10-Year Capital Market Return Assumptions Calendar Year 2016

Transcription

1 INVESTMENT MANAGEMENT 10-Year Capital Market Return Assumptions Calendar Year 2016 BNY MELLON FIDUCIARY SOLUTIONS BNY Mellon Fiduciary Solutions provides institutional investors outsourced CIO solutions using BNY Mellon and third party investment managers. Michael Rausch Head of Investment Strategy BNY Mellon Fiduciary Solutions

2 RETURN ASSUMPTIONS // 2 About the Assumptions On an annual basis, BNY Mellon Investment Management develops capital market return assumptions for approximately 50 asset classes around the world. The assumptions are based on a 10-year investment time horizon and are intended to guide investors in developing their long term strategic asset allocations. In the US, we forecast annualized inflation over the next ten years to be 2.2%, slightly higher than the Federal Reserve target of 2% but in line with consensus forecasts. Led by BNY Mellon Fiduciary Solutions, the capital market assumption team consists of more than 30 investment professionals including investment strategists, economists, financial advisors, manager research specialists, and portfolio managers. We developed the initial baseline assumptions using general market expectations and consensus data. The assumptions were then adjusted to reflect views and potential dislocations in global markets, based on research from across BNY Mellon Investment Management. This document outlines our forecasts for the next ten years and provides supporting details behind the numbers. Inflation And Real Short-Term Interest Rates Inflation and real short-term interest rates provide the foundation for expected returns across global asset classes. Both are primary building blocks for developing equity and fixed income returns and eventually alternative asset class returns. Later in this document, we will explain how we used inflation and real interest rates when developing our return expectations. For now, we will focus on inflation and real interest rate expectations over the next ten years. We look at three driving factors to develop the baseline assumptions for our global inflation expectations: Market expectations based on breakeven rates Consensus forecasts Central bank targets We forecast US annualized inflation over the next ten years to be 2.2%, slightly higher than the Federal Reserve target of 2% but in line with consensus forecasts. In the developed world outside of the US, we expect inflation to be slightly lower at 1.8%, which is in line with consensus forecasts and slightly below central bank targets. In emerging economies, we expect inflation to be 3.0% which is lower than central bank targets but in line with consensus forecasts. 10-Year Annual Inflation Expectations from 2016 to % 3.0% 2% 1% 2.2% 1.8% 0% US Developed Ex-US Emerging Source: BNY Mellon Fiduciary Solutions. Data as of November 30, 2015.

3 RETURN ASSUMPTIONS // 3 Due to unprecedented efforts from central banks around the globe, nominal short-term interest rates have been driven down near zero. Given positive inflation, the result is negative real short-term interest rates in most developed markets and positive but extremely low rates in emerging markets. We believe that real short-term interest rates will climb closer to historical averages, but will remain slightly depressed due to limited upward inflation pressure from excess global capacity. We believe that short-term interest rates will normalize over the next six years. In the US, we expect real short-term interest rates to migrate from well below zero to 0.75%. We expect other central banks in the developed world outside of the US to follow suit. In emerging economies, we expect real short-term interest rates to migrate slightly higher to 2%. Below are our projected nominal short-term interest rates for the US, developed markets excluding the US and emerging markets. The nominal rate includes our inflation expectations plus the real rate described previously. We expect rates to gradually increase from today s levels to the projected rates in six years. We expect rates to gradually increase from today s levels to the projected rates in six years. Projected Nominal Short-Term Interest Rates 0% 1% 2% 3% 4% 5% 6% US 2.95% Developed Ex-US 2.55% Emerging 5.00% Inflation Real Short-Term Interest Rates Projected rates in six years. Source: BNY Mellon Fiduciary Solutions. Data as of November 30, Fixed Income Market Return Expectations Our fixed income return assumptions rely on a building block approach to project yields over the next ten years. We add curve slope and credit spreads when applicable to our normalized short-term interest rates. The result is our expectation of normalized fixed income yields. For developing additional yield due to maturity, we look to historical relationships between the slope of the curve, inflation expectations and the level of short-term rates. Based on a regression analysis, our research suggests that inflation expectations and the level of short-term interest rates have predictive power for the slope of the entire yield curve. The results of our analysis are shown below. The chart compares the actual US 10-year bond slope (10-year yield minus 3-month yield) to simulated results from our regression analysis. The same formula that produces the simulated results is then used to determine the slope of the entire curve based on our expectation of inflation and short-term interest rates. Based on a regression analysis, our research suggests that inflation expectations and the level of short-term interest rates have predictive power for the slope of the yield curve.

