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Market Review and 2020 Outlook

U.S. Economy

U.S. economy overview

3U.S. Economy

▪ 4Q GDP of 2.3% forecasted by GDP Now from Atlanta Fed

▪ The unemployment rate for December was unchanged at 3.5% with 145K new jobs added

▪ CPI increased 2.1% over the trailing 12 months with core CPI at 2.3%

▪ Articles of impeachment against Trump are expected to be filed shortly

▪ Phase one agreement reached in China tariff talks

Updated economic forecasts from the IMF

2019 Projections2019 Change in

Forecast2020 Projections

2020 Change in Forecast

United States 2.4% 0.1% 2.1% 0.2%

Euro Area 1.2% -0.1% 1.4% -0.1%

Emerging and Developing Economies

3.9% -0.5% 4.6% -0.2%

China 6.1% -0.2% 5.8% -0.3%

4

U.S. projections improve from April, while Euro area and emerging markets saw declines

Source: IMF

U.S. Economy

Prolonged low unemployment signals possible recession

5

The headline unemployment rate falls below the natural unemployment rate an average of 41 months before a recession

Source: St. Louis Fed

0%

2%

4%

6%

8%

10%

12%

Unem

plo

ym

ent

Rate

(%

)

USA Unemployment Rate Natural Rate of Unemployment (Long-Term)

U.S. Economy

Recession odds have dropped

6

Based on the shape of the yield curve, the NY Fed is predicting a 23% chance of a recession within the next 12 months

Source: NY Federal Reserve

0%

10%

20%

30%

40%

50%

Dec-95 Jan-98 Feb-00 Mar-02 Apr-04 May-06 Jun-08 Jul-10 Aug-12 Sep-14 Oct-16 Nov-18 Dec-20

U.S. Economy

Trade with China falls, but made up elsewhere

7

Exports and imports with China have fallen more than 10% YTD, while aggregate trade remains flat as other countries such as Mexico and Vietnam have benefited from the trade war

Source: U.S. Census

$345

$1,672

$84

$1,106

$302

$1,671

$70

$1,096

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Imports from China Imports from World Exports to China Exports to World

$ B

illio

ns

2018 through August 2019 through August

U.S. Economy

Reduced dependence on the Middle East

8

Reliance on OPEC/Persian Gulf energy inputs has decreased over time

Source: U.S. Energy Information Administration

U.S. Economy

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Jan

-00

Jul-

00

Jan

-01

Jul-

01

Jan

-02

Jul-

02

Jan

-03

Jul-

03

Jan

-04

Jul-

04

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

Jan

-14

Jul-

14

Jan

-15

Jul-

15

Jan

-16

Jul-

16

Jan

-17

Jul-

17

Jan

-18

Jul-

18

Jan

-19

Jul-

19

Crude/Petroleum Imports from OPEC/Persian Gulf Other Country Imports

Consumer fundamentals

9

Gradually upticking student loan, credit card, and auto loan delinquencies, but recently student loan delinquencies downticked

Transition into Serious Delinquency (90+ Days) by Loan Type

Note: 4 Quarter Moving SumSource: NY Fed Consumer Credit Panel/Equifax, 3Q19 latest as of December 31, 2019

Fixed Income

0%

2%

4%

6%

8%

10%

12%

Auto Loan Credit Card Mortgage Home Equity Line of Credit Student Loan

Fixed Income

Month (%) Qtr (%) YTD (%) 1 Yr (%) 3 Yr (%) 5 Yr (%) 10 Yr (%)

