WOMEN IN SUPER. Unravelling Members Investment Decisions. Thursday 6 April 2017

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1 WOMEN IN SUPER Unravelling Members Investment Decisions Thursday 6 April 2017

2 SABRINA BAILEY Northern Trust Asset Management

3 NORTHERN TRUST ASSET MANAGEMENT Women and Investing Sabrina Bailey Global Head of Retirement Solutions northerntrust.com 2016 Northern Trust 3

4 3 out of 5 earn less than $40K Women over 70 have <50% Of account balance of male peers only 44% participate in retirement plans Wage gap $0.79 for every $1 male earns results in $300K Loss of lifetime income The facts about women today Data include U.S. figures only. Refer to slide 15 for source. northerntrust.com 2016 Northern Trust 4

5 PATH FORWARD: Surveyed 1,001 DC Participants 45% 55% Research Partner: Greenwald & Associates, 2016 northerntrust.com 2016 Northern Trust 5

6 Women are LESS likely to believe they will retire before 65 Source: Northern Trust Asset Management, The Path Forward, 2016 northerntrust.com 2016 Northern Trust 6

7 Women are MORE likely to want a better lifestyle in retirement Source: Northern Trust Asset Management, The Path Forward, 2016 northerntrust.com 2016 Northern Trust 7

8 Women are MORE likely to contribute JUST ENOUGH to get the employer match Source: Northern Trust Asset Management, The Path Forward, 2016 northerntrust.com 2016 Northern Trust 8

9 Women are LESS likely to select investment mix on their own Source: Northern Trust Asset Management, The Path Forward, 2016 northerntrust.com 2016 Northern Trust 9

10 Women are LESS likely to look at performance as criteria for selecting investment mix Source: Northern Trust Asset Management, The Path Forward, 2016 northerntrust.com 2016 Northern Trust 10

11 Women are LESS familiar with target date funds Source: Northern Trust Asset Management, The Path Forward, 2016 northerntrust.com 2016 Northern Trust 11

12 Women feel LESS knowledgeable about investing Source: Northern Trust Asset Management, The Path Forward, 2016 northerntrust.com 2016 Northern Trust 12

13 Women are longer term investors Source: Northern Trust Asset Management, The Path Forward, 2016 northerntrust.com 2016 Northern Trust 13

14 Women are LESS likely to react to market movements Source: Northern Trust Asset Management, The Path Forward, 2016 northerntrust.com 2016 Northern Trust 14

15 % of Participants Who: Results Believe they will retire before 65 50% 56% Want a much better lifestyle in retirement 36% 27% Contribute just enough to get the employer match 44% 36% Select their investment mix on their own 37% 61% Look at performance as a criteria for selecting investment mix 45% 73% Are familiar with target date funds 42% 55% Feel very knowledgeable about investing 21% 37% Made no change to their mix in the past 12 months 45% 29% Would not do anything if the stock market dropped significantly 68% 55% Source: Northern Trust Asset Management, The Path Forward, 2016 northerntrust.com 2016 Northern Trust 15

