABOR FORCE PARTICIPATION REMAINS LOW

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EMPLOYMENT OFF HISTORICAL LEVELS

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Employment as Percent of Total US PopulationSource: Bloomberg

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Ryan Labs Asset Management 15Source: Ryan Labs Indices

ASSET LIABILITY WATCH – AUGUST 31, 2016

ASSET LIABILITY WATCH – AUGUST 31, 2016

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Notes: RL PPA liability curve is the spot curve of the replication of IRS PPA curve (US credit A to AAA). RL Treasury liability curve is the proxy for economic liabilities.

Assumptions: Normal costs = annual contributionsNo benefit enhancements

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THE CREDIT CYCLE

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THE CREDIT CYCLE

What is it? • The credit cycle tracks the expansion and contraction of access to credit over time.

Why is it important? • Influences the overall business cycle because access to credit affects a company’s ability to invest

• Overtime, performance of credit-oriented fixed income sectors are directly linked

• Sequence of events typically “rhyme”, not necessarily repeat

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THE FOUR PHASES OF THE CREDIT CYCLE

Falling Leverage

Rising Leverage

Higher Growth

Lower Growth

Downturn

Repair Recovery

Expansion

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Repair Stage• After economic

downturn

• Companies repay debt

• Focus on cost cutting & cash generation

• Corporate bond spreads typically decline

• Economic growth improves

Recovery Stage• Profit margins

improved

• Restricted balance sheets

• Reduced debt

• Free cash flows grows

• Corporate bond spreads continue to decline

• Economy continues to improve

Expansion Stage• Strengthening

economy

• Confidence improves

• Banks increase lending

• Corporations increase borrowing

• Corporate bonds face higher volatility

• Credit Cycle peaks

Downturn Stage• Slowing corporate

growth

• Increased borrowing

• Lower earnings

• Banks reduce lending & tighten lending requirements

• Corporate bond spreads widen & prices fall

• Economic slowdown or recession

THE FOUR PHASES OF THE CREDIT CYCLE

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CREDIT CYCLE: DELEVERAGING, THEN LEVERAGING

“History never repeats itself, but it does rhyme.” – Mark Twain

• High Default Rates begin to fall

• Companies in “Survival Mode”• Focus on Liquidity/Consolidation• Deleveraging Occurs

• Peak in Credit Quality (Leverage Nadir)

• “Animal Spirits” Re-emerge• Companies Focus

on Expansion

• Leverage Increases

• Defaults Start to Increase

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EVIDENCE OF A LATE-CYCLE CREDIT ENVIRONMENT

Flattening Treasury Curve

High and Rising Leverage

Tightening Credit Conditions

Peaking Margins

Fall in M&A Activity

Modest Slowdown in Employment

Possible Federal Reserve Rate Hike

Ryan Labs Asset Management 23Source: RL Indices

RL TREASURY YIELDS (12/31/2011 to 8/31/2016)

2 Year TSY 0.7955 Year TSY 1.1817 Year TSY 1.43910 Year TSY 1.56930 Year TSY 2.231

8/31/2016 Yield (%)

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RISING HIGH YIELD DEFAULT RATE

Source: J.P. Morgan

Note: Long term default high yield rate based on number of issues

Ryan Labs Asset Management 25Source: Morgan Stanley Research, Bloomberg, Capital IQ, Moody’s, NBER

HIGH AND RISING LEVERAGE

Notes: Assumes US bond issuer default rates for 2001, 2009, and current. Assumes US speculative grade default rate for 19

Ryan Labs Asset Management 26Source: Yardeni Research, Standard & Poor’s, Thomson Reuters

LOWER CORPORATE MARGINS

Notes: Assumes US bond issuer default rates for 2001, 2009, and current. Assumes US speculative grade default rate for 19

Ryan Labs Asset Management 27Source: Pitchbook Data

FALL IN M&A ACTIVITY$1

56

$219

$264

$233

$182

$401

$267

$251

$194

$306

$240

$365

$200

$348

$289

$384

$327

$367

$439

$525

$571

$454

$484

$507

$540

$461

3,436 3,405

3,023

4,049

4,6014,427

4,142

4,4244,584

4,435

4,379

4,9534,476

4,334

4,5654,722

5,4325,5355,212

4,946

5,778

5,449

5,717

5,5475,176

3,906

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

$0

$100

$200

$300

$400

$500

$600

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2010 2011 2012 2013 2014 2015 2016