Broad Market Indices Blm BC Aggregate -0.1 0.2 8.7 8.7 4.0 3.0 3.7

Intermediate Indices Blm BC Int. Gov./Credit 0.1 0.4 6.8 6.8 3.2 2.6 3.1

Government Only Indices Blm BC Long Gov. -2.8 -4.1 14.7 14.7 6.9 4.2 7.0

Blm BC Int. Gov. 0.0 0.0 5.2 5.2 2.6 2.0 2.4

Blm BC 1-3 Year Gov. 0.2 0.5 3.6 3.6 1.9 1.4 1.2

Blm BC U.S. TIPS 0.4 0.8 8.4 8.4 3.3 2.6 3.4

Credit Indices Blm BC U.S. Long Credit 0.1 1.2 23.4 23.4 8.9 6.3 8.0

Blm BC High Yield 2.0 2.6 14.3 14.3 6.4 6.1 7.6

CS Leveraged Loan Index 1.6 1.7 8.2 8.2 4.5 4.5 5.2

Securitized Bond Indices Blm BC MBS 0.3 0.7 6.4 6.4 3.2 2.6 3.2

Blm BC ABS 0.1 0.4 4.5 4.5 2.6 2.2 2.7

Blm BC CMBS -0.3 -0.3 8.3 8.3 4.2 3.4 5.7

Non-U.S. Indices Blm BC Global Aggregate Hedged -0.2 -0.5 8.2 8.2 4.3 3.6 4.1

JPM EMBI Global Diversified 2.0 1.8 15.0 15.0 6.7 6.2 6.9

JPM GBI-EM Global Diversified 0.9 1.6 12.3 12.3 8.1 7.4 7.8

Municipal Indices Blm BC Municipal 5 Year 0.3 1.0 5.4 5.4 3.4 2.4 2.9

Blm BC HY Municipal 0.3 0.9 10.7 10.7 8.3 5.9 7.2

Fixed income: an early start to the roaring 2020s?

11

U.S.-China Phase 1 deal announcement steepened yield curve in December

Note: the local currency GBI index is unhedged and denominated in local currencies. Sources: Bloomberg Barclays, Credit Suisse, JPMorgan as of December 31, 2019

Fixed Income

Return to an upward sloping curve

12

The yield curve inverted on the short end following the 2016-2018 hikes, but is now almost entirely upward sloping

U.S. Treasury Yield Curve

Source: Bloomberg as of December 31, 2019

Fixed Income

Historical Rate Levels

12/31/2019 11/30/2019 9/30/2019 12/31/2018 12/31/2017 12/31/2016 12/31/2015

3 Mo 1.55 1.59 1.88 2.45 1.39 0.51 0.16

6 Mo 1.60 1.63 1.83 2.56 1.53 0.62 0.49

1 Year 1.59 1.60 1.75 2.63 1.76 0.85 0.65

2 Year 1.58 1.61 1.63 2.48 1.89 1.20 1.06

5 Year 1.69 1.62 1.55 2.51 2.20 1.93 1.76

10 Year 1.92 1.78 1.68 2.69 2.40 2.45 2.27

20 Year 2.25 2.07 1.94 2.87 2.58 2.79 2.67

30 Year 2.39 2.21 2.12 3.02 2.74 3.06 3.01

0%

1%

2%

3%

4%

5%

6%

7%

0 5 10 15 20 25 30

Yie

ld

Maturity (Year)

4/7/00 11/27/06 12/31/19

What inversion?

13

3Q19 short end inversion now almost forgotten; previous inversions had full inversion between 2yr and 30yr

Yield Curve

Source: U.S. Treasury

Fixed Income

Peak inversion 4/7/00

Peak inversion 11/27/06

Still upward sloping

90.9%

9.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1.50%-1.75% 1.75%-2.00%

Fed Funds Range

Potential rate hike back on table, with low probability

14

Market expects low probability of 9.1% for a hike at end of January, next Fed meeting with over 50% chance of cut is November 2020

Probability of Fed Funds Rate at January 29, 2020 Fed Meeting

Source: Bloomberg; latest data as of January 7, 2019

Fixed Income

Current Fed Funds Range: 1.50% – 1.75%

Inflation still shy of Fed’s targeted 2%

15

Market’s expectation of inflation rose sharply in December with U.S.-China Phase 1 deal announcement

Market-Implied vs. Actual Inflation

Note: Market-implied based on 10-year breakeven inflation rate minus 50bp, as Core PCE is typically 50bp lower than CPI, and the 10-year breakeven inflation is based on CPISource: Federal Reserve; latest data as of December 31, 2019