4 RETURN ASSUMPTIONS // 4 US Yield Curve Slope 4% 3% 2% We expect some curve flattening with the short end of the curve rising about 275 basis points, the 10-year yield rising about 185 basis points, and the 30-year yield rising about 155 basis points. 1% 0% -1% Actual Slope of Curve (10 Yr Yield Minus 3 Mo Yield) Simulated Slope of Curve (10 Yr Yield Minus 3 Mo Yield) Source: BNY Mellon Fiduciary Solutions, Barclays. Data as of November 30, Once the short-term interest rates and the slope of the curve are developed, we can construct the entire yield curve for various fixed income regions around the world. In the US, we see Treasury yields rising until they reach a normalized level in six years. We expect some curve flattening with the short end of the curve rising about 275 basis points, the 10-year yield rising about 185 basis points, and the 30-year yield rising about 155 basis points. US Treasury Yield Curve 5% 30 4% % Bill 30 Yield 2% 1% 5 10 Normalized Interest Rates Current Interest Rates Bill 0% Years to Maturity Current Interest Rates as of November 30, Normalized Interest Rates are projected in six years. Source: BNY Mellon Fiduciary Solutions, Barclays. Data as of November 30, 2015.

5 RETURN ASSUMPTIONS // 5 In the developed world outside of the US, we see similar increases in government bond yields. However, we expect the overall level of government bond yields to be slightly lower than the US due to subdued inflation and lower growth expectations. Emerging markets will likely also experience rising rates due to normalization, though the increase may not be as extreme as in developed markets. Developed Ex-US and Emerging Market Spot Curves Yield 7% 6% 5% 4% 3% 2% 1% Developed Ex-US Current Emerging Current Developed Ex-US Norm Emerging Normalized In the developed world outside of the US, we see similar increases in government bond yields. However, we expect the overall level of government bond yields to be slightly lower than the US due to subdued inflation and lower growth expectations. 0% Duration (in years) Current Interest Rates as of November 30, Normalized Interest Rates are projected in six years. Source: BNY Mellon Fiduciary Solutions. Data as of November 30, We expect credit spreads to migrate toward long-term historical averages over a time horizon consistent with our view on interest rate increases. To determine the historical average, we Winsorize the data to eliminate skews to the average from extreme events such as the credit crisis. As shown in the chart below, this Winsorize approach applies a floor and ceiling on the data at the 5th and 95th percentiles to eliminate extreme shocks and provide a more consistent data stream for determining the average. US Corporate High Yield Spread to Treasury 20% 15% Historical Spread Winsorized Spread 10% 5% 0% Source: BNY Mellon Fiduciary Solutions, Barclays. Data as of November 30, 2015.

6 RETURN ASSUMPTIONS // 6 We expect most credit spreads to fall slightly from today s levels to long-term averages because most sectors are currently trading wider than historical averages. We expect most credit spreads to fall slightly from today s levels to long-term averages because most sectors are currently trading wider than historical averages. We also expect default and recovery rates to be in line with historical averages. Overall, fixed income returns will be suppressed due to low current yields and principal losses due to rising interest rates. However, higher yields in the future will help offset poor returns in the near-term. We expect spread sectors that are less sensitive to rising interest rates to be among the best performers. We also expect merging markets to perform well due to higher yields in the current environment and less principal loss from less significant interest rate increases. We expect returns to be lowest in the developed world outside of the US, due to extremely low current yields and loss of principal from rising rates. 10-Year Fixed Income Expected Returns from 2016 to 2025 (in USD) US Aggregate 2.5% US Treasury 1.9% US Treasury Bills 1.8% US Investment Grade Credit 3.3% US TIPS 2.5% US Intermediate Municipal 2.4% In the developed world outside of the US, we expect the lowest returns due to extremely low current yields, loss of principal from rising rates, and currency depreciation relative to the US dollar created by quantitative easing programs. US High Yield 5.9% US Bank Loans 5.2% Global Aggregate Ex-US 0.9% Global Treasury Ex-US 0.6% Global Corporate Ex-US 2.0% Emerging Markets Sovereign USD 5.1% Emerging Markets Corporate USD 5.6% Emerging Markets Sovereign Local Currency 5.1% Source: BNY Mellon Fiduciary Solutions. Data as of November 30, Please see page 13 for a list of representative indices. Equity Market Return Expectations We develop equity assumptions using a building block approach consisting of nominal earnings growth, income return consisting of dividends and stock net buybacks, valuation adjustments and currency adjustments. Inflation We break down nominal earnings growth into inflation expectations and real earnings growth. Our returns are published in US dollars, so our expected inflation for earnings growth around the world is based on our US inflation expectation of 2.2%, which assumes Purchasing Power Parity.