16 IMPORTANT INFORMATION This material is directed to eligible counterparties and professional clients only and should not be relied upon by retail investors. This presentation is intended only for the exclusive benefit and use of our clients. This material is provided for informational purposes only. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein. The information in this presentation reflects prevailing market conditions and our judgment as of this date, which are subject to change. Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but the accuracy, completeness and interpretation cannot be guaranteed. This presentation is for your private information and is intended for one-on-one use with current or prospective clients of Northern Trust. The information does not constitute investment advice or a recommendation to buy or sell any security and is subject to change without notice. This material is provided for informational purposes only. Information is not intended to be and should not be construed as an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Current or prospective clients should under no circumstances rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. Information is confidential and may not be duplicated in any form or disseminated without the prior consent of Northern Trust. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein. The opinions expressed herein are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing in this material only and is subject to change without notice. Indices and trademarks are the property of their respective owners. All rights reserved. Issued by Northern Trust Global Investments Limited (NTGIL). NTGIL is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered in England Registered Office: 50 Bank Street, London E14 5NT. Northern Trust Asset Management is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, and personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company. For Asia Pacific markets, this material is directed to expert, institutional, professional and wholesale investors only and should not be relied upon by retail clients or investors. Northern Trust Global Investments Japan, K.K. is regulated by the Japan Financial Services Agency. The Northern Trust Company has a branch in China mainly regulated by the China Banking Regulatory Commission, People s Bank of China and State Administration of Foreign Exchange. The Northern Trust Company of Hong Kong Limited is regulated by the Hong Kong Securities and Futures Commission. In Singapore, Northern Trust Global Investments Limited (NTGIL), Northern Trust Investments, Inc. and The Northern Trust Company of Connecticut (NTCC) are exempt from the requirement to hold a Financial Adviser's Licence under the Financial Advisers Act and a Capital Markets Services Licence under the Securities and Futures Act with respect to the provision of certain financial advisory services and fund management activities. In Australia, The Northern Trust Company of Hong Kong Limited (TNTCHK) is exempt from the requirement to hold an Australian Financial Services Licence under the Corporations Act. TNTCHK is authorized and regulated by the SFC under Hong Kong laws, which differ from Australian laws. As of 12/31/2016, Northern Trust Corporation had assets under management totaling $942.5 billion. For purposes of compliance with the Global Investment Performance Standards (GIPS ), we have defined our firm as Northern Trust Asset Management Services, a subset of Northern Trust Asset Management, and includes those investment products managed by NTI, NTGIL, NTGIJ, and TNTC that are distributed through national channels. As of 12/31/2016 Northern Trust Asset Management Services had assets under management totaling $766.9 billion. northerntrust.com 2016 Northern Trust 16

17 REFERENCES US Censs PINC08 Chart: Source of Income 2013 People 15 Years Old & Over, By Income of Specific Type in 2013, Age Race, Hispanic, Origin & Sex (Female, All Races, Earnings), Women and Retirement Savings, September 2015, Employee Benefits Security Administration, United States Department of Labor, ING Women and Retirement Readiness: US Participant Data, AAUW The Simple Truth About the Gender Pay Gap Fall 2015 Edition northerntrust.com 2016 Northern Trust 17

18 northerntrust.com 2016 Northern Trust

19 STACY SCHAUS PIMCO

20 Presentation to Women in Super Melbourne, Australia April 2017 Asset allocation tailored to female investors idiosyncrasies For use by wholesale clients only. This document must not be passed on or distributed to any retail clients within the meaning of the Corporations Act.

21 Key Takeaways Behavioral realities influence defined contribution plan design and asset allocation Women differ from men in many ways, including earnings, longevity and risk preferences Gender differences suggest a need for more tailored asset allocation or advice!mk_dc_discussion_short 21

22 1.DC Design 2.Women Idiosyncrasies 3.Tailored Asset Allocation DC_standard_tab_03

23 DC spreads globally capturing nearly half of retirement assets: behavioral research supports mandatory and auto-enrollment Mandatory DC Mandatory DB/hybrid Auto enrolment DC Voluntary DC/DB As of 31 December 2015 Source: Allianz International Pensions Country Factsheets,

24 Australia leads world in defined contribution as the largest share of retirement assets DB/DC asset split per market % 20% 40% 60% 80% 100% Australia 87% 13% $1.4T DC United States 60% 40% $13.5T DC + IRAs UK 18% 82% DC Netherlands 6% 94% DB Canada 5% 95% Japan 4% 96% Source: Willis Towers Watson and secondary sources,

25 Consultants suggest DC plans have an 80% income replacement target: DC plans need to replace 70% of pay assuming no DB or retiree medical Q: What is the appropriate overall income replacement goal?* (n=59)) 65% 80% 100 % Q: Assuming no DB plan and no retiree medical, what income replacement percent should the DC plan alone target? (n=57)) 40% 70% 100 % OECD projects median worker income replacement at less than the 80% overall and DC well below the consultant suggestions: DC Public Total U.S 32.6% 35.2% 67.8% Australia 30.9% 13.5% 44.5% Source: PIMCO DC Consulting Support and Trends Survey 2017; OECD Pensions at a glance 2015 *Given a typical American worker earning $75k a year at retirement; each colored bar represents the high and low of responses; the white line indicates the median response 25