Fixed Income

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Infl

ati

on (

%)

Market-Implied Core PCE YoY Inflation (%) Realized Core PCE YoY Inflation (%)

U.S. Equities

U.S. equities: New all-time highs set in December

17

U.S. equity index returns

Source: Morningstar Direct as of December 31, 2019

U.S. Equities

Month (%) 3-Month (%) YTD (%) 1 Year (%) 3 Year (%) 5 Year (%) 10 Year (%)

Broad Market Indices

Dow Jones 1.9 6.7 25.3 25.3 15.7 12.6 13.4

Wilshire 5000 2.9 9.1 31.0 31.0 14.5 11.4 13.4

Russell 3000 2.9 9.1 31.0 31.0 14.6 11.2 13.4

Large-Cap Market Indices

S&P 500 3.0 9.1 31.5 31.5 15.3 11.7 13.6

Russell 1000 2.9 9.0 31.4 31.4 15.0 11.5 13.5

Russell 1000 Value 2.8 7.4 26.5 26.5 9.7 8.3 11.8

Russell 1000 Growth 3.0 10.6 36.4 36.4 20.5 14.6 15.2

Mid-Cap Market Indices

Russell MidCap 2.3 7.1 30.5 30.5 12.1 9.3 13.2

Russell MidCap Value 3.0 6.4 27.1 27.1 8.1 7.6 12.4

Russell MidCap Growth 1.2 8.2 35.5 35.5 17.4 11.6 14.2

Small-Cap Market Indices

Russell 2000 2.9 9.9 25.5 25.5 8.6 8.2 11.8

Russell 2000 Value 3.5 8.5 22.4 22.4 4.8 7.0 10.6

Russell 2000 Growth 2.3 11.4 28.5 28.5 12.5 9.3 13.0

162

164

166

168

170

172

2,400

2,500

2,600

2,700

2,800

2,900

3,000

3,100

3,200

3,300

Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19

S&P 500 Price Level Earnings per Share

Expected

Multiple expansion drove returns in 2019

18

Earnings steadily declined amid rising prices

Source: Bloomberg as of December 31, 2019

U.S. Equities

A stellar year for U.S. equities

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

19

S&P 500 had the 4th highest returning calendar year the past 30 years

Source: eVestment; data as of December 31, 2019

U.S. Equities

Despite strong markets, negative returns are normal

15.8%

5.5%

-37.0%

26.5%

15.1%

2.1%

16.0%

32.4%

13.7%

1.4%

12.0%

21.8%

-4.4%

31.5%

-7%-10%

-47%

-27%

-16%-19%

-10%-6% -7%

-12%-9%

-3%

-19%

-7%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Retu

rns

Calendar Year Return Max. Drawdown

20

S&P 500 maximum market drawdown

Source: Bloomberg as of December 31, 2019

U.S. Equities

The bull market has been strong, but increasingly wild

-55%-16% -19% -12% -13% -10% -19%

498%

285%249%

89% 91%

30% 40%

-100%

0%

100%

200%

300%

400%

500%

600%

Financial Crisis Soverign DebtCrisis

U.S. DebtDowngrade

China A-ShareBubble

China Slowdown U.S. Rate &Inflation Fears

Global GrowthSlowdown

Correction Return Cumulative Post-Correction Return

21

Market corrections are temporary movements having little impact over the long-term

Source: Bloomberg; cumulative returns calculated through December 31, 2019

U.S. Equities

2007-2009 Spring ‘10 2011 Summer ‘15 Winter ‘16 Winter ‘18 Fall ‘18

Technology sector has best year since 2009

-10%

0%

10%

20%

30%

40%

50%

Cons. Disc. Cons. Stap. Energy Financials Health Care Industrials Tech Materials Comm.Serv.

