FOR INSTITUTIONAL / WHOLESALE / PROFESSIONAL CLIENTS … · 2020. 11. 3. · LTCMA Mark-to-Market: COVID-19 – New cycle, new starting point FOR INSTITUTIONAL / WHOLESALE / PROFESSIONAL

IN BRIEF• Prompted by the profound shock to the economy

and markets of COVID-19, we are for the very first time providing an off-cycle mark-to-market of our Long-Term Capital Market Assumptions return projections.

• We have not altered the assumptions themselves but, rather, focused on how the sharp swings in asset prices will affect the long-term outlook for returns and, by extension, portfolio construction.

• While the full implications of today’s policy actions are still vague, the effect of massive fiscal and monetary stimulus, and the associated jump in government borrowing, could eventually lead to steeper curves, a shift in equity market leadership and a tilt in how economic rewards are shared in the years to come.

• We finish with personal recollections and insights gained through previous crises from a dozen of our most senior portfolio managers, strategists and research analysts. While no two bear markets are the same, the lessons of history can offer a helpful perspective.

2020 Long-Term Capital Market AssumptionsLTCMA Mark-to-Market: COVID-19 – New cycle, new starting point

FOR INSTITUTIONAL / WHOLESALE / PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – NOT FOR RETAIL USE OR DISTRIBUTION

Time-tested projectionsto build stronger portfolios

PORTFOLIO INSIGHTS

2 LTCMA MARK-TO-MARKET: COVID-19 – NEW CYCLE, NEW STARTING POINT

LTCMA Mark-to-Market: COVID-19 – New cycle, new starting point John Bilton, CFA, Head of Global Multi-Asset Strategy, Multi-Asset Solutions

LTCMA COVID-19 UPDATE: OVERVIEWFor the first time in nearly a quarter-century of producing our Long-Term Capital Market Assumptions (LTCMAs), we have elected to provide an update outside of our normal annual publication cycle to the return expectations for a range of asset classes. To be clear, this is not a complete reassessment of our underlying assumptions, and we look forward to publishing our 25th annual edition in November. However, the severity of market moves in early 2020, as well as our memories and experiences of prior crises and recessions, motivated us to mark our assumptions to market.1

The economic optimism that had begun to emerge in late 2019 as the ravages of the U.S.-China trade spat receded, now seems little more than a distant memory. But if we cast our minds back, the world economy was in the latter stages of a record-breaking expansion phase and a remarkable bull market. Nevertheless, a combination of easy policy and a lack of corporate exuberance provided the ingredients for the already aged cycle to extend further. From a long-term perspective, forward-looking asset returns had been pushed inexorably downward as valuations had risen and – as a result of exceptionally easy monetary policy – interest rates had steadily fallen.

Few, if any, outside of the medical and scientific communities might have predicted what happened next. Under the shadow of a burgeoning medical crisis, governments globally faced the trade-off between public health and economic health. Unsurprisingly, public health prevailed, but the price was a sudden stop to the last economic cycle and a rewrite of the economic policy textbook as we knew it.

In this update to our return expectations (Exhibit 1), we focus primarily on taking into account the wild market moves that occurred over March 2020 as global equities swung from bull market to bear market territory in record time. Clearly, however, the market volatility has continued, as the sharp bounce in stock prices through April suggests. As the precise mark-to-market remains a moving target, we have also sought to provide some insight into how sensitive the long-term return forecasts might be to the entry price.

1 In this exercise, we have simply updated the starting price of assets from that on September 30, 2019, to the prevailing price on March 31, 2020. This captures the sharp market moves of March 2020 but at this time does not update any underlying assumptions – including equilibrium yields and normalization paths for rates and equilibrium valuations and margins for stocks. These will be updated and in the next full edition of LTCMAs due in November 2020. The full details of the current assumptions are available in the 2020 Long-Term Capital Market Assumptions. The mark-to-market exercise has been conducted for expected returns in USD-, EUR- and GBP-denominated assets; it does not extend to updating covariance assumptions, which already include an adjustment for periods of high volatility.

We have also considered the portfolio context and the possible impact that recent policy actions might have on the economic and investing landscape in years to come. Finally, we have asked a dozen of our most senior and experienced portfolio managers, strategists and research analysts to share some of their personal experiences from past crises, ranging from the crash of ’87 to the eurozone sovereign debt crisis. While no two shocks or recessions are the same, we hope that this montage will provide some useful perspective as we navigate the current crisis.

Global government bond returns are down slightly since our last publication, while global equity returns are higher

EXHIBIT 1: CHANGE OF EXPECTED RETURNS FROM 9/30/19 TO 3/31/20 FOR SELECTED ASSETS

Fixed income assets (%, local expected return)

Asset Sep-30 Mar-31 Change

U.S. cash 1.9% 1.6% -0.3%

U.S. short Treasuries 2.7% 2.3% -0.4%

U.S. intermediate Treasuries

2.7% 2.2% -0.5%

U.S. long Treasuries 1.6% 0.3% -1.3%

Euro cash 0.6% 0.6% 0.0%

Euro government bonds 0.7% 1.0% 0.3%

World government bonds*

2.5% 2.4% -0.1%

U.S. aggregate bonds 3.1% 2.8% -0.3%

U.S. investment grade corporate bonds

3.4% 3.8% 0.4%

U.S. high yield bonds 5.2% 6.9% 1.7%

Equities and alternatives assets (%, local expected return)

Asset Sep-30 Mar-31 Change

AC world equity* 6.5% 8.1% 1.6%

U.S. large cap 5.6% 7.2% 1.6%

Euro area large cap 5.8% 8.2% 2.4%

Japanese equity 5.5% 6.5% 1.0%

Emerging market equity*

9.2% 10.5% 1.3%

Private equity 8.8% 9.8% 1.0%

U.S. core real estate 5.8% 6.6% 0.8%

Source: LTCMAs, J.P.Morgan Asset Management Multi-Asset Solutions; data as of April 2020. Note: Short Treasuries - 1 to 5 Yrs Maturity; Intermediate Treasuries - 1 to 10 Yrs; Long Treasuries - Over 20 Yrs.* Composite returns are listed in USD terms.

J .P. MORGAN ASSET MANAGEMENT 3

LT C M A M A R K-T O - M A R K E T: C O V I D -1 9 – N E W C Y C L E , N E W S TA R T I N G P O I N T

Change in expected returns for selected assets

In providing this mark-to-market of our return expectations, we should first note that we have not altered any of the equilibrium economic assumptions or normalization pathways that we published in November 2019. Our economic framework is based on a supply-side model that provides an estimate of trend growth for countries and regions. While COVID-19 is clearly having a deep impact on economic activity today, we see few first-order impacts on the long-term potential growth of the economy. Simply put, we don’t see the coronavirus-linked recession as significantly changing potential growth in the long term. Certainly, some of the policy measures being rolled out today could have an impact at the margin, and we will assess these in our 25th edition of the LTCMAs, due in November, but for the purposes of this exercise we are keeping our ultimate equilibrium growth, inflation and policy rates unchanged.

As stock markets slumped in March, sovereign bond yields fell and credit spreads widened, translating to a drop in expected returns of 30 basis points (bps) for world government bonds2 and a jump of 170bps for U.S. high yield bonds when we mark-to-market off of March 31 asset prices. But as we delve deeper, we find some interesting nuances. The decline in government bond returns is profound for U.S. Treasuries – with expected returns for U.S. 10-year notes falling 70bps and for the long Treasuries index falling 130bps. By contrast, expected returns for euro government bonds are actually 30bps better, reflecting the extraordinarily low yields already in place well before the start of the coronavirus crisis (Exhibit 2).

Across geographies, the returns on longer-duration bonds are worse than those for cash

EXHIBIT 2: KEY BOND EXPECTED RETURNS (USD, EUR, JPY, GBP) AND FORECAST INFLATION

-2%

-1%

0%

1%

2%

3%

USD GBP EUR JPY

Cash return Bond index return Long end return Inflation rate

Bond return comparison LTCMA update 2020, local expected return, %

Source: LTCMAs, J.P.Morgan Asset Management Multi-Asset Solutions; data as of April 2020.Note: USD refers to the US Government Bond Index Return.

2 Global government bonds, hedged in USD.

Key expected bond returns and forecast inflation

Expected returns in credit have improved more or less in inverse proportion to credit quality. This reflects both the level of spread widening that took place and the shorter duration of speculative grade bonds compared with investment grade. The March 31 mark-to-market doesn’t account for the Fed’s recent decision to buy corporate bonds, including some BB rated bonds, which has compressed spreads quickly in April. Equally, however, it does not reflect either the recent oil price volatility or the extended leverage in some sectors – both of which may act to increase credit losses in the near term. On balance, expected returns in credit have risen, and in some cases they approach those available in equity markets. Meanwhile, government bond returns have fallen and in most instances are now negative in real terms. Although duration is set to remain in demand while the world is in recession, today’s buyers of bonds really shouldn’t be looking to hang onto them for the long haul.

Expected returns for stocks have risen across the board by between 100bps and 250bps. This may seem counterintuitive given recent commentary on the risks to earnings, dividends and buybacks. But even though short-term fluctuations in earnings are important, within our LTCMA equity framework we focus on trend earnings, which are linked to long-term potential growth. At the same time, we would not expect restrictions on cash return to persist for long after the crisis and recession start to clear. Although in certain regions and sectors there is near-term pressure to reduce payouts, we don’t expect that to become a lasting theme since the nature of this shock was not a result of corporate misbehavior.

At this stage we don’t expect the current recession to significantly affect potential growth in the long run largely because the losses have been socialized – taken on to the governments’ balance sheet. The medium-term implications for household and corporate financial health should be limited and as a result trend earnings and margins remain largely stable in our outlook. Thus the major change to our forecasts is linked to valuations, and therefore to prevailing prices.

U.S. large cap stocks were long the most expensive of equities, yet throughout the last expansion they set the pace globally due to the high quality of the market and the tilt toward technology. As of March 31, expected returns for U.S. large caps had risen from 5.60% to 7.20%, reflecting the sharp drop in the index over March. While this puts expected returns from U.S. equities much closer to what we consider their fair “secular” level,3 expected returns for other regions now stand well ahead of the U.S. In local currency terms, returns on euro area equities increase 240bps to 8.20%, emerging market (EM) equities increase 90bps to 9.60%, and Japanese equities increase 100bps to 6.50%. Given the current overvaluation of the U.S. dollar, the currency effect further amplifies the expected return premium for non-U.S. markets. But when this is put into risk-adjusted terms, the non-U.S. return premium is lessened (Exhibit 3).

3 Secular return expectations were referenced in both the 2019 and 2020 LTCMA notes and refer to the anticipated level of returns from an asset at equilibrium; in the case of equities, this eliminates the effect of valuation and margins from the estimate.