7 RETURN ASSUMPTIONS // 7 Real Earnings Growth As a baseline assumption, we assume real corporate earnings growth will be consistent with real GDP growth consensus expectations. As the chart below indicates, historically, there is a relationship between corporate earnings growth and GDP growth over a longterm time horizon. US GDP versus Corporate Earnings Growth US Nominal GDP S&P 500 Index Nominal Earnings Source: BNY Mellon Fiduciary Solutions, Bloomberg. Data as of November 30, In the US, developed markets outside of the US, and emerging markets, we believe real earnings growth will be in line with our expectation of regional real GDP growth. We anticipate real earnings growth of 2.3% in the US, 1.7% in the developed markets outside of the US, and 4.1% in emerging markets. Dividend/Buyback Yield Over the next ten years, we expect dividend yields to be in line with long term payout ratios and current earnings yield levels. Outside the US, we see dividend yields of 3.0% and 2.6% for developed markets and emerging markets, respectively. These figures are based on long-term average dividend payout ratios of 50% for developed markets outside of the US and 35% for emerging markets (see charts below). The dividend yield is determined by applying the payout ratio to current earnings yield of approximately 6% for developed markets outside of the US and 7.5% for emerging markets. As a baseline assumption, we assume real corporate earnings growth will be consistent with real GDP growth consensus expectations.

8 RETURN ASSUMPTIONS // 8 Dividend Payout Ratios Outside the US 300% 250% 200% MSCI EAFE Index Dividend Payout Ratio Median Over the next ten years, we expect dividend yields to be in line with long term payout ratios and current earnings yield levels. 150% 100% 50% 0% % 80% 60% 40% 20% MSCI Emerging Index Dividend Payout Ratio Median 0% Source: BNY Mellon Fiduciary Solutions, MSCI. Data as of November 30, In the US, we also expect dividend yields to be based on payout ratios and current earnings yield levels, but a simple long-term average cannot be applied to the US for several reasons. During the 1980s, a structural change took place in the way US companies returned capital to shareholders. Prior to the 1980s, capital was predominately returned via dividends with an average payout ratio of approximately 45% of earnings. After the 1980s, the average dividend payout ratio shrank to 35% due to companies replacing dividends with share buybacks as a form of returning capital to investors (see chart below). This structural shift occurred due to changes in tax law that made capital gains more advantageous than dividends for investors and the addition of safe harbor provisions that made share repurchasing less likely to violate share price manipulation rules. Buybacks are less common outside of the US due to different regulatory environments, so no adjustments are made.

9 RETURN ASSUMPTIONS // 9 Dividend Payout Ratio in the US 80% 70% 60% 50% 40% 30% 20% S&P 500 Index Dividend Payout Ratio Pre 1990 Median Post 1990 Median Source: BNY Mellon Fiduciary Solutions, S&P. Data as of November 30, To account for income returned to investors via dividends and share buybacks, we ve assumed a total payout ratio of 45% in the US. To account for income returned to investors via dividends and share buybacks, we ve assumed a total payout ratio of 45% in the US. Based on current earnings yield levels of approximately 6%, we ve assumed a total yield of 2.7% in the US. Equity Market Expected Returns from 2016 to 2025 (in USD) 10% 9% 8.9% 8% 7% 7.2% 6.9% 2.6% 6% 5% 2.7% 3.0% 4% 4.1% 3% 2.3% 1.7% 2% 1% 0% 2.2% 2.2% 2.2% US Developed Ex-US Emerging Dividend/Buyback Yield Real Earnings Growth Inflation Source: BNY Mellon Fiduciary Solutions. Data as of November 30, 2015.