Real Estate Utilities

Retu

rns

Dec. 3-Month YTD

22

S&P 500 sector performance

Source: Morningstar Direct as of December 31, 2019

U.S. Equities

Four industry groups drove 4Q return

60.7%

16.2%

44.9%46.4%

34.6%

53.1%

0%

10%

20%

30%

40%

50%

60%

70%

Russell 1000 Russell Mid Cap Russell 2000

Co

ntr

ibuti

on t

o R

etu

rn

December 4th Quarter

23

Tech hardware & equipment, software & services, semiconductors, pharma biotech & life sciences

Source: Bloomberg; data as of December 31, 20191Contribution to return from Tech Hardware & Equipment, Software & Services, Semiconductors, Pharma, Biotech & Life Sciences

U.S. Equities

Mega-cap technology leading the market

0%

2%

4%

6%

8%

10%

12%

14%

Apple Inc Microsoft Corp Facebook Inc A JPMorgan Chase & Co Amazon.com Inc

24

Largest contributors to S&P 500 return in 2019

Source: Morningstar; data as of December 31, 2019

U.S. Equities

Factor returns were mixed over the 4th quarter

-0.2%

-0.9%

0.4% 0.1% 0.3%

-0.7%-0.2%

-1.1%

-2.3%

1.2%1.6% 1.4%

-1.5%

-2.7%

0.4%

-0.9% -0.8%

3.5%

0.5%

-5.7%

-2.9%

-8%

-6%

-4%

-2%

0%

2%

4%

Momentum Low Vol Value Growth Quality Size Yield

Retu

rns

Rela

tive t

o t

he R

uss

ell 1

000

Month 3 Mo. YTD

25

YTD factor performance

Source: Bloomberg as of December 31, 2019

U.S. Equities

Small caps take the brunt of tariff woes

26

Small-cap valuations relative to large-cap

Source: Bloomberg as of December 31, 2019

Un

derv

alu

ed

Ove

rvalu

ed

U.S. Equities

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Dec-19

Relative P/E Avg Relative P/E

Small-caps remain in correction territory

-0.5%-0.3% -0.2%

-4.2%

-9.3%-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

NASDAQ 100(12/26/19)

S&P 500(12/27/19)

Russell Mid Cap(12/26/19)

Russell 2000(8/31/18)

Russell Microcap(8/31/18)

27

Percent away from prior all-time highs

Source: Bloomberg; date of all-time high noted in parentheses; as of December 31, 2019

U.S. Equities

Value is usually positive… until recently

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

Ro

llin

g 1

0-Y

ear

Retu

rns

U.S. Value Premium

28

Consistent value premium since the Great Depression

Source: Kenneth French Data Library; December 31, 1926 – November 29, 2019. U.S. value represented by Fama/French HML

U.S. Equities

U.S. valuations continue to rise

29

U.S. equity core index valuations

Source: Bloomberg. TTM P/E is adjusted for negative earnings. Small-cap forward P/E is adjusted for negative earnings. Percentiles are based on data Jan. 1995 – Dec. 2019

U.S. Equities

S&P 500 Russell 1000 Russell Mid Cap Russell 2000

Valuation Metrics

CurrentHistorical

Percentile (%)Current

Historical Percentile (%)

CurrentHistorical

Percentile (%)Current

Historical Percentile (%)

P/E 21.5 81 21.4 83 20.9 87 16.3 25

Forward P/E 19.8 81 20.3 86 20.7 89 16.1 80

P/B 3.6 84 3.5 85 2.8 84 2.1 37

P/S 2.4 100 2.3 100 1.7 97 1.0 58

P/CF 15.5 87 15.4 86 13.0 93 12.7 52

EV/EBITDA 14.1 99 14.5 100 15.7 98 15.3 80

Average 89 90 92 55

27.2%

13.3%

-11.5%

2.3%

9.4%

2.0%

9.6%

4.2%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

3/31/1984 -3/31/1987

6/30/1988 -12/31/1990

6/30/2000 -12/31/2001

3/31/2004 -9/30/2008

9/30/2010 -9/30/2011

3/31/2015 -6/30/2016

6/30/2018 -9/30/2019

Annualized Return Average

Equities are usually positive in a slowing GDP env.