A rise in expected returns for private equity and real assets

For financial alternatives – notably private equity and hedge funds – the most important driver of returns is the expected return on public asset markets. Higher expected returns across public equity markets translate to an increase in expected returns for cap-weighted private equity of 100bps to 9.80%. Our alpha projections continue to be relatively aggressive for both hedge funds and private equity and recent market volatility actually reinforces our conviction that there is a good medium-term outlook for alpha generation. Notably, dry powder on private equity balance sheets can be deployed now at lower entry multiples, broadly offsetting higher debt funding costs, and higher volatility plus greater dispersion augurs well for hedge fund alpha trends.

Within commodities the plunge in energy prices raises the expected return outlook despite there being no change to our underlying trend growth assumptions. For gold, meanwhile, we have left our return expectations unchanged despite the strong rally in the metal. Over the long run we expect our projection of a weaker dollar and an eventual rebound in inflation to support expected returns for gold.

Expected returns for private real assets have also risen, in our view, but we caveat this statement knowing that the actual marks-to-market are typically possible only six to eight weeks after quarter end. As a result, our estimates based on a theoretical March 31 mark-to-market necessarily have a wide confidence band. We think as a base case that capital values for real assets may be marked down as much as 10% as a result of the prevailing crisis. However, unlike the global financial crisis, when inflated asset values drove impairments, we see much of the markdown arising from the recession-induced near-term hit to cash flows. In the fullness of time, we expect these cash flows to rebound – first in the more stable core sectors, such as logistics, and rather later in more cyclical sectors like hotels.

This translates to an increase in expected returns of between 70bps and 100bps for real estate, and around 70bps for infrastructure, which is generally less cyclical and has greater cash flow protection; REIT returns increase meaningfully due to higher leverage and valuation adjustments.

With expected returns from bonds now impaired due to low starting yields, real assets with reliable noncyclical cash flows are likely to receive renewed attention from asset allocators. As investors move on from the liquidity fears that led to market turmoil in March, it is worth noting that it was real asset innovators that emerged as winners in the post-2008 period. Those assets exposed to technology and to renewables fared especially well, and while we think these themes remain strongly in play for the next cycle, there is an added dimension of fiscal stimulus. Sectors that benefit from this fiscal largesse also stand to be among the winners in the next cycle.

What secular themes might characterize the next cycle?

Across all asset classes, we make only one alteration in this mark-to-market exercise – the starting price. Given that price action, particularly in equity and credit markets, remains highly volatile, we would note that the mark-to-market based on prices from March 31 serves mainly as a guide. Over the coming months, the likely character of the next cycle and the implications of recent policy innovations will become clearer. But one point from this exercise is very clear and is borne out by examining the expected returns based on different starting asset prices (Exhibit 4): The more prices fall in the short run, the greater the boost to long-term expected returns. Put another way, the more bearish one is today, the more bullish one should be about long-run returns.

Equity returns have moved higher, driven by better starting valuations. This has implications for Sharpe ratios as well.

EXHIBIT 3: SHARPE RATIOS FOR KEY EQUITY CLASSES, MID-YEAR UPDATE VS 2020 LTCMAS

Mid-year update 2020 Sharpe ratio LTCMA 2020 Sharpe ratio

0.26

0.27

0.36

0.35

0.39

0.39

0.45

0.42

0.00 0.10 0.20 0.30 0.40 0.50

U.S. large cap

Euro area large cap

Japanese equity

Emerging market equity

Mid-year update 2020 expected return, USD LTCMA expected return, USD

5.6%

7.7%

7.2%

9.2%

7.2%

10.0%

8.2%

10.5%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0%

U.S. large cap

Euro area large cap

Japanese equity

Emerging market equity

Source: LTCMAs, J.P.Morgan Asset Management Multi-Asset Solutions; data as of April 2020.Sharpe Ratio = (Compound Return - Cash Return) / Volatility.

Source: LTCMAs, J.P.Morgan Asset Management Multi-Asset Solutions; data as of April 2020.



On the face of it, this may seem an odd statement to make, but it reflects an important observation, which is that we should not confuse cyclical and secular drivers of returns. As we learned in the global financial crisis, treating even profound cyclical issues – banking stability, for example – as a secular drag on returns can lead to an underestimate of long-term returns. Policymakers could, and did, find ways to help asset market returns recover. At the core of our LTCMA framework are our underlying economic building blocks of population, productivity and policy. And while we will have to account for some policy shifts in the longer run – particularly how successfully fiscal stimulus is deployed, and how it is ultimately paid for – the other building blocks of our framework are quite stable. As a result, while starting points matter greatly to our return outlook, we urge readers not to mistake today’s cyclical issues for secular headwinds.

Moving beyond the immediate impact of the price volatility on our return expectations, there are some secular themes that we believe might come to characterize the next cycle. First, we believe that fiscal stimulus will be a game changer. In our 2020 edition of the LTCMAs, we wrote about the failure of monetary policy, noting that in the next recession fiscal stimulus would also be required. Our main surprise is that this has happened so quickly and so decisively. While the current recession will naturally see concurrent disinflationary pressure and low bond yields,

we believe more expansionary fiscal policy will be a permanent feature as we emerge from the recession despite the fact that governments will have accumulated significant amounts of debt. There is simply no appetite for new wave of austerity. As a result, we expect both monetary and fiscal policy to remain expansionary into the recovery (a stark difference from the post-global financial crisis period). This in turn should lead eventually to steeper curves and reflationary pressure in the intermediate term.

This is likely to be highly supportive for equities relative to bonds over the full extent of our 10- to 15-year forecast horizon – something hinted at if we look at the extreme levels that equity risk premia have now reached in all major markets (Exhibit 5). Nevertheless, steeper curves and more scope for a reflationary cycle in the next expansion could prompt a shift in equity leadership. Value stocks never quite had their moment over the last 10 years as low yields and a very low inflation backdrop favored longer-duration equity and growth as a style. From a regional perspective, this played to the strengths of the U.S. market – and with the surge in technology it meant that the 2010s really was “the American decade” for stock market returns. The technology theme is here to stay, but with scope for steeper curves, reflation – and the possibility of fiscal stimulus sharply boosting investment in renewables and sustainability – the 2020s might see other regions start to play catch-up.

Entry points are an important driver of long-term returns, especially when markets are as volatile as they have been recently

EXHIBIT 4: LONG-TERM RETURN SENSITIVITY TO ENTRY POINT FOR U.S. EQUITY AND U.S. 10-YEAR NOTE

Local expected return S&P 500 U.S. 10-year Treasury

Starting point Starting level Implied LTCMA return Starting yield Implied LTCMA return

September 30, 2019 2976.74 5.6% 1.66 2.4%

Market high of last 6 months 3386.15 4.5% 0.54 1.6%

Market low of last 6 months 2237.40 8.5% 1.94 2.6%

March 31, 2020 2584.59 7.2% 0.67 1.7%

April 17, 2020 2874.56 6.1% 0.64 1.6%

Source: LTCMAs, J.P.Morgan Asset Management Multi-Asset Solutions; data as of April 2020. Note: Implied LTCMA Returns are calculated to the nearest 0.1%.

The recent decline in bond yields has pushed equity risk premia to near historical highs

EXHIBIT 5: EQUITY RISK PREMIA FOR KEY EQUITY MARKETS

-2%

0%

2%

4%

6%

8%

10%

1984 1989 1994 1999 2004 2009 2014 2019

GFC U.S. Europe Japan EM

Source: Datastream, LTCMAs, J.P.Morgan Asset Management Multi-Asset Solutions; data as of April 2020.



The start of a new cycle

The past few weeks will go down in history as one of the sharpest upheavals of economic policy and asset markets ever witnessed. It will also come to be seen as the end of the longest economic expansion on record and – critically – the start of a new cycle. That cycle will have its own unique characteristics, and we expect to be writing on themes such as technology, sustainability, share of economic returns between capital and labor, reflation and style rotation as the new cycle starts to take shape. Still, some of the issues we can see today are immutable: Stock returns are profoundly above bond returns; the simple 60/40 stock-bond allocation is changing, with cash flows from alternatives and real assets increasingly a substitute for coupon income; and diversi-fication remains of paramount importance (Exhibits 6A and 6B).

We believe that the economy will, in time, bounce back strongly from this recession. And while we do not yet fully know what will define the next cycle, we remain convinced that investment opportunities will present themselves as the new economic themes and priorities become clear.

Since our last update, the stock-bond frontier has steepened markedly

EXHIBIT 6A: USD STOCK-BOND FRONTIERS EXHIBIT 6B: EUR STOCK-BOND FRONTIER

2020 Mid-year update2020 stock-bond frontier2008 stock-bond frontier 60/40 portfolio (2008)

Updated 60/40 portfolio60/40 portfolio (2020)

Com

poun

d re

turn

(%)

Volatility

0

2

4

6

8

10

12

0 5 10 15 20 25

U.S. cash

U.S. HY

U.S. core RE

AC World equity

EM equity

Private equity

U.S. agg bonds

EM debt(hard currency)

U.S. intermediate Treasuries

U.S. large cap

Global infrastructure debt

Div. hedge funds

Global infrastructure equity

2020 Mid-year update2020 stock-bond frontier

Updated 60/40 portfolio60/40 portfolio (2020)

2008 stock-bond frontier 60/40 portfolio (2008)

Com

poun

d re

turn

(%)

Volatility

0

1

2

3

4

5

6

7

8

9

0 2 4 6 8 10 12 14 16 18 20

Eurocash

U.S. large cap (hedged)

Private equity

Euro area large cap

AC World equity

European ex-UK core RE

Euro gov’t bonds

EM debt (hard currency, hedged)

World gov’t bonds (hedged)

Euro agg bonds

Euro gov’t I-L bonds

U.S. HY (hedged)

Div hedge funds (hedged)

Source: LTCMAs, J.P.Morgan Asset Management Multi-Asset Solutions; data as of April 2020.


P R E V I O U S F I N A N C I A L C R I S E S : R E C O L L E C T I O N S A N D I N S I G H T S F R O M S E N I O R I N V E S T O R S A N D S T R AT E G I S T S

Previous financial crises: Recollections and insights from senior investors and strategists

While no two crises are identical, the lessons of history can provide a helpful framework for investors trying to navigate the coronavirus shock to the economy and markets. Drawing on their experiences of past crises, from the 1987 stock market crash to the sovereign debt crisis, our most senior portfolio managers, strategists and research analysts share their personal recollections and lessons learned. It’s a varied montage that we hope will resonate.



Lessons in risk-taking from the summer of 1998

“After 42 years in the business, I sometimes feel like I’ve seen everything. But I’ve never seen anything like the current crisis.”

By the summer of 1998, I had been running hedging and arbitrage strategies for institutional clients for almost 20 years. I thought that the decisions I had made during the 1987 crash would be the defining moment of my career. Little did I know what lay ahead.

That summer, cracks began to appear in Russian debt markets and other emerging markets. Options going out six months to a year, which I would typically be buying for hedging purposes, were trading incredibly cheap in terms of the forecast for risk. I snapped them up for clients that wanted to hedge. Meanwhile, in the arbitrage strategies that I ran, spreads were exceptionally narrow. On a risk-reward basis, these relationships made no sense, and I believed they were unsustainable. I slashed arbitrage risk across portfolios.