10 RETURN ASSUMPTIONS // 10 Overall, we see global equity market returns ranging from 7% to 9%. We anticipate emerging market equity will lead the way with returns near 9% primarily due to stronger earnings growth. Developed markets outside of the US will likely lag other regions due to lower earnings growth. In line with their higher levels of risk, we expect mid and small cap stocks to outperform large cap stocks over the next ten years. We anticipate emerging market equity will lead the way with returns near 9% primarily due to stronger earnings growth. 10-Year Equity Market Expected Returns from 2016 to 2025 (in USD) US Equity 7.2% US Large Cap Equity 7.1% US Mid Cap Equity 7.7% US Small Cap Equity 8.2% International Developed Equity 6.9% International Small Cap Equity 7.1% Emerging Equity 8.9% Source: BNY Mellon Fiduciary Solutions. Data as of November 30, Please see page 13 for a list of representative indices. Alternative Market Return Expectations We believe expected returns for alternative asset classes will generally be in line with public equity markets on a risk adjusted basis. To calculate risk adjusted returns, we first determine the beta of the asset class relative to public markets, based on our expectations of return standard deviations and correlations. We apply the beta to the public market expected return to determine the expected return of the alternative asset class. For private markets, we add additional return to account for illiquidity. For hedge funds and private real estate, we add additional return to reflect the residual risk not captured by market returns. The additional return assumes an information ratio of 0.3 multiplied by the residual risk. We believe expected returns for alternative asset classes will generally be in line with public equity markets on a risk adjusted basis. 10-Year Alternative Market Expected Returns from 2016 to 2025 (in USD) Hedge Funds 4.6% Commodities 2.2% Global Natural Resources Equity 6.9% US Core Real Estate 4.1% US REIT 7.1% Global REIT 7.3% US Private Equity 9.1% Source: BNY Mellon Fiduciary Solutions. Data as of November 30, Please see page 13 for a list of representative indices.

11 RETURN ASSUMPTIONS // 11 Standard Deviations And Correlations At a high level, our standard deviations and correlations are based on long term historical returns with additional emphasis on near term history. Especially with illiquid asset classes, we ve made adjustments for serial correlation and smoothing of historical asset returns. We ve also made an adjustment from our approach in previous years of taking an average of 5, 10, and 20 year historical data. Our new approach takes an exponential weighting of the last 20 years of monthly returns. This approach ensures an appropriate covariance matrix and smooths out results on a year by year basis. Historical Weighting for Standard Deviations and Correlations 1.2% 5, 10, and 20 Year Arithmetic Average Exponential Average 1.0% 0.8% 0.6% 0.4% Monthly Weight 0.2% % 1995 Date Source: BNY Mellon Fiduciary Solutions. Data as of November 30, Portfolio Implications Capital market assumptions are a critical component of portfolio construction for most investors. Many corporate defined benefit pension plans are concerned about meeting or exceeding their liability growth rates. Public pension plans have well-established return targets usually in the range of 7-8%. Endowments and foundations aim to meet their spending goals on an inflation adjusted basis. Using data from the BNY Mellon Institutional Scorecard and the BNY Mellon Master Trust Universe, we have calculated portfolio expected return and standard deviation for three segments of institutional investors based on our 2016 Capital Market Return Assumptions. We ve also compared the results of the 2016 assumptions to the 2015 assumptions so investors understand how changing capital markets over the past year impacts forward looking returns. Our new approach takes an exponential weighting of the last 20 years of monthly returns. This approach ensures an appropriate covariance matrix and smooths out results on a year by year basis.