26 U.S. defined contribution behavioral learning drives more tailored asset allocation solutions Balanced Portfolios Create your own mix 1980s You choose: Cap. Pres. Bonds Stocks 1990s You choose: 60/40 Cap. Pres. Bonds Large Cap Small Cap s You choose: Conservative Moderate Aggressive + Cap. Pres. Bonds Large Cap Small Cap Int'l Equity 2010s Default: 100% 90% 80% Or you choose: 70% 60% 50% 40% 30% + Consultants recommend 10 core investments 20% 10% Source: PIMCO, For illustrative purposes only 0% Income 26

27 # of options (median) Create your own mix: U.S. consultants recommend 10 core investments across four primary risk pillars Q: What is the optimal number of core menu options for each of these asset categories? (n=64) OPTIMAL CORE LINEUP CAPITAL PRESERVATION FIXED INCOME EQUITY INFLATION- PROTECTION ALTERNATIVES Source: PIMCO DC Consulting Support and Trends Survey 2017; *Categories may not sum to 100% due to respondents who indicated that the category be excluded 27

28 Percent Percent But, assets are not flowing to create your own core, rather target-date funds capture the largest share of contributions and overall asset allocation Hewitt 401K Index - Historical Contributions to Lifestyle funds 6-Month Moving Average 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 20% 15% 10% 5% '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Hewitt 401k Index - Historical Asset Allocations of Lifestyle funds 6-Month Moving Average 25% 41.8 % 24.0 % 97% of consultants recommend target-date funds be used as the qualified default investment alternative (QDIA)* By 2025, target-date strategies expected to capture 50%+ of DC assets 0% '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Source: Hewitt 401(k) Index, As of 28 February 2017; 2017 PIMCO Defined Consulting Support and Trends Survey, As of 31 December

29 Target-date glide paths are designed for the median worker. Is this default appropriate for women? 100% 90% 40-year old default asset allocation Asset allocation at age 40 Inflation 4% 80% 70% 60% 50% 40% 30% Inflation Real Assets Fixed Income International Equity Equity Real Assets 10% Fixed Income 19% International Equity 28% Equity 39% 20% 10% 0% Income Age 25 Assumed At retirement (age 65) retirement year Assumptions: Starting pay: $35,000 Retirement age: 65 Longevity: 20 years Tenure: 40 years As of 28 February 2017 Refer to Appendix for additional asset allocation, chart, glide path, hypothetical example for illustrative purposes only Source: PIMCO U.S. equities: S&P 500 Index; U.S. small cap equities: Russell 2000 Index; Non-U.S. developed equities: MSCI EAFE Net Div Index in USD; Emerging market equities: MSCI Emerging Markets Index; U.S. fixed income: Barclays U.S. Aggregate Index; Long Treasuries: Barclays Long- Term Treasury Index; Global bonds: JPMorgan GBI Global Hedged in USD Index; Emerging market bonds: JPMorgan EMBI Global Index prior to 31 January 2003 JP Morgan GBI-EM Global Div Unhedged USD Index thereafter; High yield: BofAML US HY BB-B Rated Constrained Index; TIPS: Barclays U.S. TIPS Index; Long TIPS: Barclays US TIPS Index 10+ yrs. Index; Commodities: Bloomberg Commodity Index; Real estate: Dow Jones U.S. Select REIT Index; Cash: BofA Merrill Lynch 3 Month U.S. T-Bill Index 29

30 1.DC Design 2.Women Idiosyncrasies 3.Tailored Asset Allocation DC_standard_tab_03