Then came the September demise of hedge fund Long-Term Capital Management, whose portfolio positioning (including ungodly amounts of leverage) had been driving markets. The fund’s unraveling created an extraordinary opportunity. I sold longer-dated volatility on equity indices for three times what I had paid earlier that summer, and at a premium even to levels reached around the 1987 crash. In addition, the internet craze was in full swing, enabling a successful arbitrage play: buying the calls on an internet stock and shorting the stock against it.

Looking back, the decisions I made in 1998 seem straightforward, but at the time they felt scary. Rather than a defining moment, they could have spelled the end of my career if my positioning had gone the wrong way. And that lesson has stayed with me.

After 42 years in the business, I sometimes feel like I’ve seen everything. But I’ve never seen anything like the current crisis, unleashed by a global pandemic. No one knows how long or deep the downturn will be. Given that uncertainty, it’s a time for balanced risk-taking.

Jeffrey Geller, CFA

Chief Investment

Officer,

Multi-Asset Solutions

The 1987 crash underscores the value of long-term investing

“The 1987 crash was without an obvious fundamental cause or significant economic consequence.”

In the fall of 1987, I was teaching an economics course at Michigan State University. On Monday, October 19, an excited student ran into my office to tell me that the Dow Jones Industrial Average had fallen by 508 points, which at the time was 22.6%. I explained to him why that couldn’t have happened – but of course it had, in the single biggest daily percentage decline in U.S. history.

In retrospect, the 1987 crash taught us a great deal.

First, it was a crash without an obvious fundamental cause. The stock market had been rising strongly for almost five years without a significant correction, and valuations were above average levels. However, the economy was growing steadily and geopolitical tensions were not particularly abnormal. Some have pointed to a falling dollar as a cause for the crash, but it is hard to argue that changes in exchange rates could justify wiping out over 20% of the value of U.S. companies.

Second, it was a crash without significant economic consequence. Consumer spending held up well in the months after the 1987 crash, and the economy continued to grow steadily until the mild recession of 1990.

Third, the crash serves as the single biggest reminder that stock market returns are not normally distributed. The standard deviation of daily returns in the year before the crash was just 25 index points. As has often been the case before and since, the decline in the market was exacerbated by trades designed to de-risk portfolios by dumping stocks or stock index futures as the market declined.

Finally, the crash underscores the value of long-term investing. If my student, instead of racing into my office that afternoon, had run off to a stockbroker, invested his money and achieved the average return of the S&P 500 since then, he would have made 10.9% annually, including dividends. However, if on that afternoon he had arrived in tears to tell me that he had put his savings into the market the Friday before the Black Monday crash, he would still have made an annual 10.0% over the subsequent years.

Dr. David Kelly, CFAChief Global

Strategist, Head

of Global Market

Insights Strategy



Lessons from the 2000 tech boom/bust

“Stocks are worth their future cash flows – there is no substitute.”

I loved being a technology investor in the late 1990s – it was such an exciting time. The internet, just emerging, unleashed fantastic possibilities. You could buy things online! Work from home! Connect with your friends! The “old” analog economy was ceding ground to the “new” digital economy. Just putting “dot-com” in a corporate name made the valuation soar, occasionally past 100 times earnings (if there were no earnings, often “eyeballs” on a website sufficed).

Tech stocks doubled and then doubled again. It seemed everyone from taxi drivers to doctors wanted to be a day trader. Most crises are rooted in fear; this one was driven by greed.

The market peaked in March of 2000. It wasn’t a big bang, and no single event caused the unraveling. High profile bankruptcies and 9/11 were contributing factors, but overall it was a slow, steady erosion, ultimately culminating in a peak-to-trough drop of 78% for the tech-heavy Nasdaq. It took 15 years for the index to reach its prior peak.

Some lessons from that era have stayed with me:

• It’s easy to get caught up in the hype: We all want to believe in innovation and growth.

• Change happens more slowly than you expect, but then it flies. The internet did change everything, but it took longer than people forecast. We needed the convergence of mobility, big data and the cloud for the change to fully accelerate.

• Stocks are worth their future cash flows – there is no substitute.

• Stocks can go down much further than you ever thought possible, even after they have already plummeted.

• You can’t set it and forget it. Most of the tech leaders of the dot-com era never recovered. New leaders emerged.

From all these lessons, I draw one conclusion. Active and engaged stock selection is key to long-term investing success.

Lee Spelman, CFA Head of U.S. Equity

Lessons in leverage from 2000-02 credit markets

“We may be living with a lower quality investment universe for quite some time to come.”

When volatility started to pick up in U.S. credit markets in 2000, I had recently started a new job managing global credit portfolios at an asset management firm. Markets were focused on increased corporate leverage and the specter of rating downgrades. When I look back on the 2000-02 period, I see clear similarities to the current environment – “leverage” and “fallen angels” are hardly unfamiliar concepts these days — but also important differences.

Several factors were specific to the earlier era. First were the effects of the 1990s deregulation of the telecom industry (leading to significant overcapacity) and the California electricity market. Elements of this deregulation helped set the stage for instances of corporate malfeasance, which resulted in the collapse of Enron and Worldcom. (I remember one stressful weekend following our decision to sell Enron based on our mounting concerns about the company’s operations. We decided to hold off on selling the euro-denominated debt, expecting a higher price on Monday. Indeed, we did sell at close to par, and weeks before the company collapsed.) Another defining event of that era was the shock of 9/11. In the end, the 2001-02 period saw an unprecedented number of fallen angels as the economy slipped into recession.

U.S. corporations entered that recession with stretched balance sheets, but after leverage peaked in 2002 it then came down steadily. And here’s where I see a key divergence from the current cycle. Companies entered the 2020 recession with higher leverage than at the 2002 peak, and they will likely emerge into the next cycle with even more debt on their balance sheets.

We do not expect a V-shaped recovery, and in a less than robust economic environment companies may remain considerably more leveraged than in past cycles. At the same time, though, the Federal Reserve will, for the first time, buy bonds of certain fallen angels (companies with investment grade ratings as of March 22), thus providing a market backstop. On balance, we may be living with a lower quality investment universe for quite some time to come.

Lisa Coleman

Head of Global

Investment Grade

Corporate Credit



2000–02: The pain of bear market rallies

“A bear market rally can make you a hero or … something else altogether.”

In 1999, as the tech boom roared, I was fresh out of university, a newly minted portfolio manager on the European behavioral finance equities team. Having studied the various principles of valuation, I was interested to see that a discounted cash flow could easily justify any share price as long as your forecasts were optimistic enough and your terminal value was suitably extravagant.

As the cycle neared its peak, I was concentrating on mid and small cap companies. Looking back, I see that I was very lucky to be working for an experienced portfolio manager who had seen several bear markets in his time. He kept me focused on corporate cash flows and balance sheets.

Two lessons from the 2000-02 bear market have stayed with me. First, bear market rallies can be brutal. In 2001, I recall, the FTSE fell by 15% overall, but there was a 20% rally in the final months of the year. We won’t know for some time whether the recent rally this year is in fact a bear market episode. Depending on how you are positioned, a bear market rally can make you a hero or … something else altogether. In my early years in the business, I learned that it helps to keep true to your investment framework while remaining humble enough to shift course when the evidence changes.

Second, I learned that investors may overlook valuations for a period of time, but it’s rarely a permanent condition. Value stocks had been somewhat out of fashion in the later stages of the late 1990s bull market. But once the bear market ended in 2003 and the stage was set for a reacceleration of growth, investors had the luxury of being more price sensitive. Again, only time will tell, but if the next cycle delivers higher levels of nominal growth, it could provide a tailwind for long-beleaguered value stocks.

Katy Thorneycroft

Portfolio Manager,


1987 crash: Bank training grad sees first black swan event

“By definition, black swan events are low probability occurrences. But over the past 30-plus years, they seem to arrive with some regularity.”

I was a few weeks out of the training program at J.P. Morgan when the stock market crashed on October 19, 1987, Black Monday. My desk in the old headquarters at 23 Wall Street looked out on the floor of the New York Stock Exchange. “What have I gotten myself into?” I asked myself.

At the time, the double-dip recessions of the early 1980s were fresh in people’s minds and a downturn seemed inevitable. But the stock market regained its previous highs in less than a year and a U.S. recession did not arrive for several years, not until 1990.

Coming into Black Monday, stocks were overvalued and investors were complacent. Portfolio insurance “guaranteed” downside protection – until it didn’t. Portfolio insurance clearly exacerbated the 1987 sell-off. And certainly there is an element of commonality in subsequent crises, with financial markets or financial engineering as a causal or contributing factor.

In the normal course of things, it’s hard to think about left tail or black swan events. By definition, they are low probability occurrences. But looking back over the past 30-plus years, these events seem to arrive with some regularity: the Asian financial crisis and Long-Term Capital Management, the dot-com bust, the global financial crisis, the sovereign debt crisis. Each had a slightly different contour, but each was a left tail event.

My younger colleagues find it difficult to imagine, but in October 1987 we worked without computers or cellphones. Trading was manual and slow. Today, in the midst of a global pandemic, J.P. Morgan Asset Management is, in essence, remotely run. That is remarkable – and a reminder to me of the fundamental resilience of the economy and markets through all manner of crises.

Patrik Jakobson

Portfolio Manager,




Sovereign debt crisis: The importance of a big-picture view

“I understood that the eurozone was first and foremost a political union. The crisis was more about political commitment than economics.”

For the countries bound together in Europe’s monetary union, the financial crisis did not end in 2009. Indeed, for many it was just beginning. As government debt spiraled, investors soon shifted their attention from the question of whether banks would go bust to whether sovereigns would default. As a sell-side economist during the sovereign debt crisis (which ran from roughly 2010–12), I had to form a view on whether the end result would be a breakup of the eurozone.

While every crisis is different, the analytical toolkit we use is essentially the same. From my perspective, crises are much like impressionist art. Get too close to the canvas and the art is impossible to fathom. But if you step back a few paces, it all becomes much clearer.

In a crisis, it’s essential to consider the big picture. As an economist – and a student of history – I understood that the eurozone was first and foremost a political union. In turn, the crisis was more about political commitment than economics. Because I didn’t doubt Germany’s commitment to the project, I expected compromises would ultimately be made, and they were. This was far more important than understanding the minutiae of the various bailout packages.

And I learned that it is important to step back physically as well as mentally. In the sovereign crisis, policymakers made key decisions late on a Sunday night or in the early hours of Monday morning following a eurogroup meeting. Staying awake to cover the press conference followed by a whole day of client meetings was physically as well as mentally draining. Finding a way to recuperate is essential for making clear, rational decisions.

Finally, while it’s important to have a clear view, it’s equally important to challenge that view. Team culture is critical here. Healthy debate is essential at all times, but never more so than in a crisis, when both the emotions and the stakes run high.