30

S&P 500 performance during slowing GDP environments

Source: Bloomberg. Annualized returns of the last five periods of declining, but not negative, GDP growth

U.S. Equities

Political infighting is inconclusive

31

S&P 500 return during impeachment proceedings

Source: Bloomberg as of December 31, 2019

U.S. Equities

-26.0%

23.8%

8.9%

-30%

-20%

-10%

0%

10%

20%

30%

Nixon (10/30/1973 - 8/9/1974) Clinton (10/8/1998 - 12/19/1998) Trump (9/24/2019 - 12/31/2019)

S&P 500 Return S&P 500 Std. Dev. S&P 500 Avg. Std. Dev. (10/30/1973 - 12/31/2019)

Equities can still move higher

32

Yield curve inversion doesn’t signal immediate trouble for equities

Source: Bloomberg, National Bureau of Economic Research

U.S. Equities

Inversion Date Recession Start# of Months Until

RecessionS&P 500 Return For

the Period

12/27/2005 Dec. 2007 23 25.2%

5/26/1998 Mar. 2001 32 19.8%

12/13/1988 Jul. 1990 19 40.9%

9/12/1980 Jul. 1981 10 8.5%

8/18/1978 Jan. 1980 17 9.7%

Average 20.2 20.8%

Non-U.S. Equities

Non-U.S. equities: finish the year with a bang

34

Double digit returns across the board in 2019

Source: eVestment as of December 31, 2019

Non-U.S. Equities

Month (%) 3-Month (%) YTD (%) 1 Year (%) 3 Year (%) 5 Year (%) 10 Year (%)

MSCI ACWI 3.5 9.0 26.6 26.6 12.4 8.4 8.8

MSCI ACWI ex. U.S. 4.3 8.9 21.5 21.5 9.9 5.5 5.0

MSCI EAFE 3.3 8.2 22.0 22.0 9.6 5.7 5.5

MSCI EAFE Local 1.3 5.2 21.7 21.7 7.7 6.7 7.2

MSCI Emerging Markets 7.5 11.8 18.4 18.4 11.6 5.6 3.7

MSCI EM Local 5.7 9.5 18.1 18.1 11.5 7.5 6.1

MSCI EAFE Small-Cap 4.4 11.5 25.0 25.0 10.9 8.9 8.7

MSCI EM Small-Cap 6.1 9.5 11.5 11.5 6.7 3.0 3.0

MSCI Frontier 4.3 6.6 18.0 18.0 9.2 2.7 5.3

35% 36%

23%

28%

68%

51%

35%

67%

0%

10%

20%

30%

40%

50%

60%

70%

80%

MSCI ACWI ex US MSCI EAFE MSCI EAFE Small Cap MSCI EM

2018 2019

Active managers rebound in 2019

35

Percentage of active managers who beat the benchmark in 2019

Source: Morningstar Direct. MSCI EAFE small cap universe includes mangers with a similar developed market small cap benchmark. Data is net of fees.

Non-U.S. Equities

GDP growth estimates down across the board

0%

1%

2%

3%

4%

5%

6%

7%

World UnitedStates

EuropeanUnion

UnitedKingdom

Germany Japan EM China SouthKorea

Brazil India

Annual G

DP

Gro

wth

Rate

2018 Actual 2019 Estimate 2020 Estimate

36

Global growth is forecast at 3.0% for 2019, lowest since 2008-2009, and only Japan is expected to see accretive GDP growth

Source: International Monetary Fund, World Economic Outlook Database, October 2019

Non-U.S. Equities

Contractionary signs in major developed markets

37

Manufacturing PMIs trending below 50 in Germany, Japan, and U.K.

Source: Bloomberg

Non-U.S. Equities

Contraction Expansion

41 42 43 44 45 46 47 48 49 50 51

Japan

U.K.