Deal Value ($B) Deal Count

$ Billions Count

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HISTORICAL CREDIT SPREADS

Ryan Labs Asset Management 29Source: Crandall, Pierce & Company, Bureau of Labor Statistics, Bureau of Economic Analysis

IMPLICATIONS OF A FED RATE HIKE

Overnight Rate (Federal Funds Rate) Increases

● Interest Rate at which depository institutions trade federal funds with each other overnight● Central Interest Rate in the U.S. financial market

Discount Window Lending Rate Increases

● Short term funding for financial institutions in three forms:(1) Primary Credit(2) Secondary Credit(3) Seasonal Credit

Prime Rate Increases

● Credit rate that banks extended to their most credit-worth clients- Primary index for most credit cards, home equity loans, and lines of credit● Typically 300 basis points (3%) over the Federal Funds Rate

Short Duration Curve Rises

Long Duration Curve Flattens

Heightened Volatility

Ryan Labs Asset Management 30Source: Federal Reserve Bank of St. Louis

OVERNIGHT RATE (FEDERAL FUNDS RATE)12/31/2010 TO 7/31/2016

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CONCLUSION

Low Growth Scenario

Demographics Drive GDP

Higher Overnight Rates does not mean higher Longer Term Yields

Low Liquidity Environment

High / Rising Leverage + Peaking Margins = Late Cycle Environment

Current Market Environment lends itself to Active Management

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PERFORMANCE AND INFORMATION RATIO QUARTILE RANKING ENDING 6/30/2016

QUARTILE RANKING – RATE OF RETURN

QUARTILE RANKING – INFORMATION RATIO

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Source: Informa Investment Solutions (www.informais.com) Note: Performance presented above is gross of fees. There are 197 Firms and 401 Products in this universe. Ryan Labs Asset Management receives the PSN 6 star, Top Gun rating for our Core Strategy. 6 star is the top rating. While there is no payment required to be considered for, be awarded, or use the “Top Gun” award, Ryan Labs Asset Management purchases certain data services from Informa Investment Solutions, Inc.

Ryan Labs, Inc. Core Fixed Income

Ryan Labs, Inc. Core Fixed Income

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APPENDIX

BOND MARKET WATCH AUGUST 31, 2016

Ryan Labs Asset Management 34Source: Ryan Labs Indices

BOND MARKET WATCH AUGUST 31, 2016

Ryan Labs Asset Management 35Source: Ryan Labs Indices

Assumptions:1. Nominals represent conventional U.S. Treasury Bonds and Notes.2. BEI = Breakeven Inflation Rate (Nominal yields minus TIPS yields). Widening BEI indicates that TIPS are outperforming nominal

bonds. When realized inflation is greater than implied inflation, TIPS also outperform.3. Current Inflation = Bureau of Labor Statistics, Year over Year Consumer Price Index (non-seasonally adjusted, all items, 1 month lag)

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0

Ryan Labs Asset Management 37Source: Crandall, Pierce & Company

INTEREST RATES

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TOTAL RETURN – FIXED INCOME

Source: Crandall, Pierce & Company

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TOTAL RETURN - EQUITIES

Source: Crandall, Pierce & Company

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TOTAL RETURN - ALTERNATIVES

Source: Crandall, Pierce & Company

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VALUATION & INFLATION

Source: Crandall, Pierce & Company

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EMPLOYMENT, ECONOMY, & TRADE

Source: Crandall, Pierce & Company

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RL CASH YIELDS (12/31/2010 to 8/31/2016)

1 Month TSY 0.3553 Month TSY 0.3106 Month TSY 0.46112 Month TSY 0.593

8/31/2016 Yield (%)

Source: RL Indices

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RL TIPS YIELDS (12/31/2010 to 8/31/2016)

2 Year TIPS -0.2665 Years TIPS -0.08910 Year TIPS 0.19430 Year TIPS 0.585

8/31/2016 Yield (%)

Source: RL Indices

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DO DEMOGRAPHICS DRIVE THE EQUITY MARKETS?

Source: Bank Credit Analyst

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JAPAN’S POPULATION BUST WAS LARGELY FORESEEN

Source: Bank Credit Analyst

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SPENDING TENDS TO DECLINE IN OLD AGE

Source: Bloomberg