Karen WardChief Market

Strategist, EMEA,

Global Market

Insights Strategy

From the crucible of the 2008 crisis, the expansion and evolution of real assets

“Financial crises produce winners and losers. The real asset winners had contractual cash flows and strong counterparties.”

“Build it and they will come” was the motto of real estate investing across global markets leading up to the 2008 crisis. Working in the Middle East, I witnessed the development boom that produced some of the world’s largest structures. Although the global financial crisis was not directly connected to emerging markets, it exposed vulnerabilities that led to a prolonged real estate bust as development projects were stalled or scrapped altogether.

In the U.S., unlike the dot-com crash where real estate values were unscathed, the 2008 mortgage meltdown created ripple effects across private and public real estate. Cracks first appeared in real estate credit markets, which impacted public and then private real estate. Transaction volumes decreased, and a heightened need for liquidity led to an increase in private fund redemption queues as investors sought to withdraw capital wherever available.

Financial crises produce winners and losers. The winners had exposures to inelastic demand sectors, contractual cash flows and strong counterparties. Low leverage private core debt and primary markets core real estate equity fared better than higher leverage debt, public and noncore private real estate. This period also saw the emergence of infrastructure as an asset class. Its similar, albeit noncorrelated and more defensive, return profile relative to real estate made it a suitable complement.

Each crisis reshapes the industry it impacts, and the global financial crisis sparked a wave of innovation and opportunities for the next decade. These included the rise of infill logistics, renewable energy and globalization of real estate, and the emergence of regulation-driven asset classes such as transport leasing and mezzanine real estate. Over the long term, the safe haven characteristics of high quality cash flows of real estate and infrastructure will remain important sources of income and diversification, and investors should be on the lookout for new sources of sustainable innovation to further expand and evolve their exposure to real assets.

Pulkit Sharma, CFA, CAIA

Head of Alternatives

Investment Strategy

and Solutions



Quant chaos in the summer of 2007

“My main takeaway from this difficult period? Plainly put, there is never just one cockroach.”

In the summer of 2007, I was a client portfolio manager at J.P. Morgan, leading our behavioral finance/quantitative equities product team. In those days, quants ruled, investment performance was strong and we had just launched our first long-short product. Then everything changed, seemingly overnight. The first two weeks of August – the lead-up to the global financial crisis, as it later became clear – delivered broad-scale liquidations. Overly levered quant strategies’ returns plunged (a 5+ standard deviation event) and as a result experienced sizable redemptions. What had been up was now down. Our first instinct was to think that this was a temporary blip and we should thus stay disciplined. But we quickly understood that chaos now ruled the quant world, and investors did not like chaos. While the quants would ultimately reemerge stronger in the wake of this experience, in the subsequent two years, it is estimated, nearly 80% of quant strategy assets were liquidated.

My main takeaway from this difficult period? Plainly put, “There is never just one cockroach.” What was happening in the quant space proved to be an early warning sign of the financial stresses across much of the global economy. In other words, it was one of the first but by no means the only cockroach. As a crisis emerges, it’s human nature to find patterns that resemble prior episodes. But in reality, each crisis is different. Today I push myself to take a multi-faceted view of the market and economic environment and try to focus on what’s different from the past. While a historical perspective is helpful, too narrow a focus can turn into tunnel vision. Then you miss the fact that there are a lot more cockroaches that warrant investigation.

Ted DimigHead of U.S.

Advisory and Core

Beta Solutions,


Learning the limitations of quant models in the 2008 financial crisis

“Understanding the limitations and biases of your models can help you navigate your response to severe dislocations.”

I began my finance career in 2004, so the 2008 global financial crisis was my first experience with live market disruptions. As a quant investor, I could see that implementation decisions such as improper risk sizing and leverage overwhelmed otherwise “correct” portfolio views and positions. I learned that the true power of a robust investment process is its ability to manage through cycles of underperformance, recalibrate to new information and risk, and establish better positioning for the next market phase.

Understanding the limitations and biases of your models and processes can help you navigate your response to severe dislocations. Models based more heavily on valuations may be significantly early in signaling a market peak, whereas those based on technicals may take longer to register a turning point. Depending on the model, an investor can evaluate the necessary speed of a response and decide whether to lean into the downturn or rebound of an event.

From a quant investing perspective, our reliance on data is a humbling element of any market dislocation. In 2008, so many of our data series, such as Libor or other liquidity measures, which had worked reliably in prior periods, began to fail as liquidity and market stresses impacted not only market prices but the financial system itself. This meant that our models had difficulty interpreting the reality of current market conditions and thus could not predict where markets were headed. Being able to understand your data, its limitations and their exact impact on your models is essential to navigating these types of market events. In the current crisis, economic data will be equally challenged to keep up with the fast pace of the economy’s sudden stop and the pace (as yet unknown) of the economy’s eventual restart. Finding new sources of data to help interpret economic activity can be useful, but investors need to think carefully before jumping into anything new and untested.

Katherine Santiago Head of Quantitative

Research,




Past crises reinforce the lesson—It’s not (essentially) different this time

“I am repeatedly amazed by how resilient economies and markets are.”

On October 19, 1987, when the Dow Jones Industrial Average fell 22.6%, the biggest single-day percentage decline in U.S. history, I was working as the head of an equity sales and trading desk in the Boston office of a bulge-bracket investment banking firm. We handled dozens of convertible bond trades that day that were priced 25% or more below the previous day’s close. Even then, those prices were only that day’s clearing bid, as talk of further steep declines in markets ahead made every trade a risky proposition. As investment professionals seeing the carnage in markets, we were convinced something important was afoot that would change markets for a long time.

The next 32 years included other frightening market episodes: the 1998 crisis precipitated by the collapse of the Russian ruble and hedge fund Long-Term Capital Management, the 2000 technology stock bust and the economic and market meltdown of the global financial crisis. Looking back, a pattern seems to emerge: Shock around a completely unexpected (but still probable) event lends itself to wide-ranging explanations of possible outcomes that eventually narrow as events evolve and policymakers address the crisis as best they can.

Although the 1987 crash turned out to have no significant economic impact, financial market participants, including investors and managers, learned valuable lessons. “Portfolio insurance,” at the time the latest technique to hedge portfolios, was discredited – and then resurfaced in other forms over the subsequent decades. And in some ways, large investor redemptions during the 1987 crash paved the way for the market’s bull run in the 1990s.

The current crisis will have significant repercussions over the next couple of years, especially since a serious public health crisis is unfolding along with an important economic and market event. But I am repeatedly amazed by how resilient economies and markets are. The events of 2020 are likely to accelerate changes that are already underway but not radically alter their basic course.

Anthony WerleyChief Investment

Officer,

Endowments &

Foundations Group

From bear markets to new opportunities

“From bear markets are forged new economic expansions, new bull markets and new investment opportunities.”

In 2008, I watched the global financial crisis unfold from the vantage point of a derivatives desk. What has always struck me about the acute phase of a market dislocation is how eerily quiet dealing floors become – in stark contrast to images in the media. Asset markets may be doing somersaults, but often trading is paralyzed and the most frantic activity occurs behind office doors as the scale of the impact is assessed.

Derivatives are often associated with hedging, but the complexity of some instruments compromised their effectiveness – for instance, increased counterparty risk following the collapse of Lehman Brothers impaired the value of some hedges by far more than price action in the underlying asset. Ultimately, in any market dislocation cash is the most prized asset. Hedges are important – but they need to be simple, liquid and effective, since converting them back into cash is critical.

In a bear market, the initial shock, where cash is in high demand, passes fairly quickly. A more drawn-out phase then begins. Benjamin Graham noted that markets are “voting machines in the short run and weighing machines in the long run.” The initial shock may be analogous to investors “voting” on whether sufficient cash is available, and what follows is a weighing or calibration of the long-run impact on growth and valuations.

In the recent turmoil, central banks moved swiftly to flood markets with cash, and it is comforting that the initial dislocation phase is calming down – even if the trajectory of the economy remains uncertain. Price discovery is now possible, and the weighing phase can get underway. As the veteran of now four recessions and six major market dislocations, I can clearly see that from bear markets are forged new economic expansions, new bull markets and new investment opportunities.

John Bilton, CFAHead of Global Multi-

Asset Strategy,



Compound Return September 2019 (%)

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tion

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h

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Emer

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Loc

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Mid

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EAFE

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AC A

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AC W

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Com

mod

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Gold

Annualized Volatility (%)

Arithmetic Return March 2020 (%)

Compound Return March 2020 (%)

FIX

ED

IN

CO

ME

U.S. Inflation 2.00 2.01 1.40 2.00 1.00

U.S. Cash 1.60 1.60 0.46 1.90 0.09 1.00

U.S. Intermediate Treasuries 2.20 2.26 3.45 2.70 -0.22 0.21 1.00

U.S. Long Treasuries 0.30 0.90 11.02 1.60 -0.19 0.05 0.80 1.00

TIPS 2.40 2.54 5.39 2.70 0.10 0.07 0.59 0.56 1.00

U.S. Aggregate Bonds 2.80 2.86 3.42 3.10 -0.18 0.10 0.81 0.82 0.72 1.00

U.S. Securitized 3.00 3.03 2.46 3.30 -0.15 0.14 0.74 0.69 0.67 0.92 1.00

U.S. Short Duration Government/Credit 2.60 2.62 1.93 2.80 -0.19 0.36 0.77 0.45 0.56 0.75 0.69 1.00

U.S. Long Duration Government/Credit 2.20 2.62 9.34 2.50 -0.19 0.00 0.69 0.90 0.62 0.92 0.74 0.53 1.00

U.S. Inv Grade Corporate Bonds 3.80 3.97 5.96 3.40 -0.09 -0.03 0.40 0.50 0.63 0.80 0.67 0.55 0.78 1.00

U.S. Long Corporate Bonds 3.40 3.87 9.89 3.00 -0.15 -0.05 0.39 0.60 0.55 0.80 0.63 0.46 0.88 0.95 1.00

U.S. High Yield Bonds 6.90 7.21 8.22 5.20 0.13 -0.11 -0.26 -0.23 0.32 0.17 0.18 0.12 0.11 0.56 0.46 1.00

U.S. Leveraged Loans 5.30 5.57 7.55 5.00 0.34 -0.14 -0.53 -0.43 0.06 -0.11 -0.09 -0.15 -0.13 0.31 0.22 0.78 1.00

World Government Bonds hedged 1.80 1.84 2.99 2.10 -0.29 0.10 0.84 0.85 0.49 0.81 0.69 0.60 0.79 0.50 0.55 -0.19 -0.44 1.00

World Government Bonds 2.40 2.60 6.43 2.50 -0.10 0.10 0.66 0.51 0.57 0.70 0.61 0.68 0.60 0.53 0.52 0.14 -0.18 0.59 1.00

World ex-U.S. Government Bonds hedged 1.70 1.74 2.92 1.80 -0.30 0.07 0.72 0.74 0.39 0.72 0.60 0.53 0.72 0.47 0.52 -0.15 -0.38 0.97 0.53 1.00