31 Women differ from men in many ways from an investment perspective, three discrepancies stand out Earnings Lower pay level (10%-20% lower than males) More pay interruptions (may leave work to have children or care for others) Longevity Live 3 to 5 years longer May work longer Risk Preference Prefer more stability avoid losses and more help or advice Less likely to trade or change investment allocation Source: OECD, cs_TR_strat_01 31

32 A Day Without a Woman: International Strike on March 8, 2017 A Demonstration of Economic Solidarity: Economic Inequality Women s average earnings are almost half those of men, with average global earned income for women and men estimated at $10,778 and $19,873, respectively. -- World Economic Forum, The Global Gender Gap Report

33 Only 19% of women globally are confident of retiring in a lifestyle they consider comfortable India 50% China 38% United States Brazil Netherlands Australia Canada 17% 17% 16% 31% 30% U.S. retirement confidence highest among women who: Have a retirement plan (e.g., DC) Income exceeding $60,000 Married UK 15% Germany 14% Hungary 11% Source: Transamerica Center for Retirement studies, 2016; EBRI Retirement Confidence Survey,

34 36% of women globally always make sure they are saving for retirement U.S. Women vs. Men Higher DC participation at 75.8% vs 61% 63.8% 51% Higher contribution rate at 6.9% vs. 6.8% 45% 44% 42% 39% 36% 35% 33% 28% Lower average balance at $75,000 vs. $115,000 Lower wage at $56,000 vs. $75,000 Source: Transamerica Center for Retirement studies, 2016; Vanguard,

35 Earnings Australian and the U.S. rank 45 th and 46 th on the Gender Gap Index Source: World Economic Forum, Global Gender Gap Report Score includes labor force participation, wage inequality, and other factors 35

36 Earnings U.S. Earnings Ratio differs notably by industry 36

37 Earnings U.S. earnings increase with education, but the gender gap widens 37

38 Earnings U.S. gender wage gap also widens for older cohorts 38

39 Life expectancy at age 60 (years) Longevity Women expected to live 3 to 5 years longer than men Life expectancy of women at age 60 over time Australian women at age 60, expected to live past Japan United Kingdom United States of America Australia Australian men at age 60, expected to live past Source: United Nations Population Division Department of Economic and Social Affairs World Population Prospects: The 2015 Revision File MORT/13-3: Female life expectancy at age 60 by major area, region and country, (years) italics show estimates 39

40 Longevity Nearly half of Australians and Americans expect to work past 70 What chance do you think there is that you will still be working at age 70? Employees aged 50 or more Japan United States Australia United Kingdom 48% 46% 45% 31% U.S. women both expect to and do retire later than men Source: 2016/2016 Global Benefits Attitudes Survey; Society of Actuaries, 2013 Risks and Process of Retirement Survey Sample: Members of a retirement plan. Except U.S. and Canada, full-time employees who are a member of a retirement plan. Aged 50 or more. Source: 40

41 Risk Preference U.S. women invest slightly more in target-date and balanced funds, while slightly less in equity Men Women Bonds & cash 19% Bonds & cash 18% Target-date & balanced 31% Equity & company stock 50% Target-date & balanced 35% Equity & company stock 47% Source: Vanguard,

42 Risk Preference U.S. women also trade less often compared to men 42

43 1.DC Design 2.Women Idiosyncrasies 3.Tailored Asset Allocation DC_standard_tab_03

44 How should gender differences influence asset allocation? Assumption differences between male and female investors Earnings/startin g salary Longevity at age 65 Risk aversion Male Female $50,000 $41, years 23 years Standard level Conservative level Standard assumptions: 9.5% contribution rate 1% real wage increase Source: PIMCO,

45 Gender differences suggest women allocate slightly less to equity and more to fixed income Suggested asset allocation for 40-year old workers Male Female To improve outcomes: Bonds 43% Equity 49% Equity 57% Bonds 51% Retirement Outcome Expectations Increase contributions Increase earnings Delay retirement Change lifestyle Improve investment returns Male Female 95th percentile 60.8% 47.5% Median 30.8% 26.3% 5th percentile 17.1% 15.4% Source: PIMCO, Note: Bond allocation is nearly 100% in long-duration inflation-linked which most directly hedge DC liability 45