12 RETURN ASSUMPTIONS // 12 Institutional Investor Allocations Asset Class Corporate Defined Benefit Public Defined Benefit Endowment and Foundation US Equity 29.0% 24.0% 23.0% International Developed Equity 12.5% 15.0% 8.0% Emerging Equity 3.5% 4.0% 2.0% US Aggregate 6.0% 23.0% 8.0% Global Aggregate Ex US 1.0% 2.0% 1.0% US Long Treasury 9.5% 0.0% 1.0% US Long Investment Grade Credit 16.5% 0.0% 0.0% Public defined benefit plans, expecting to return 5.8% over the next 10 years, may need markets to perform better than expectations to hit return targets in the 7-8% range. US Private Equity 8.0% 13.0% 16.0% Global REIT 1.0% 6.0% 8.0% Absolute Return 11.0% 9.0% 23.0% Commodities 2.0% 4.0% 11.0% Source: Fiduciary Solutions, BNY Mellon Institutional Scorecard, BNY Mellon Master Trust Universe. Data as of November 30, Please see page 13 for a list of representative indices. Portfolio Expected Return and Standard Deviation (2016 to 2025) Metric Corporate Defined Benefit Public Defined Benefit Endowment and Foundation Expected Return (Change from 2015 assumptions) 5.5% (-0.1%) 5.8% (-0.2%) 5.9% (-0.1%) Standard Deviation (Change from 2015 assumptions) 10.0% (-0.5%) 11.3% (-0.5%) 11.7% (-0.5%) Source: Fiduciary Solutions. Data as of November 30, Corporate defined benefit plans have a return expectation of 5.5%. This level of return should be more than sufficient for most frozen well-funded plans, but may not hit the mark for poorly funded plans or plans with high levels of benefit accruals. Public defined benefit plans, expecting to return 5.8% over the next 10 years, may need markets to perform better than expectations to hit return targets in the 7-8% range. Endowments and foundations that typically target a 5% spending + inflation policy may need inflation to remain in the low single digits over the next 10 years in order to achieve their objective.

13 RETURN ASSUMPTIONS // 13 Asset Class Expected Returns And Standard Deviations Alternatives Fixed Income Equity Asset Class Representative Index Expected Return Standard Deviation U.S. Equity Russell % 16.1% U.S. Large Cap Equity Russell % 15.9% U.S. Mid Cap Equity Russell Mid Cap 7.7% 18.3% U.S. Small Cap Equity Russell % 21.0% U.S. Micro Cap Equity Dow Jones Wilshire U.S. Micro-Cap 8.1% 22.6% Global Equity MSCI ACWI 7.3% 16.6% International Developed Equity MSCI EAFE 6.9% 17.9% International Small Cap Equity MSCI EAFE Small Cap 7.1% 19.5% Emerging Equity MSCI Emerging 8.9% 23.8% U.S. Aggregate Barclays U.S. Aggregate 2.5% 3.5% U.S. Treasury Barclays U.S. Treasury 1.9% 4.4% U.S. Treasury Bills Barclays U.S. Treasury Bills 3-6 Month 1.8% 0.7% U.S. Intermediate Treasury Barclays U.S. Intermediate Treasury 2.0% 3.0% U.S. Long Treasury Barclays U.S. Long Treasury 1.2% 11.9% U.S. Investment Grade Credit Barclays U.S. Credit 3.3% 5.4% U.S. Intermediate Investment Grade Credit Barclays U.S. Intermediate Credit 3.1% 4.1% U.S. Long Investment Grade Credit Barclays U.S. Long Credit 4.0% 9.8% U.S. TIPS Barclays U.S. Inflation Linked Bonds 2.5% 6.2% U.S. Agencies Barclays U.S. Agencies 2.4% 3.0% U.S. MBS Barclays U.S. MBS 2.7% 2.6% U.S. Investment Grade CMBS Barclays Investment Grade CMBS 3.0% 8.9% U.S. Intermediate Municipal S&P Municipal Bond Intermediate 2.4% 3.9% U.S. Short Municipal S&P Municipal Bond Short 2.1% 1.2% U.S. High Yield Barclays U.S. Corporate High Yield 5.9% 9.8% U.S. Bank Loans CSFB Leveraged Loan 5.2% 6.2% Global Aggregate Ex-US Barclays Global Aggregate Ex-USD 0.9% 8.0% Global Treasury Ex-US Barclays Global Treasury Ex-USD 0.6% 7.8% Global Corporate Ex-US Barclays Global Corporate Ex-USD 2.0% 9.6% Emerging Markets Sovereign USD Barclays EM USD Sovereign 5.1% 10.4% Emerging Markets Corporate USD Barclays EM USD Corporate 5.6% 12.8% Emerging Markets Sovereign Local Currency Barclays EM Local Currency Government 5.1% 11.8% Absolute Return 1,2 HFRX Global Hedge Fund 4.3% 5.8% Hedge Funds 1,2 HFRI Fund Weighted Composite 4.6% 6.6% Hedge Funds - Equity Hedge 1,2 HFRI Equity Hedge 5.7% 9.0% Hedge Funds - Event Driven 1,2 HFRI Event Driven 4.7% 6.8% Hedge Funds - Macro 1,2 HFRI Macro 3.9% 5.5% Hedge Funds - Relative Value 1,2 HFRI Relative Value 3.7% 4.6% Hedge Funds - Managed Futures 1,2 Newedge CTA Index 4.3% 8.1% Commodities Dow Jones UBS Commodities 2.2% 16.6% Global Natural Resources Equity S&P Global Natural Resources Index 6.9% 20.9% U.S. Core Real Estate 2 NCREIF Property Index 4.1% 5.3% U.S. Residential Real Estate S&P/Case-Shiller U.S. Home Price Index 3.5% 3.1% Timberland 2 NCREIF Total Return Timberland 4.5% 5.4% Farmland 2 NCREIF Total Return Farmland 5.0% 7.5% U.S. REIT FTSE NAREIT Equity 7.1% 24.1% Global REIT FTSE EPRA/NAREIT Developed Index 7.3% 20.5% U.S. Private Equity 1,2 Cambridge Associates LLC U.S. Private Equity 9.1% 19.1% U.S. Venture Capital 1,2 Cambridge Associates LLC U.S. Venture Capital 9.1% 25.0% Energy Infrastructure Alerian MLP Infrastructure 6.9% 18.8% 1. Consistent with the Representative Index, returns are net of management fees. 2. The Representative Index is not investable. Returns are based on manager averages. Actual results may vary significantly For illustrative purposes only. There can be no assurance that the expected returns above will be achived.