World ex-U.S. Government Bonds 2.60 2.91 8.00 2.40 -0.08 0.08 0.55 0.39 0.52 0.61 0.53 0.61 0.51 0.50 0.49 0.21 -0.11 0.49 0.99 0.45 1.00

Emerging Markets Sovereign Debt 6.70 7.03 8.36 5.10 0.03 -0.02 0.18 0.20 0.57 0.55 0.52 0.38 0.48 0.76 0.68 0.71 0.40 0.26 0.47 0.26 0.49 1.00

Emerging Markets Local Currency Debt 6.00 6.69 12.17 5.90 0.06 0.10 0.15 0.06 0.40 0.39 0.34 0.37 0.32 0.54 0.48 0.58 0.27 0.15 0.59 0.16 0.64 0.78 1.00

Emerging Markets Corporate Bonds 5.70 6.02 8.20 4.90 0.12 -0.05 0.05 0.07 0.51 0.44 0.41 0.32 0.36 0.76 0.64 0.72 0.53 0.10 0.33 0.11 0.35 0.89 0.66 1.00

U.S. Muni 1-15 Yr Blend 2.50 2.55 3.15 2.50 -0.12 0.02 0.45 0.47 0.50 0.64 0.62 0.43 0.55 0.56 0.51 0.23 0.05 0.50 0.40 0.46 0.35 0.46 0.24 0.32 1.00

U.S. Muni High Yield 4.90 5.15 7.33 4.00 0.30 -0.08 -0.07 0.10 0.36 0.21 0.22 -0.04 0.20 0.39 0.30 0.40 0.52 0.04 -0.03 0.04 -0.03 0.43 0.15 0.44 0.47 1.00

EQ

UIT

IES

U.S. Large Cap 7.20 8.14 14.34 5.60 0.05 -0.06 -0.31 -0.30 0.06 0.00 0.00 -0.06 -0.01 0.28 0.25 0.69 0.55 -0.24 0.12 -0.18 0.19 0.50 0.55 0.51 -0.02 0.18 1.00

U.S. Mid Cap 6.70 7.91 16.30 5.90 0.09 -0.07 -0.33 -0.29 0.09 0.00 0.00 -0.07 -0.01 0.30 0.26 0.74 0.59 -0.26 0.09 -0.20 0.16 0.51 0.54 0.52 0.01 0.20 0.96 1.00

U.S. Small Cap 7.20 8.81 18.95 6.50 0.05 -0.08 -0.34 -0.33 0.00 -0.07 -0.06 -0.11 -0.07 0.20 0.17 0.65 0.50 -0.28 0.03 -0.22 0.10 0.41 0.48 0.41 -0.06 0.08 0.91 0.95 1.00

Euro Area Large Cap 10.00 12.00 21.47 7.70 0.03 0.01 -0.21 -0.26 0.13 0.08 0.09 0.09 0.04 0.37 0.31 0.69 0.49 -0.18 0.30 -0.14 0.38 0.60 0.69 0.57 0.04 0.14 0.84 0.82 0.74 1.00

Japanese Equity 8.20 9.19 14.80 7.20 0.01 -0.09 -0.26 -0.19 0.10 0.07 0.04 0.03 0.10 0.38 0.36 0.61 0.46 -0.19 0.17 -0.15 0.23 0.48 0.56 0.50 -0.01 0.11 0.70 0.68 0.61 0.72 1.00

Hong Kong Equity 6.70 8.51 20.06 6.30 -0.01 0.02 -0.18 -0.19 0.20 0.16 0.13 0.14 0.12 0.47 0.40 0.68 0.53 -0.15 0.23 -0.12 0.28 0.63 0.67 0.64 0.14 0.26 0.69 0.68 0.59 0.73 0.65 1.00

UK Large Cap 10.10 11.35 16.84 7.60 0.09 -0.02 -0.30 -0.30 0.13 0.04 0.04 0.02 0.02 0.39 0.33 0.72 0.61 -0.26 0.21 -0.21 0.29 0.60 0.64 0.61 0.03 0.27 0.84 0.81 0.72 0.90 0.72 0.77 1.00

EAFE Equity hedged 8.40 9.24 13.59 6.70 0.00 -0.05 -0.38 -0.32 -0.02 -0.02 -0.03 -0.08 0.00 0.31 0.29 0.70 0.59 -0.25 -0.03 -0.17 0.03 0.51 0.52 0.53 -0.01 0.19 0.88 0.86 0.79 0.88 0.79 0.73 0.88 1.00

EAFE Equity 9.20 10.46 16.81 7.20 0.05 -0.02 -0.25 -0.25 0.16 0.10 0.08 0.08 0.07 0.42 0.37 0.74 0.55 -0.20 0.29 -0.15 0.37 0.64 0.72 0.63 0.04 0.18 0.88 0.86 0.77 0.97 0.82 0.80 0.95 0.91 1.00

Emerging Markets Equity 10.50 12.43 21.12 9.20 0.07 0.05 -0.20 -0.20 0.25 0.13 0.12 0.13 0.09 0.43 0.37 0.72 0.54 -0.17 0.30 -0.14 0.38 0.67 0.78 0.66 0.05 0.24 0.76 0.77 0.67 0.83 0.68 0.88 0.83 0.76 0.87 1.00

AC Asia ex-Japan Equity 9.60 11.50 20.84 9.20 0.01 0.03 -0.18 -0.17 0.23 0.15 0.13 0.14 0.13 0.46 0.40 0.71 0.52 -0.13 0.28 -0.10 0.34 0.65 0.73 0.64 0.07 0.24 0.75 0.75 0.66 0.80 0.68 0.91 0.80 0.76 0.85 0.98 1.00

AC World Equity 8.10 9.18 15.46 6.50 0.06 -0.03 -0.28 -0.28 0.14 0.06 0.05 0.03 0.04 0.38 0.33 0.75 0.58 -0.23 0.23 -0.17 0.31 0.61 0.68 0.61 0.02 0.20 0.96 0.93 0.85 0.93 0.78 0.80 0.93 0.91 0.97 0.89 0.87 1.00

U.S. Equity Value Factor 9.80 10.88 15.59 7.20 0.03 -0.09 -0.31 -0.31 0.04 -0.02 0.00 -0.06 -0.03 0.27 0.23 0.70 0.53 -0.24 0.10 -0.18 0.17 0.48 0.55 0.49 -0.03 0.14 0.98 0.97 0.93 0.82 0.68 0.64 0.80 0.86 0.85 0.73 0.72 0.93 1.00

U.S. Equity Momentum Factor 7.80 8.76 14.52 5.40 0.10 -0.07 -0.33 -0.29 0.10 0.00 0.00 -0.07 -0.01 0.28 0.25 0.71 0.58 -0.26 0.09 -0.21 0.16 0.50 0.52 0.50 0.01 0.21 0.97 0.97 0.90 0.82 0.68 0.71 0.82 0.86 0.86 0.78 0.77 0.94 0.93 1.00

U.S. Equity Quality Factor 7.00 7.78 13.00 5.60 0.05 -0.06 -0.28 -0.27 0.08 0.02 0.02 -0.05 0.01 0.29 0.25 0.68 0.52 -0.21 0.14 -0.16 0.20 0.51 0.56 0.50 0.00 0.17 0.99 0.96 0.91 0.83 0.67 0.68 0.83 0.86 0.86 0.75 0.74 0.94 0.97 0.97 1.00

U.S. Equity Minimum Volatility Factor 6.10 6.70 11.37 5.80 0.03 -0.07 -0.21 -0.16 0.11 0.10 0.11 -0.02 0.10 0.34 0.32 0.68 0.51 -0.09 0.17 -0.04 0.22 0.54 0.58 0.50 0.08 0.22 0.94 0.92 0.87 0.77 0.62 0.63 0.77 0.81 0.81 0.70 0.69 0.89 0.93 0.92 0.95 1.00

U.S. Equity Dividend Yield Factor 8.40 9.29 14.05 6.90 0.04 -0.08 -0.24 -0.20 0.13 0.09 0.09 -0.01 0.08 0.36 0.33 0.72 0.55 -0.14 0.17 -0.09 0.23 0.56 0.60 0.53 0.10 0.22 0.95 0.95 0.90 0.79 0.65 0.66 0.80 0.83 0.84 0.74 0.72 0.91 0.96 0.92 0.96 0.97 1.00

U.S. Equity Diversified Factor 8.90 9.67 13.08 6.30 0.08 -0.08 -0.29 -0.26 0.10 0.03 0.03 -0.05 0.02 0.31 0.28 0.71 0.56 -0.20 0.12 -0.14 0.19 0.53 0.57 0.52 0.04 0.20 0.98 0.98 0.92 0.82 0.68 0.68 0.81 0.86 0.86 0.75 0.74 0.94 0.97 0.97 0.98 0.97 0.97 1.00

U.S. Convertible Bond hedged 7.20 7.72 10.62 4.60 0.08 -0.09 -0.30 -0.27 0.18 0.08 0.09 0.03 0.03 0.42 0.34 0.81 0.65 -0.22 0.12 -0.17 0.19 0.58 0.55 0.61 0.10 0.28 0.87 0.91 0.83 0.80 0.70 0.75 0.81 0.83 0.85 0.81 0.81 0.90 0.86 0.90 0.86 0.80 0.85 0.88 1.00

Global Convertible Bond 7.50 7.99 10.36 4.80 0.04 -0.06 -0.32 -0.28 0.15 0.08 0.09 0.05 0.05 0.45 0.37 0.82 0.65 -0.22 0.11 -0.16 0.18 0.62 0.58 0.66 0.10 0.27 0.86 0.88 0.79 0.85 0.74 0.80 0.85 0.89 0.89 0.84 0.84 0.91 0.84 0.88 0.85 0.79 0.83 0.86 0.97 1.00

Global Credit Sensitive Convertible 7.10 7.33 7.00 4.40 0.15 -0.03 -0.13 -0.20 -0.01 -0.02 -0.10 -0.04 0.01 0.18 0.18 0.28 0.34 -0.10 0.06 -0.06 0.10 0.18 0.19 0.24 -0.06 0.20 0.39 0.36 0.31 0.38 0.32 0.31 0.44 0.41 0.41 0.30 0.29 0.40 0.34 0.38 0.36 0.32 0.33 0.35 0.36 0.38 1.00

ALT

ER

NA

TIV

ES

Private Equity 9.80 11.58 20.17 8.80 0.19 0.04 -0.49 -0.54 0.04 -0.23 -0.17 -0.14 -0.31 0.18 0.04 0.67 0.63 -0.49 -0.05 -0.44 0.04 0.49 0.51 0.55 -0.07 0.33 0.73 0.75 0.69 0.75 0.54 0.72 0.80 0.71 0.77 0.80 0.76 0.80 0.70 0.75 0.72 0.64 0.68 0.72 0.77 0.79 0.30 1.00