46 Investment returns are an important factor that may improve outcomes Active management important in most asset classes Vast majority of consultants feel that active management is important for Emerging market equity, non-u.s. and U.S. bonds. Very important Important Somewhat important Not important Emerging market equity Non-U.S. 67% bonds 27% 6% Non-U.S. bonds U.S. bonds Infrastructure/MLPs Commodities U.S. equity (small cap) Emerging 56% market equity 48% U.S. bonds 45% U.S. equity (small cap) 34% 32% 30% Global asset-allocation strategy 52% 40% 42% 36% 27% 8% 8% 5% 6% 8% 7% 17% Non-U.S. equity (developed markets) 25% Non-U.S. equity (developed markets) 57% 18% Balanced strategies Target-date strategies REITs TIPS 21% 18% 16% 10% 20% REITS41% 28% Commodities 33% TIPS 38% 42% 33% 29% 33% 9% 12% 19% U.S. equity (large cap) 2% 16% U.S. equity (large 46% cap) 37% As of 31 December 2016 Source: 2017 PIMCO Defined Consulting Support and Trends Survey (n=63) 46

47 Women-focused solutions are emerging: Robo Advisor Ellevest targets female investors with simple, tailored communication and tools Source: Ellevest March

48 Closing observations DC plans play central role in building retirement security: Australians and Americans may need plans to replace up to 70% of pay Behavioral science has driven mandatory and automatic enrollment programs plus asset accumulation in defaults Default investments such as target-dates help with inertia, but fail to address gender and other differences Advice or tools are needed that point to the appropriate allocation based on earnings, longevity and risk preference Women will benefit from higher pay, more tailored investment solutions and higher return opportunities!mk_dc_discussion_short 48

49 PIMCO glidepath assumptions CONTRIBUTION RATES Cohort Participant Employer Total % 4.70% 11.80% % 4.60% 11.90% % 4.60% 12.20% % 4.60% 12.20% % 4.60% 12.20% % 4.60% 12.20% % 4.60% 12.20% % 4.60% 12.20% INCOME ASSUMPTIONS Real income Cohort (thousands) $ $ $ $ $ $ $ $54 RISK AND RETURN ASSUMPTIONS Asset Classes Nominal return Estimated volatilities assumptions (Over 40-years) (Over 40-years) REITs 6.39% 20.30% EM equities 7.11% 18.50% Non-U.S. equities 6.27% 16.20% U.S. Small equities 6.56% 23.40% U.S. Large equities 6.27% 16.20% Commodities 2.21% 17.50% Long TIPS 3.81% 10.80% TIPS 3.45% 5.40% High Yield 5.90% 10.70% EM Fixed Income 5.53% 10.30% Global Fixed Income 3.41% 4.30% Long Treasuries 3.60% 12.80% U.S. Fixed Income 3.41% 4.30% Cash 2.55% 1.70% As of 31 December 2016 SOURCE: PIMCO, Employee Benefit Research Institute (EBRI) Hypothetical example for illustrative purposes only Cash: BofA Merrill Lynch 3-Month Treasury Bill Index; Fixed income: Barclays U.S. Aggregate Index; long treasuries: Barclays Long-Term Treasury Index; long TIPS: Barclays U.S. TIPS: 10 Year+ Index; Investment Grade: Barclays U.S. Credit Index; High yield: Barclays U.S. High Yield Index; U.S. large cap: S&P 500 Index; U.S. Small cap: Russell 2000 Index; EM equity: MSCI EM Index; real estate: Dow Jones U.S. Select REIT TR Index; Commodities: Dow Jones UBS Commodity TR Index; Inflation: U.S. Consumer Price Index Refer to Appendix for additional hypothetical example, index and return assumption information. 49