14 RETURN ASSUMPTIONS // 14 Asset Class Correlations Negative Correlation Equity Fixed Income Equity Fixed Income Alternatives 10-Year Correlation Matrix U.S. Equity U.S. Large Cap Equity U.S. Mid Cap Equity U.S. Small Cap Equity U.S. Micro Cap Equity Global Equity International Developed Equity International Small Cap Equity Emerging Equity U.S. Equity U.S. Large Cap Equity U.S. Mid Cap Equity U.S. Small Cap Equity U.S. Micro Cap Equity Global Equity International Developed Equity International Small Cap Equity Emerging Equity U.S. Aggregate U.S. Treasury U.S. Treasury Bills U.S. Intermediate Treasury U.S. Long Treasury U.S. Investment Grade Credit U.S. Intermediate Investment Grade Credit U.S. Long Investment Grade Credit U.S. TIPS U.S. Agencies U.S. MBS U.S. Investment Grade CMBS U.S. Intermediate Municipal U.S. Short Municipal U.S. High Yield U.S. Bank Loans Global Aggregate Ex-US Global Treasury Ex-US Global Corporate Ex-US Emerging Markets Sovereign USD Emerging Markets Corporate USD Emerging Markets Sovereign Local Currency Absolute Return 1, Hedge Funds 1, Hedge Funds - Equity Hedge 1, Hedge Funds - Event Driven 1, Hedge Funds - Macro 1, Hedge Funds - Relative Value 1, Hedge Funds - Managed Futures 1, Commodities Global Natural Resources Equity U.S. Core Real Estate U.S. Residential Real Estate Timberland Farmland U.S. REIT Global REIT U.S. Private Equity 1, U.S. Venture Capital 1, Energy Infrastructure U.S. Aggregate U.S. Treasury U.S. Treasury Bills U.S. Intermediate Treasury U.S. Long Treasury U.S. Investment Grade Credit U.S. Intermediate Investment Grade Credit U.S. Long Investment Grade Credit U.S. TIPS U.S. Agencies U.S. MBS U.S. Investment Grade CMBS U.S. Intermediate Municipal U.S. Short Municipal U.S. High Yield 1. Consistent with the Representative Index, returns are net of management fees. 2. The Representative Index is not investable. Returns are based on manager averages. Actual results may vary significantly. For illustrative purposes only. There can be no assurance that the expected returns above will be achived.