Germany

Eurozone

Dec-19

Nov-19

Oct-19

Sep-19

Aug-19

Jul-19

Germany avoids a technical recession

0.9%

-0.2%

0.6%

0.5%

0.4%

0.8%

0.6%

0.2%

0.4%

1.2%

0.6%

0.9%

0.7%

0.1%

0.4%

-0.1%

0.2%

0.4%

-0.1%

0.1%

-0.3%

-0.1%

0.1%

0.3%

0.5%

0.7%

0.9%

1.1%

1.3%

Quart

erl

y G

DP

Gro

wth

Rate

38

Europe’s largest economy narrowly missed a technical recession in Q3, recording +0.1% growth.

Source: German Federal Statistics Office, Ifo Institute

Non-U.S. Equities

48

49

50

51

52

53

54

55

56

57

Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19

Manufa

cturi

ng

PM

I

JP Morgan Global Manufacturing PMI SAMarkit Emerging Markets Manufacturing PMIMarkit Developed Markets Manufacturing PMI

Expansion

Contraction

Manufacturing slowdown across globe

39

Data did improve in the second half of 2019

Source: Bloomberg

Non-U.S. Equities

Services continue to live in expansion territory

40

Services help cushion the slowdown in global growth

Source: Bloomberg

Non-U.S. Equities

48

49

50

51

52

53

54

55

56

57

Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19

Serv

ices

PM

I

JP Morgan Global Services PMI

Markit EM Services PMI

Markit Developed Markets Services PMI Business Activity

Expansion

Contraction

Central banks across the globe cut rates

41

Accommodative monetary policy continues across the globe

Sources: Capital Group, Factset, November 2019

Non-U.S. Equities

Cut Hike

Latest central bank action

Wage growth rises while unemployment falls

42

Labor markets remain resilient despite slowed economic momentum

Source: Bloomberg

Non-U.S. Equities

0%

2%

4%

6%

8%

10%

12%

14%

0%

1%

1%

2%

2%

3%

3%

4%

4%

Unem

plo

ym

ent

Wag

e G

row

th

U.S Wage Growth Eurozone Wage Growth

U.S. Unemployment Rate Eurozone Unemployment Rate

8%

15%17%

19% 20%

26%

37% 37%

57%

0%

10%

20%

30%

40%

50%

60%

U.S. Japan UK China Eurozone Canada Mexico Korea Taiwan

Goods Exports as a % to GDP (2018)Goods Exports as a % of GDP (2018)

Emerging countries reliant on global trade

43

U.S. potentially less impacted by slowdown in global trade

Sources: JP Morgan, IMF

Non-U.S. Equities

Non-U.S. equities: not cheap by any means

S&P 500 MSCI EAFE MSCI EM MSCI EAFE SC

Valuation Metrics

CurrentHistorical

Percentile (%)Current

Historical Percentile (%)

CurrentHistorical

Percentile (%)Current

Historical Percentile (%)

P/E 21.4 88 17.3 76 14.5 89 16.5 91

Forward P/E 18.0 100 14.6 94 12.7 97 15.3 97

P/B 3.6 93 1.7 52 1.7 62 1.5 64

P/S 2.4 100 1.2 86 1.4 77 1.0 92

P/CF 15.5 88 10.5 71 10.0 90 9.4 50

EV/EBITDA 14.1 100 10.0 70 9.9 97 11.3 68

Average 95 75 85 77

44

Multiple expansion has increased valuations since start of year

Source: Bloomberg through December 31, 2019, as of January 3, 2020P/E is adjusted for negative earnings; percentiles are based on data going back to 1999 except for FP/E which goes back to 2005.

Non-U.S. Equities

Real Estate

Sector diversification

46

Exposure to “other” sub-sectors (student housing, senior housing, and medical office) continues to grow, providing a wide range of demand drivers that differ from traditional sectors

Source: NCREIF as of 3Q19

Real Estate

Office35%

Industrial18%

Apartment25%

Retail21%

Hotel1%

Property Type

East32%

Midwest8%

South20%

West40%

Geography

Real estate performance snapshot

47

Core real estate still positive in 3Q, but returns continue to moderate

Sources: NCREIF, as of September 30, 2019

Real Estate

3Q19 (%) YTD (%) 1 Year (%) 3 Year (%) 5 Year (%) 10 Year (%) 10 Yr Risk (%)