50 Appendix GLIDE PATH The glide path is intended to illustrate how allocations among asset classes change as a target-date approaches. The target asset allocation is based on a target date, which assumes a normal retirement age of 65, and time horizons based on current longevity of persons reaching retirement in average health. The glide path is designed to reduce risk as the target retirement date nears, but may also provide investors diversification across a variety of asset classes, with an emphasis on asset classes that may protect against inflation over time. The target allocations used in this presentation are for illustrative purposes only. They are based on quantitative and qualitative data relating to long-term market trends, risk metrics, correlation of asset types and actuarial assumptions of life expectancy and retirement The PIMCO glide path implements an optimal asset allocation mix that moves from higher risk to lower risk over time and is designed to manage the risk of an individual s savings as they approach retirement. The glide path acts as a benchmark portfolio, reflecting an allocation that is optimal with respect to our long-run, real return assumptions for each asset class (referred to above as capital market assumptions ). The PIMCO glide path optimization takes into account the compounding of returns over the given investment horizon, unlike standard mean-variance analysis. PIMCO s approach to developing a glide path incorporates liability-driven modelling in a real return framework, using a broad opportunity set of asset classes seeking to deliver meaningful improvements over traditional approaches. This approach may increase the median return and narrow the range of expected future outcomes when compared to the typical glidepath, while hedging the risk of future inflation and reducing the risk of a shortfall in future sustainable spending power. More income is likely to distribute near the median. HYPOTHETICAL EXAMPLE No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Hypothetical or simulated performance results have several inherent limitations. Unlike an actual performance record, simulated results do not represent actual performance and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated performance results and the actual results subsequently achieved by any particular account, product, or strategy. In addition, since trades have not actually been executed, simulated results cannot account for the impact of certain market risks such as lack of liquidity. There are numerous other factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. PIMCO s methodology uses a Block Bootstrapping model to run a portfolio through multiple hypothetical trials to generate a full distribution. Bootstrapping is similar to Monte Carlo simulation, but instead of sampling from a theoretical distribution, it samples from an empirical distribution using historical factor returns. Block bootstrapping uses contiguous blocks of data, which captures serial correlation effects in factor performance, such as momentum and reversal. Bootstrapping captures non-normality in factor returns. Stress Testing is a simulation technique used on a portfolio to determine its reactions to different hypothetical situations. PIMCO employs methodologies which may include market or other assumptions, subjective judgments and valuation models. Such assumptions, judgments and models may reflect PIMCO's current thinking and may be changed or modified in response to PIMCO's perception of market conditions, or otherwise. INVESTMENT STRATEGY There is no guarantee that these investment strategies will work under all market conditions and each investor should evaluate their ability to invest for a long-term especially during periods of downturn in the market. 50

51 Appendix RISK All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. Government. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Derivatives and commodity-linked derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Commodity-linked derivative instruments may involve additional costs and risks such as changes in commodity index volatility or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in derivatives could lose more than the amount invested. Investors should consult their investment professional prior to making an investment decision. VOLATILITY (ESTIMATED) We employed a block bootstrap methodology to calculate volatilities. We start by computing historical factor returns that underlie each asset class proxy from January 1997 through the present date. We then draw a set of 12 monthly returns within the dataset to come up with an annual return number. This process is repeated 25,000 times to have a return series with 25,000 annualized returns. The standard deviation of these annual returns is used to model the volatility for each factor. We then use the same return series for each factor to compute covariance between factors. Finally, volatility of each asset class proxy is calculated as the sum of variances and covariance of factors that underlie that particular proxy. For each asset class, index, or strategy proxy, we will look at either a point in time estimate or historical average of factor exposures in order to determine the total volatility. Please contact your PIMCO representative for more details on how specific proxy factor exposures are estimated. This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. 2017, PIMCO CHART Performance results for certain charts and graphs may be limited by date ranges specified on those charts and graphs; different time periods may produce different results. 51