15 RETURN ASSUMPTIONS // 15 Asset Class Correlations Negative Correlation Fixed Income Alternatives Equity Fixed Income Alternatives 10-Year Correlation Matrix U.S. Bank Loans Global Aggregate Ex-US Global Treasury Ex-US Global Corporate Ex-US Emerging Markets Sovereign USD Emerging Markets Corporate USD Emerging Markets Sovereign Local Currency Absolute Return Hedge Funds U.S. Equity U.S. Large Cap Equity U.S. Mid Cap Equity U.S. Small Cap Equity U.S. Micro Cap Equity Global Equity International Developed Equity International Small Cap Equity Emerging Equity U.S. Aggregate U.S. Treasury U.S. Treasury Bills U.S. Intermediate Treasury U.S. Long Treasury U.S. Investment Grade Credit U.S. Intermediate Investment Grade Credit U.S. Long Investment Grade Credit U.S. TIPS U.S. Agencies U.S. MBS U.S. Investment Grade CMBS U.S. Intermediate Municipal U.S. Short Municipal U.S. High Yield U.S. Bank Loans Global Aggregate Ex-US Global Treasury Ex-US Global Corporate Ex-US Emerging Markets Sovereign USD Emerging Markets Corporate USD Emerging Markets Sovereign Local Currency Absolute Return 1, Hedge Funds 1, Hedge Funds - Equity Hedge 1, Hedge Funds - Event Driven 1, Hedge Funds - Macro 1, Hedge Funds - Relative Value 1, Hedge Funds - Managed Futures 1, Commodities Global Natural Resources Equity U.S. Core Real Estate U.S. Residential Real Estate Timberland Farmland U.S. REIT Global REIT U.S. Private Equity 1, U.S. Venture Capital 1, Energy Infrastructure Hedge Funds - Equity Hedge Hedge Funds - Event Driven Hedge Funds - Macro Hedge Funds - Relative Value Hedge Funds - Managed Futures Commodities Global Natural Resources Equity U.S. Core Real Estate U.S. Residential Real Estate Timberland Farmland U.S. REIT Global REIT U.S. Private Equity U.S. Venture Capital Energy Infrastructure 1. Consistent with the Representative Index, returns are net of management fees. 2. The Representative Index is not investable. Returns are based on manager averages. Actual results may vary significantly. For illustrative purposes only. There can be no assurance that the expected returns above will be achived.

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Borges de Medeiros, 633, 4th floor, Rio de Janeiro, RJ, Brazil, CEP Authorized and regulated by the Brazilian Securities and Exchange Commission (CVM). The issuing entities above are BNY Mellon entities ultimately owned by The Bank of New York Mellon Corporation. BNY Mellon Investment Management EMEA Limited ( BNYMIM EMEA ) is the distributor of the capabilities of its investment managers in Europe, Middle East, Africa and Latin America. Investment managers are appointed by BNYMIM EMEA or affiliated fund operating companies to undertake portfolio management services in respect of the products and services provided by BNYMIM EMEA or the fund operating companies. These products and services are governed by bilateral contracts entered into by BNYMIM EMEA and its clients or by the Prospectus and associated documents related to the funds. BNY Mellon Cash Investment Strategies is a division of The Dreyfus Corporation. Investment advisory services in North America are provided through four different SEC-registered investment advisers using the brand Insight Investment: Cutwater Asset Management Corp, Cutwater Investor Services Corp, Pareto New York LLC and Pareto Investment Management Limited. The Insight Investment Group includes Insight Investment Management (Global) Limited, Pareto Investment Management Limited, Insight Investment Funds Management Limited, Cutwater Asset Management Corp and Cutwater Investor Services Corp. BNY Mellon owns 90% of The Boston Company Asset Management, LLC and the remainder is owned by employees of the firm. The Newton Group ( Newton ) is comprised of the following affiliated companies: Newton Investment Management Limited, Newton Capital Management Limited (NCM Ltd), Newton Capital Management LLC (NCM LLC), NCM LLC personnel are supervised persons of NCM Ltd and NCM LLC does not provide investment advice, all of which is conducted by NCM Ltd. Only NCM LLC and NCM Ltd offer services in the U.S. BNY Mellon owns a 20% interest in Siguler Guff & Company, LP and certain related entities (including Siguler Guff Advisers LLC). BNY Mellon owns a 71% interest in Amherst Capital Management LLC (Amherst Capital), an indirect majority owned subsidiary. The remainder is owned by Amherst Holdings LLC which is independent of BNY Mellon and whose CEO is an employee of Amherst Capital. This information does not constitute an offer to sell, or a solicitation of an offer to purchase, any of the firms services or funds to any U.S. investor, or where otherwise unlawful. NM KL20 Exp: 1/17 bnymellonim.com