U.S. Core Real Estate 6.60 7.17 11.07 5.80 0.34 -0.08 -0.37 -0.32 0.03 -0.19 -0.13 -0.25 -0.19 0.08 0.01 0.51 0.60 -0.36 -0.19 -0.32 -0.14 0.30 0.29 0.39 -0.19 0.44 0.53 0.54 0.51 0.38 0.40 0.36 0.49 0.47 0.45 0.42 0.40 0.50 0.54 0.51 0.51 0.56 0.55 0.54 0.43 0.41 0.31 0.49 1.00

U.S. Value-Added Real Estate 8.70 10.02 17.18 7.70 0.34 -0.08 -0.37 -0.32 0.03 -0.19 -0.13 -0.25 -0.19 0.08 0.01 0.51 0.60 -0.36 -0.19 -0.32 -0.14 0.30 0.29 0.39 -0.19 0.44 0.53 0.54 0.51 0.38 0.40 0.36 0.49 0.47 0.45 0.42 0.40 0.50 0.54 0.51 0.51 0.56 0.55 0.54 0.43 0.41 0.31 0.49 1.00 1.00

European ex-UK Core Real Estate 7.50 8.67 16.04 6.90 0.32 0.01 -0.52 -0.53 0.06 -0.29 -0.24 -0.19 -0.33 0.11 -0.01 0.62 0.63 -0.53 -0.02 -0.49 0.07 0.40 0.44 0.49 -0.16 0.35 0.58 0.62 0.53 0.67 0.50 0.55 0.73 0.59 0.69 0.70 0.64 0.68 0.56 0.60 0.57 0.49 0.55 0.58 0.68 0.68 0.23 0.84 0.56 0.56 1.00

Asia Pacific Core Real Estate 7.50 8.20 12.36 6.50 0.30 -0.05 -0.32 -0.26 0.19 -0.01 0.01 -0.12 -0.02 0.33 0.26 0.63 0.63 -0.31 0.09 -0.28 0.15 0.50 0.48 0.53 0.03 0.45 0.64 0.67 0.55 0.62 0.54 0.58 0.68 0.60 0.67 0.66 0.63 0.69 0.62 0.66 0.62 0.63 0.65 0.65 0.64 0.63 0.49 0.60 0.75 0.75 0.67 1.00

U.S. REITs 8.00 9.07 15.42 6.00 -0.02 -0.05 -0.01 0.06 0.23 0.27 0.27 0.07 0.26 0.43 0.41 0.61 0.36 0.09 0.26 0.11 0.28 0.55 0.55 0.46 0.19 0.25 0.72 0.75 0.73 0.63 0.51 0.47 0.59 0.62 0.65 0.55 0.55 0.69 0.74 0.69 0.73 0.80 0.80 0.75 0.64 0.60 0.19 0.43 0.61 0.61 0.38 0.61 1.00

Global Infrastructure Equity 6.70 7.21 10.46 6.00 0.22 -0.04 -0.27 -0.31 0.19 -0.03 0.02 0.00 -0.10 0.26 0.16 0.55 0.55 -0.28 0.17 -0.25 0.25 0.50 0.49 0.50 0.05 0.28 0.47 0.45 0.38 0.54 0.39 0.59 0.59 0.40 0.55 0.60 0.56 0.55 0.44 0.47 0.44 0.40 0.43 0.44 0.48 0.47 0.07 0.62 0.47 0.47 0.62 0.51 0.34 1.00

Global Infrastructure Debt 3.70 3.90 6.46 3.30 0.10 -0.03 0.31 0.48 0.66 0.63 0.55 0.35 0.63 0.83 0.76 0.43 0.31 0.41 0.30 0.37 0.25 0.64 0.29 0.70 0.49 0.56 0.08 0.11 0.01 0.14 0.15 0.27 0.21 0.10 0.18 0.24 0.27 0.15 0.06 0.10 0.08 0.15 0.15 0.12 0.25 0.26 0.08 0.18 0.17 0.17 0.16 0.28 0.25 0.25 1.00

Diversified Hedge Funds 5.00 5.26 7.37 4.50 0.22 0.06 -0.42 -0.33 0.11 -0.10 -0.11 -0.12 -0.08 0.25 0.19 0.60 0.65 -0.35 -0.07 -0.30 -0.01 0.39 0.35 0.45 -0.06 0.40 0.67 0.69 0.59 0.64 0.60 0.63 0.73 0.73 0.71 0.69 0.67 0.73 0.61 0.74 0.64 0.59 0.60 0.67 0.74 0.78 0.43 0.77 0.46 0.46 0.68 0.61 0.34 0.41 0.23 1.00

Event Driven Hedge Funds 5.70 6.08 9.02 4.80 0.21 -0.03 -0.45 -0.45 0.07 -0.11 -0.10 -0.07 -0.13 0.28 0.20 0.77 0.75 -0.41 0.01 -0.34 0.09 0.47 0.49 0.55 -0.06 0.33 0.79 0.83 0.76 0.76 0.66 0.69 0.82 0.81 0.82 0.77 0.74 0.85 0.78 0.82 0.77 0.70 0.76 0.79 0.84 0.86 0.50 0.80 0.56 0.56 0.73 0.69 0.50 0.47 0.14 0.86 1.00

Long Bias Hedge Funds 5.50 6.07 11.05 4.80 0.13 -0.03 -0.39 -0.40 0.09 -0.05 -0.06 -0.01 -0.07 0.31 0.24 0.75 0.65 -0.35 0.11 -0.30 0.20 0.51 0.58 0.55 -0.05 0.22 0.86 0.89 0.82 0.83 0.74 0.80 0.86 0.85 0.89 0.88 0.86 0.93 0.84 0.90 0.85 0.77 0.81 0.86 0.90 0.92 0.42 0.82 0.46 0.46 0.70 0.66 0.54 0.52 0.10 0.85 0.93 1.00

Relative Value Hedge Funds 5.50 5.72 6.79 4.50 0.25 -0.03 -0.40 -0.37 0.18 0.00 0.02 -0.01 -0.04 0.40 0.30 0.84 0.84 -0.35 -0.02 -0.29 0.05 0.55 0.50 0.61 0.06 0.46 0.68 0.73 0.63 0.67 0.63 0.70 0.76 0.75 0.75 0.75 0.72 0.76 0.68 0.72 0.66 0.63 0.68 0.69 0.80 0.83 0.43 0.76 0.55 0.55 0.69 0.68 0.45 0.52 0.32 0.84 0.92 0.86 1.00

Macro Hedge Funds 3.60 3.89 7.78 3.30 -0.10 0.15 0.12 0.10 0.24 0.20 0.11 0.26 0.20 0.29 0.27 0.18 0.05 0.16 0.32 0.18 0.33 0.23 0.30 0.19 0.11 0.10 0.25 0.24 0.14 0.31 0.27 0.30 0.33 0.26 0.34 0.38 0.36 0.33 0.19 0.29 0.25 0.23 0.22 0.24 0.29 0.33 0.14 0.30 -0.08 -0.08 0.21 0.11 0.12 0.06 0.18 0.54 0.31 0.40 0.29 1.00

Direct Lending 8.50 9.37 13.87 7.00 0.38 -0.11 -0.49 -0.48 0.14 -0.22 -0.12 -0.23 -0.29 0.07 -0.03 0.67 0.72 -0.47 -0.26 -0.41 -0.19 0.39 0.27 0.47 -0.04 0.39 0.54 0.61 0.53 0.43 0.32 0.44 0.53 0.54 0.48 0.54 0.48 0.55 0.53 0.61 0.53 0.49 0.53 0.57 0.65 0.64 0.24 0.65 0.54 0.54 0.61 0.59 0.31 0.39 0.15 0.63 0.70 0.66 0.74 0.04 1.00

Commodities 4.50 5.71 16.13 2.50 0.28 0.07 -0.14 -0.23 0.29 0.02 -0.01 0.10 -0.03 0.24 0.17 0.46 0.39 -0.25 0.28 -0.26 0.33 0.39 0.49 0.43 -0.11 0.16 0.45 0.47 0.38 0.47 0.36 0.47 0.60 0.36 0.54 0.60 0.52 0.55 0.41 0.49 0.43 0.37 0.43 0.43 0.50 0.47 0.28 0.58 0.38 0.38 0.59 0.55 0.26 0.47 0.17 0.55 0.58 0.60 0.56 0.40 0.51 1.00

Gold 3.00 4.46 17.63 3.00 0.02 0.08 0.36 0.27 0.47 0.40 0.37 0.38 0.31 0.37 0.30 0.10 -0.09 0.25 0.51 0.20 0.50 0.35 0.40 0.32 0.23 0.09 -0.03 -0.01 -0.06 0.06 -0.02 0.22 0.10 -0.13 0.08 0.23 0.19 0.07 -0.05 0.01 -0.01 0.00 0.01 -0.01 0.09 0.09 -0.01 0.06 -0.03 -0.03 0.04 0.21 0.04 0.15 0.33 0.10 0.05 0.12 0.07 0.40 0.05 0.43 1.00

U . S . D O L L A R A S S U M P T I O N S



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Gold

Annualized Volatility (%)

Arithmetic Return March 2020 (%)

Compound Return March 2020 (%)

FIX

ED

IN

CO

ME

U.S. Inflation 2.00 2.01 1.40 2.00 1.00

U.S. Cash 1.60 1.60 0.46 1.90 0.09 1.00

U.S. Intermediate Treasuries 2.20 2.26 3.45 2.70 -0.22 0.21 1.00

U.S. Long Treasuries 0.30 0.90 11.02 1.60 -0.19 0.05 0.80 1.00

TIPS 2.40 2.54 5.39 2.70 0.10 0.07 0.59 0.56 1.00

U.S. Aggregate Bonds 2.80 2.86 3.42 3.10 -0.18 0.10 0.81 0.82 0.72 1.00

U.S. Securitized 3.00 3.03 2.46 3.30 -0.15 0.14 0.74 0.69 0.67 0.92 1.00

U.S. Short Duration Government/Credit 2.60 2.62 1.93 2.80 -0.19 0.36 0.77 0.45 0.56 0.75 0.69 1.00

U.S. Long Duration Government/Credit 2.20 2.62 9.34 2.50 -0.19 0.00 0.69 0.90 0.62 0.92 0.74 0.53 1.00

U.S. Inv Grade Corporate Bonds 3.80 3.97 5.96 3.40 -0.09 -0.03 0.40 0.50 0.63 0.80 0.67 0.55 0.78 1.00

U.S. Long Corporate Bonds 3.40 3.87 9.89 3.00 -0.15 -0.05 0.39 0.60 0.55 0.80 0.63 0.46 0.88 0.95 1.00

U.S. High Yield Bonds 6.90 7.21 8.22 5.20 0.13 -0.11 -0.26 -0.23 0.32 0.17 0.18 0.12 0.11 0.56 0.46 1.00