52 Appendix INDEX DESCRIPTIONS Barclays Long-Term Treasury consists of U.S. Treasury issues with maturities of 10 or more years. Prior to 1 November 2008, this index was published by Lehman Brothers. The Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. The Barclays U.S. TIPS Index is an unmanaged market index comprised of all U.S. Treasury Inflation Protected Securities rated investment grade (Baa3 or better), have at least one year to final maturity, and at least $250 million par amount outstanding. Performance data for this index prior to 10/97 represents returns of the Lehman Inflation Notes Index. BofA Merrill Lynch U.S. High Yield, BB-B Rated, Constrained Index tracks the performance of BB-B Rated US Dollar-denominated corporate bonds publicly issued in the US domestic market. Qualifying bonds are capitalization-weighted provided the total allocation to an individual issuer (defined by Bloomberg tickers) does not exceed 2%. Issuers that exceed the limit are reduced to 2% and the face value of each of their bonds is adjusted on a pro-rata basis. Similarly, the face value of bonds of all other issuers that fall below the 2% cap are increased on a pro-rata basis. Barclays U.S. Treasury Inflation Notes: 10+ Year is an unmanaged index market comprised of U.S. Treasury Inflation Protected securities with maturities of over 10 years. The BofA Merrill Lynch US 3-Month Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month that issue is sold and rolled into a newly selected issue. The issue selected at each month-end rebalancing is the outstanding Treasury Bill that matures closest to, but not beyond, three months from the rebalancing date. To qualify for selection, an issue must have settled on or before the month-end rebalancing date. While the index will often hold the Treasury Bill issued at the most recent 3-month auction, it is also possible for a seasoned 6-month Bill to be selected. The Bloomberg Commodity Index is an unmanaged index composed of futures contracts on 19 physical commodities. The index is designed to be a highly liquid and diversified benchmark for commodities as an asset class. Prior to 7 July 2014, the index was known as the Dow Jones UBS Commodity TR Index. Prior to 7 May 2009, this index was known as the Dow Jones AIG Commodity Total Return Index. The Dow Jones U.S. Select Real Estate Investment Trust (REIT) Total Return Index, a subset of the Dow Jones U.S. Select Real Estate Securities Total Return Index, is an unmanaged index comprised of U.S. publicly traded Real Estate Investment Trusts. This index was formerly known as the Dow Jones Wilshire REIT Index. JPMorgan Government Bond Index-Emerging Markets Global Diversified Index (Unhedged) is a comprehensive global local emerging markets index, and consists of regularly traded, liquid fixed-rate, domestic currency government bonds to which international investors can gain exposure. JPMorgan GBI Global Hedged in USD is an unmanaged index market representative of the total return performance in U.S. dollars on a hedged basis of major world bond markets. The MSCI EAFE (Morgan Stanley Capital International Europe, Australasia, Far East Index) is an unmanaged index of over 900 companies, and is a generally accepted benchmark for major overseas markets. Index weightings represent the relative capitalizations of the major overseas markets included in the index on a U.S. dollar adjusted basis. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index. The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index. 52

53 Appendix RETURN ASSUMPTIONS Return assumptions are for illustrative purposes only and are not a prediction or a projection of return. Return assumption is an estimate of what investments may earn on average over the long term. Actual returns may be higher or lower than those shown and may vary substantially over shorter time periods. PIMCO Australia Pty Ltd ABN , AFSL (PIMCO Australia). This publication has been prepared for general information of wholesale clients only and has not been prepared for, and is not available to persons who are retail clients, as defined by the Corporations Act 2001 (Cth). Past performance is not a reliable indicator of future results. Investment management products and services offered by PIMCO Australia are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorised. Before making an investment decision investors should obtain professional advice. PIMCO Australia believes the information contained in this publication to be reliable, however its accuracy, reliability or completeness is not guaranteed. Any opinions or forecasts reflect the judgment and assumptions of PIMCO Australia on the basis of information at the date publication and may later change without notice. These should not be taken as a recommendation of any particular security, strategy or investment product. All investments carry risk and may lose value. To the maximum extent permitted by law, PIMCO Australia and each of their directors, employees, agents, representatives and advisers disclaim all liability to any person for any loss arising, directly or indirectly, from the information in this publication. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission of PIMCO Australia. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. PIMCO,