NPI 1.4 4.8 6.2 6.8 8.6 9.8 2.2

Income 1.1 3.4 4.5 4.6 4.7 5.3 0.4

Appreciation 0.3 1.4 1.6 2.1 3.7 4.3 2.1

NFI-ODCE 1.3 3.8 5.6 7.3 9.3 10.9 2.9

Income 1.1 3.1 4.2 4.3 4.4 5.0 0.4

Appreciation 0.3 0.7 1.4 2.9 4.7 5.6 2.9

FTSE NAREIT All Eq. REITs 7.7 28.5 20.7 8.9 11.0 13.5 13.5

Property Type

NPI Apartment 1.2 4.0 5.4 6.0 7.7 9.8 2.8

NPI Office 1.5 4.8 6.5 6.4 7.9 8.9 2.3

NPI Industrial 3.2 9.9 13.6 13.5 13.7 12.2 2.1

NPI Retail 0.2 1.9 1.4 3.8 7.3 9.6 2.7

NPI Hotel 1.8 3.3 4.6 5.5 7.6 7.7 2.8

Geographic Sectors

NPI East 0.9 3.5 4.7 5.0 6.7 8.5 2.5

NPI Midwest 0.9 2.6 3.1 4.6 6.9 8.4 2.0

NPI South 1.5 5.2 6.4 6.9 8.7 10.0 2.1

NPI West 1.9 6.1 8.2 8.7 10.5 11.2 2.3

Retail sector continues to be challenged

48

Retail sector same-store NOI growth has decelerated significantly since 2013 as store closings and capex accelerate

NPI YoY same-store NOI growth

Sources: NCREIF, Clarion as of 2Q 2019. NPI = NCREIF Property Index, LTA = Long Term Average from 2Q 2001 – 2Q 2019.

3.8%

0.5%

1.9%

0%

1%

2%

3%

4%

5%

6%

NPI YoY SS NOI Growth Excluding Retail Retail YoY SS NOI Growth

NPI LTA =

Real Estate

Rent control policies impacting apartments

49

To date, OR, NY, & CA have passed statewide rent control laws, which mainly limit annual rent increases between 5% and 7% after inflation

Source: Clarion Partners Investment Research, 3Q19

Real Estate

Private Markets

Private equity: Outperformance continues

51

Private equity has outperformed public markets through 1H of 2019 with venture capital providing the strongest returns. Long-term data continues to be very supportive of increasing allocations.

Source: Cambridge Associates as of June 30, 2019

QTR (%) YTD (%) 1 Year (%) 3 Year (%) 5 Year (%) 10 Year (%) 15 Year (%) 20 Year (%)

Cambridge Associates U.S. PE Index 4.7 10.6 13.8 17.4 13.9 16.8 14.1 12.1

Global Buyout & Growth Equity Index 4.3 9.5 11.9 16.5 12.2 15.2 13.7 12.3

Ex-U.S. Developed PE and VC Index 5.9 9.7 12.1 18.5 11.0 13.7 13.6 13.6

Cambridge Associates U.S. VC Index 6.9 13.8 21.8 15.5 14.0 14.5 11.5 13.6

U.S. VC Early Stage Index 8.0 16.1 24.2 16.7 15.6 15.6 11.5 23.4

U.S. VC Late & Expansion Stage Index 8.3 13.2 23.7 15.9 11.8 14.7 12 9.3

NASDAQ Composite Index 3.6 20.7 6.6 18.2 12.7 15.9 9.5 5.6

Russell 1000 Index 4.3 18.8 10.0 14.2 10.5 14.8 8.9 6.2

Russell 2000 Index 2.1 17.0 -3.3 12.3 7.1 13.5 8.2 7.8

S&P 500 Index 4.3 18.5 10.4 14.2 10.7 14.7 8.8 5.9

Wilshire 5000 Total Market Index 4.0 18.7 9.1 14.0 10.3 14.7 9.0 6.4

Private Equity

Sector median gross IRR by deal year

52

Sector outperformance appears persistent within Consumer Staples, Materials, Healthcare, and Information Technology