U.S. Leveraged Loans 5.30 5.57 7.55 5.00 0.34 -0.14 -0.53 -0.43 0.06 -0.11 -0.09 -0.15 -0.13 0.31 0.22 0.78 1.00

World Government Bonds hedged 1.80 1.84 2.99 2.10 -0.29 0.10 0.84 0.85 0.49 0.81 0.69 0.60 0.79 0.50 0.55 -0.19 -0.44 1.00

World Government Bonds 2.40 2.60 6.43 2.50 -0.10 0.10 0.66 0.51 0.57 0.70 0.61 0.68 0.60 0.53 0.52 0.14 -0.18 0.59 1.00

World ex-U.S. Government Bonds hedged 1.70 1.74 2.92 1.80 -0.30 0.07 0.72 0.74 0.39 0.72 0.60 0.53 0.72 0.47 0.52 -0.15 -0.38 0.97 0.53 1.00

World ex-U.S. Government Bonds 2.60 2.91 8.00 2.40 -0.08 0.08 0.55 0.39 0.52 0.61 0.53 0.61 0.51 0.50 0.49 0.21 -0.11 0.49 0.99 0.45 1.00

Emerging Markets Sovereign Debt 6.70 7.03 8.36 5.10 0.03 -0.02 0.18 0.20 0.57 0.55 0.52 0.38 0.48 0.76 0.68 0.71 0.40 0.26 0.47 0.26 0.49 1.00

Emerging Markets Local Currency Debt 6.00 6.69 12.17 5.90 0.06 0.10 0.15 0.06 0.40 0.39 0.34 0.37 0.32 0.54 0.48 0.58 0.27 0.15 0.59 0.16 0.64 0.78 1.00

Emerging Markets Corporate Bonds 5.70 6.02 8.20 4.90 0.12 -0.05 0.05 0.07 0.51 0.44 0.41 0.32 0.36 0.76 0.64 0.72 0.53 0.10 0.33 0.11 0.35 0.89 0.66 1.00

U.S. Muni 1-15 Yr Blend 2.50 2.55 3.15 2.50 -0.12 0.02 0.45 0.47 0.50 0.64 0.62 0.43 0.55 0.56 0.51 0.23 0.05 0.50 0.40 0.46 0.35 0.46 0.24 0.32 1.00

U.S. Muni High Yield 4.90 5.15 7.33 4.00 0.30 -0.08 -0.07 0.10 0.36 0.21 0.22 -0.04 0.20 0.39 0.30 0.40 0.52 0.04 -0.03 0.04 -0.03 0.43 0.15 0.44 0.47 1.00

EQ

UIT

IES

U.S. Large Cap 7.20 8.14 14.34 5.60 0.05 -0.06 -0.31 -0.30 0.06 0.00 0.00 -0.06 -0.01 0.28 0.25 0.69 0.55 -0.24 0.12 -0.18 0.19 0.50 0.55 0.51 -0.02 0.18 1.00

U.S. Mid Cap 6.70 7.91 16.30 5.90 0.09 -0.07 -0.33 -0.29 0.09 0.00 0.00 -0.07 -0.01 0.30 0.26 0.74 0.59 -0.26 0.09 -0.20 0.16 0.51 0.54 0.52 0.01 0.20 0.96 1.00

U.S. Small Cap 7.20 8.81 18.95 6.50 0.05 -0.08 -0.34 -0.33 0.00 -0.07 -0.06 -0.11 -0.07 0.20 0.17 0.65 0.50 -0.28 0.03 -0.22 0.10 0.41 0.48 0.41 -0.06 0.08 0.91 0.95 1.00

Euro Area Large Cap 10.00 12.00 21.47 7.70 0.03 0.01 -0.21 -0.26 0.13 0.08 0.09 0.09 0.04 0.37 0.31 0.69 0.49 -0.18 0.30 -0.14 0.38 0.60 0.69 0.57 0.04 0.14 0.84 0.82 0.74 1.00

Japanese Equity 8.20 9.19 14.80 7.20 0.01 -0.09 -0.26 -0.19 0.10 0.07 0.04 0.03 0.10 0.38 0.36 0.61 0.46 -0.19 0.17 -0.15 0.23 0.48 0.56 0.50 -0.01 0.11 0.70 0.68 0.61 0.72 1.00

Hong Kong Equity 6.70 8.51 20.06 6.30 -0.01 0.02 -0.18 -0.19 0.20 0.16 0.13 0.14 0.12 0.47 0.40 0.68 0.53 -0.15 0.23 -0.12 0.28 0.63 0.67 0.64 0.14 0.26 0.69 0.68 0.59 0.73 0.65 1.00

UK Large Cap 10.10 11.35 16.84 7.60 0.09 -0.02 -0.30 -0.30 0.13 0.04 0.04 0.02 0.02 0.39 0.33 0.72 0.61 -0.26 0.21 -0.21 0.29 0.60 0.64 0.61 0.03 0.27 0.84 0.81 0.72 0.90 0.72 0.77 1.00

EAFE Equity hedged 8.40 9.24 13.59 6.70 0.00 -0.05 -0.38 -0.32 -0.02 -0.02 -0.03 -0.08 0.00 0.31 0.29 0.70 0.59 -0.25 -0.03 -0.17 0.03 0.51 0.52 0.53 -0.01 0.19 0.88 0.86 0.79 0.88 0.79 0.73 0.88 1.00

EAFE Equity 9.20 10.46 16.81 7.20 0.05 -0.02 -0.25 -0.25 0.16 0.10 0.08 0.08 0.07 0.42 0.37 0.74 0.55 -0.20 0.29 -0.15 0.37 0.64 0.72 0.63 0.04 0.18 0.88 0.86 0.77 0.97 0.82 0.80 0.95 0.91 1.00

Emerging Markets Equity 10.50 12.43 21.12 9.20 0.07 0.05 -0.20 -0.20 0.25 0.13 0.12 0.13 0.09 0.43 0.37 0.72 0.54 -0.17 0.30 -0.14 0.38 0.67 0.78 0.66 0.05 0.24 0.76 0.77 0.67 0.83 0.68 0.88 0.83 0.76 0.87 1.00

AC Asia ex-Japan Equity 9.60 11.50 20.84 9.20 0.01 0.03 -0.18 -0.17 0.23 0.15 0.13 0.14 0.13 0.46 0.40 0.71 0.52 -0.13 0.28 -0.10 0.34 0.65 0.73 0.64 0.07 0.24 0.75 0.75 0.66 0.80 0.68 0.91 0.80 0.76 0.85 0.98 1.00

AC World Equity 8.10 9.18 15.46 6.50 0.06 -0.03 -0.28 -0.28 0.14 0.06 0.05 0.03 0.04 0.38 0.33 0.75 0.58 -0.23 0.23 -0.17 0.31 0.61 0.68 0.61 0.02 0.20 0.96 0.93 0.85 0.93 0.78 0.80 0.93 0.91 0.97 0.89 0.87 1.00

U.S. Equity Value Factor 9.80 10.88 15.59 7.20 0.03 -0.09 -0.31 -0.31 0.04 -0.02 0.00 -0.06 -0.03 0.27 0.23 0.70 0.53 -0.24 0.10 -0.18 0.17 0.48 0.55 0.49 -0.03 0.14 0.98 0.97 0.93 0.82 0.68 0.64 0.80 0.86 0.85 0.73 0.72 0.93 1.00

U.S. Equity Momentum Factor 7.80 8.76 14.52 5.40 0.10 -0.07 -0.33 -0.29 0.10 0.00 0.00 -0.07 -0.01 0.28 0.25 0.71 0.58 -0.26 0.09 -0.21 0.16 0.50 0.52 0.50 0.01 0.21 0.97 0.97 0.90 0.82 0.68 0.71 0.82 0.86 0.86 0.78 0.77 0.94 0.93 1.00

U.S. Equity Quality Factor 7.00 7.78 13.00 5.60 0.05 -0.06 -0.28 -0.27 0.08 0.02 0.02 -0.05 0.01 0.29 0.25 0.68 0.52 -0.21 0.14 -0.16 0.20 0.51 0.56 0.50 0.00 0.17 0.99 0.96 0.91 0.83 0.67 0.68 0.83 0.86 0.86 0.75 0.74 0.94 0.97 0.97 1.00

U.S. Equity Minimum Volatility Factor 6.10 6.70 11.37 5.80 0.03 -0.07 -0.21 -0.16 0.11 0.10 0.11 -0.02 0.10 0.34 0.32 0.68 0.51 -0.09 0.17 -0.04 0.22 0.54 0.58 0.50 0.08 0.22 0.94 0.92 0.87 0.77 0.62 0.63 0.77 0.81 0.81 0.70 0.69 0.89 0.93 0.92 0.95 1.00

U.S. Equity Dividend Yield Factor 8.40 9.29 14.05 6.90 0.04 -0.08 -0.24 -0.20 0.13 0.09 0.09 -0.01 0.08 0.36 0.33 0.72 0.55 -0.14 0.17 -0.09 0.23 0.56 0.60 0.53 0.10 0.22 0.95 0.95 0.90 0.79 0.65 0.66 0.80 0.83 0.84 0.74 0.72 0.91 0.96 0.92 0.96 0.97 1.00

U.S. Equity Diversified Factor 8.90 9.67 13.08 6.30 0.08 -0.08 -0.29 -0.26 0.10 0.03 0.03 -0.05 0.02 0.31 0.28 0.71 0.56 -0.20 0.12 -0.14 0.19 0.53 0.57 0.52 0.04 0.20 0.98 0.98 0.92 0.82 0.68 0.68 0.81 0.86 0.86 0.75 0.74 0.94 0.97 0.97 0.98 0.97 0.97 1.00

U.S. Convertible Bond hedged 7.20 7.72 10.62 4.60 0.08 -0.09 -0.30 -0.27 0.18 0.08 0.09 0.03 0.03 0.42 0.34 0.81 0.65 -0.22 0.12 -0.17 0.19 0.58 0.55 0.61 0.10 0.28 0.87 0.91 0.83 0.80 0.70 0.75 0.81 0.83 0.85 0.81 0.81 0.90 0.86 0.90 0.86 0.80 0.85 0.88 1.00

Global Convertible Bond 7.50 7.99 10.36 4.80 0.04 -0.06 -0.32 -0.28 0.15 0.08 0.09 0.05 0.05 0.45 0.37 0.82 0.65 -0.22 0.11 -0.16 0.18 0.62 0.58 0.66 0.10 0.27 0.86 0.88 0.79 0.85 0.74 0.80 0.85 0.89 0.89 0.84 0.84 0.91 0.84 0.88 0.85 0.79 0.83 0.86 0.97 1.00

Global Credit Sensitive Convertible 7.10 7.33 7.00 4.40 0.15 -0.03 -0.13 -0.20 -0.01 -0.02 -0.10 -0.04 0.01 0.18 0.18 0.28 0.34 -0.10 0.06 -0.06 0.10 0.18 0.19 0.24 -0.06 0.20 0.39 0.36 0.31 0.38 0.32 0.31 0.44 0.41 0.41 0.30 0.29 0.40 0.34 0.38 0.36 0.32 0.33 0.35 0.36 0.38 1.00

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Private Equity 9.80 11.58 20.17 8.80 0.19 0.04 -0.49 -0.54 0.04 -0.23 -0.17 -0.14 -0.31 0.18 0.04 0.67 0.63 -0.49 -0.05 -0.44 0.04 0.49 0.51 0.55 -0.07 0.33 0.73 0.75 0.69 0.75 0.54 0.72 0.80 0.71 0.77 0.80 0.76 0.80 0.70 0.75 0.72 0.64 0.68 0.72 0.77 0.79 0.30 1.00

U.S. Core Real Estate 6.60 7.17 11.07 5.80 0.34 -0.08 -0.37 -0.32 0.03 -0.19 -0.13 -0.25 -0.19 0.08 0.01 0.51 0.60 -0.36 -0.19 -0.32 -0.14 0.30 0.29 0.39 -0.19 0.44 0.53 0.54 0.51 0.38 0.40 0.36 0.49 0.47 0.45 0.42 0.40 0.50 0.54 0.51 0.51 0.56 0.55 0.54 0.43 0.41 0.31 0.49 1.00

U.S. Value-Added Real Estate 8.70 10.02 17.18 7.70 0.34 -0.08 -0.37 -0.32 0.03 -0.19 -0.13 -0.25 -0.19 0.08 0.01 0.51 0.60 -0.36 -0.19 -0.32 -0.14 0.30 0.29 0.39 -0.19 0.44 0.53 0.54 0.51 0.38 0.40 0.36 0.49 0.47 0.45 0.42 0.40 0.50 0.54 0.51 0.51 0.56 0.55 0.54 0.43 0.41 0.31 0.49 1.00 1.00

European ex-UK Core Real Estate 7.50 8.67 16.04 6.90 0.32 0.01 -0.52 -0.53 0.06 -0.29 -0.24 -0.19 -0.33 0.11 -0.01 0.62 0.63 -0.53 -0.02 -0.49 0.07 0.40 0.44 0.49 -0.16 0.35 0.58 0.62 0.53 0.67 0.50 0.55 0.73 0.59 0.69 0.70 0.64 0.68 0.56 0.60 0.57 0.49 0.55 0.58 0.68 0.68 0.23 0.84 0.56 0.56 1.00

Asia Pacific Core Real Estate 7.50 8.20 12.36 6.50 0.30 -0.05 -0.32 -0.26 0.19 -0.01 0.01 -0.12 -0.02 0.33 0.26 0.63 0.63 -0.31 0.09 -0.28 0.15 0.50 0.48 0.53 0.03 0.45 0.64 0.67 0.55 0.62 0.54 0.58 0.68 0.60 0.67 0.66 0.63 0.69 0.62 0.66 0.62 0.63 0.65 0.65 0.64 0.63 0.49 0.60 0.75 0.75 0.67 1.00

U.S. REITs 8.00 9.07 15.42 6.00 -0.02 -0.05 -0.01 0.06 0.23 0.27 0.27 0.07 0.26 0.43 0.41 0.61 0.36 0.09 0.26 0.11 0.28 0.55 0.55 0.46 0.19 0.25 0.72 0.75 0.73 0.63 0.51 0.47 0.59 0.62 0.65 0.55 0.55 0.69 0.74 0.69 0.73 0.80 0.80 0.75 0.64 0.60 0.19 0.43 0.61 0.61 0.38 0.61 1.00

Global Infrastructure Equity 6.70 7.21 10.46 6.00 0.22 -0.04 -0.27 -0.31 0.19 -0.03 0.02 0.00 -0.10 0.26 0.16 0.55 0.55 -0.28 0.17 -0.25 0.25 0.50 0.49 0.50 0.05 0.28 0.47 0.45 0.38 0.54 0.39 0.59 0.59 0.40 0.55 0.60 0.56 0.55 0.44 0.47 0.44 0.40 0.43 0.44 0.48 0.47 0.07 0.62 0.47 0.47 0.62 0.51 0.34 1.00

Global Infrastructure Debt 3.70 3.90 6.46 3.30 0.10 -0.03 0.31 0.48 0.66 0.63 0.55 0.35 0.63 0.83 0.76 0.43 0.31 0.41 0.30 0.37 0.25 0.64 0.29 0.70 0.49 0.56 0.08 0.11 0.01 0.14 0.15 0.27 0.21 0.10 0.18 0.24 0.27 0.15 0.06 0.10 0.08 0.15 0.15 0.12 0.25 0.26 0.08 0.18 0.17 0.17 0.16 0.28 0.25 0.25 1.00

Diversified Hedge Funds 5.00 5.26 7.37 4.50 0.22 0.06 -0.42 -0.33 0.11 -0.10 -0.11 -0.12 -0.08 0.25 0.19 0.60 0.65 -0.35 -0.07 -0.30 -0.01 0.39 0.35 0.45 -0.06 0.40 0.67 0.69 0.59 0.64 0.60 0.63 0.73 0.73 0.71 0.69 0.67 0.73 0.61 0.74 0.64 0.59 0.60 0.67 0.74 0.78 0.43 0.77 0.46 0.46 0.68 0.61 0.34 0.41 0.23 1.00

Event Driven Hedge Funds 5.70 6.08 9.02 4.80 0.21 -0.03 -0.45 -0.45 0.07 -0.11 -0.10 -0.07 -0.13 0.28 0.20 0.77 0.75 -0.41 0.01 -0.34 0.09 0.47 0.49 0.55 -0.06 0.33 0.79 0.83 0.76 0.76 0.66 0.69 0.82 0.81 0.82 0.77 0.74 0.85 0.78 0.82 0.77 0.70 0.76 0.79 0.84 0.86 0.50 0.80 0.56 0.56 0.73 0.69 0.50 0.47 0.14 0.86 1.00

Long Bias Hedge Funds 5.50 6.07 11.05 4.80 0.13 -0.03 -0.39 -0.40 0.09 -0.05 -0.06 -0.01 -0.07 0.31 0.24 0.75 0.65 -0.35 0.11 -0.30 0.20 0.51 0.58 0.55 -0.05 0.22 0.86 0.89 0.82 0.83 0.74 0.80 0.86 0.85 0.89 0.88 0.86 0.93 0.84 0.90 0.85 0.77 0.81 0.86 0.90 0.92 0.42 0.82 0.46 0.46 0.70 0.66 0.54 0.52 0.10 0.85 0.93 1.00

Relative Value Hedge Funds 5.50 5.72 6.79 4.50 0.25 -0.03 -0.40 -0.37 0.18 0.00 0.02 -0.01 -0.04 0.40 0.30 0.84 0.84 -0.35 -0.02 -0.29 0.05 0.55 0.50 0.61 0.06 0.46 0.68 0.73 0.63 0.67 0.63 0.70 0.76 0.75 0.75 0.75 0.72 0.76 0.68 0.72 0.66 0.63 0.68 0.69 0.80 0.83 0.43 0.76 0.55 0.55 0.69 0.68 0.45 0.52 0.32 0.84 0.92 0.86 1.00

Macro Hedge Funds 3.60 3.89 7.78 3.30 -0.10 0.15 0.12 0.10 0.24 0.20 0.11 0.26 0.20 0.29 0.27 0.18 0.05 0.16 0.32 0.18 0.33 0.23 0.30 0.19 0.11 0.10 0.25 0.24 0.14 0.31 0.27 0.30 0.33 0.26 0.34 0.38 0.36 0.33 0.19 0.29 0.25 0.23 0.22 0.24 0.29 0.33 0.14 0.30 -0.08 -0.08 0.21 0.11 0.12 0.06 0.18 0.54 0.31 0.40 0.29 1.00

Direct Lending 8.50 9.37 13.87 7.00 0.38 -0.11 -0.49 -0.48 0.14 -0.22 -0.12 -0.23 -0.29 0.07 -0.03 0.67 0.72 -0.47 -0.26 -0.41 -0.19 0.39 0.27 0.47 -0.04 0.39 0.54 0.61 0.53 0.43 0.32 0.44 0.53 0.54 0.48 0.54 0.48 0.55 0.53 0.61 0.53 0.49 0.53 0.57 0.65 0.64 0.24 0.65 0.54 0.54 0.61 0.59 0.31 0.39 0.15 0.63 0.70 0.66 0.74 0.04 1.00

Commodities 4.50 5.71 16.13 2.50 0.28 0.07 -0.14 -0.23 0.29 0.02 -0.01 0.10 -0.03 0.24 0.17 0.46 0.39 -0.25 0.28 -0.26 0.33 0.39 0.49 0.43 -0.11 0.16 0.45 0.47 0.38 0.47 0.36 0.47 0.60 0.36 0.54 0.60 0.52 0.55 0.41 0.49 0.43 0.37 0.43 0.43 0.50 0.47 0.28 0.58 0.38 0.38 0.59 0.55 0.26 0.47 0.17 0.55 0.58 0.60 0.56 0.40 0.51 1.00

Gold 3.00 4.46 17.63 3.00 0.02 0.08 0.36 0.27 0.47 0.40 0.37 0.38 0.31 0.37 0.30 0.10 -0.09 0.25 0.51 0.20 0.50 0.35 0.40 0.32 0.23 0.09 -0.03 -0.01 -0.06 0.06 -0.02 0.22 0.10 -0.13 0.08 0.23 0.19 0.07 -0.05 0.01 -0.01 0.00 0.01 -0.01 0.09 0.09 -0.01 0.06 -0.03 -0.03 0.04 0.21 0.04 0.15 0.33 0.10 0.05 0.12 0.07 0.40 0.05 0.43 1.00

2 0 2 0 E S T I M AT E S A N D C O R R E L AT I O N S

U . S . D O L L A R A S S U M P T I O N SNote: All estimates on this page are in U.S. dollar terms. Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations to all of these asset classes and strategies. Please note that all information shown is based on qualitative analysis. Exclusive reliance on this information is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only–they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice.

Source: J.P. Morgan Asset Management; as of March 31, 2020. Please note that LTCMA return numbers are now rounded to the nearest 0.1% (having been nearest 0.25% in previous years). Alternative asset classes (including hedge funds, private equity, real estate, direct lending and infrastructure) are unlike other asset categories shown above in that there is no underlying investible index. The return estimates for these alternative asset classes and strategies are estimates of the industry average, net of manager fees. The dispersion of return among managers of these asset classes and strategies is typically significantly wider than that of traditional asset classes. Correlations of value-added and core real estate in their local currencies are identical since value-added local returns are scaled versions of their corresponding core real estate local returns. All returns are nominal. For the full opportunity set, please contact your J.P. Morgan representative.



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FOR INSTITUTIONAL / WHOLESALE / PROFESSIONAL CLIENTS … · 2020. 11. 3. · LTCMA Mark-to-Market: COVID-19 – New cycle, new starting point FOR INSTITUTIONAL / WHOLESALE / PROFESSIONAL