Source: Hamilton Lane as of October 2019

Private Equity

Expanding number of private equity opportunities

1,598

7,737

6,917

4,397

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

U.S

. In

vento

ry o

f C

om

panie

s

U.S. PE-Backed Companies U.S. Public Companies

53

The U.S. inventory gap between public and private equity owned companies continues to grow as increasing capital flows into private equity are expanding the number of investment opportunities

Sources: Pitchbook and Worldbank.org

Private Equity

Large funds have significant capital to deploy

54

U.S. private equity dry powder by fund size

Source: Pitchbook as of December 31, 2019

Private Equity

$0

$100

$200

$300

$400

$500

$600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

U.S

. P

rivate

Eq

uit

y D

ry P

ow

der

($B

)

Small Funds (<$500M) Medium Funds ($500M - $1B) Large/Mega Funds (>$1B)

Private equity provides relative value opportunity

55

Average middle market U.S. buyout transaction multiples reflect a 27% discount relative to public market valuations

Source: Bloomberg; Robert W. Baird Global M&A Monthly Report

Private Equity

8.0x

11.7x

10.8x

5.0x

6.0x

7.0x

8.0x

9.0x

10.0x

11.0x

12.0x

13.0x

14.0x

15.0x

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Nov.2019

U.S

. B

uyo

ut

Mult

iple

s (E

nte

rpri

se V

alu

e /

EB

ITD

A)

Avg. Middle Market Russell 3000 EV <$100M EV $100M - $499M EV $500M - $1B

Private credit funds continue to take market share

56

Private credit funds have taken a significant share of private market lending as banks have reduced their activity in this area of the market. Private credit funds continue to attract institutional capital as investors are willing to sacrifice liquidity for the higher yielding returns available from private loans.

Source: LCD Quarterly Q4 2018

Private Equity

72

%

72

%

67

%

63

%

65

%

52

%

46

%

38

%

32

%

24

% 30

%

26

%

20

%

17

% 28

%

30

%

18

%

19

%

13

%

14

%

10

%

14

%

12

%

11

%

9%

0

2,000

4,000

6,000

8,000

10,000

12,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

No

. o

f U

.S.

Co

mm

erc

ial B

anks

% o

f C

ap

ital Lend

ed

to

U.S

. LB

O

Transa

ctio

ns

Banks & Sec. Firms Non-Banks (Institutional Investors & Finance Companies) U.S. Commercial Banks

Private credit AUM

57

AUM has Increased three-fold over the Past Decade

Private Credit Assets Under Management, 2008 - 2018

Source: Preqin

Private Credit

$130

$169

$207$228

$254 $263$288

$323

$377

$412

$467

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18

Unre

alize

d V

alu

e (

$B

)

Purpose:

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MissionEnable institutions to become more effective investment stewards

VisionLeading investment consultant of risk-adjusted returns & client services

Principles✓ Real-world experience✓ Independent expertise✓ Focused client service✓ Careful research

The sources of information used in this report are believed to be reliable. Marquette Associates, Inc. has

not independently verified all of the information and its accuracy cannot be guaranteed. Opinions,

estimates, projections and comments on financial market trends constitute our judgment and are subject

to change without notice. References to specific securities are for illustrative purposes only and do not

constitute recommendations. Past performance does not guarantee future results.

Marquette is an independent investment adviser registered under the Investment Advisers Act of 1940,

as amended. Registration does not imply a certain level of skill or training. More information about

Marquette including our investment strategies, fees and objectives can be found in our ADV Part 2,

which is available upon request.

About Marquette Associates

Marquette Associates is an independent investment consulting firm that guides institutional investment

programs with a focused client service approach and careful research. For more than 30 years Marquette

has served this mission in close collaboration with clients – enabling institutions to be more effective

investment stewards. Marquette is a completely independent and 100% employee-owned consultancy

founded with the sole purpose of advising institutions. For more information, please visit

www.marquetteassociates.com.

59

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60

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