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A PRECISE APPROACH TO ASSET ALLOCATION

Michael Hunstad, Ph.D.Head of Quantitative Strategies

2northerntrust.com | © 2018 NorthernTrust

Northern Trust Asset Management

* Northern Trust Asset Management assets under management as of March 31, 2018. The above rankings are not indicative of future performance. Unless otherwise noted, rankings are based on total worldwide assets under management of $942.4 billion as of December 31, 2016 by Pensions & Investments magazine’s 2017 Special Report on the Largest Money Managers.

A leading global investment manager with a client-centric culture rooted in a fiduciary heritage.

Institutional79%

Wealth & Retail21%

Equity$524B

Fixed Income$422B

Other$8B

Asset Class

Active$387B

Passive$567B

Style Client Type

World’s 14th largest asset manager

$954 billion TOTAL AUM*

TOTAL ASSETS UNDER MANAGEMENT


A GLOBAL LEADER IN ASSET MANAGEMENT

Providing innovative solutions to meet client objectives has earned the confidence of global investors.

Worldwide Assets1

14TH LARGEST

Worldwide Institutional Assets2

12TH LARGEST

Factor-Based Strategies1

6TH LARGEST

ESG Principles Manager1

16TH LARGEST

Sovereign Wealth Funds1

6TH LARGEST

Endowment/Foundation Assets3

6TH LARGEST

Institutional Cash Tax-Exempt Manager3

LARGEST IN THE U.S.

Indexed (U.S.) Equity3

5TH LARGEST

ETF Sponsor1

16TH LARGEST

TOP MONEY MANAGER RANKING EquityLeaders in Factor-based investing since 1994

Best Smart Beta Strategies5

Fixed Income &Liquidity Solutions

ESGOver 25 Years of Managing Socially Responsible Portfolios

UNPRI Signatory

Retirement Solutions8th Largest DB Manager3

10th Largest DC Manager4

50 South Capital

Hedge Funds andPrivate Equity Solutions

Northern Funds

$161 billion8 diversified mutual fund family

Multi-ManagerThird-party manager solutions

3rd Largest OutsourcingManager Worldwide / 1st U.S.7

Flexshares®

Family of equity, fixed income & real asset ETFs

Northern Trust Asset Management

1Total worldwide assets under management. 2Worldwide institutional assets under management. 3U.S. Institutional, tax-exempt assets managed internally.4U.S. Institutional, tax exempt. 6Institutional Investor, 2013 and 2014. 7Pensions and Investments as of March 31, 2017. 8Data as of December 31, 2017. The above rankings are not indicative of future performance. Unless otherwise noted, rankings are based on total worldwide assets under management of $942.5 billion as of December 31, 2016 by Pensions & Investments magazine’s 2017 Special Report on the Largest Money Managers.

Two-time Fixed Income Municipal Manager of the Year6

Are you currently engaging in factor-investing?



Intentionally or unintentionally?Are you being compensated for it?


LOW VOLATILITY

MOMENTUM

Defining Factors

VALUE

DIVIDEND YIELD

SIZE

QUALITY


Performance Composition

1Mehra, Rajnish; Edward C. Prescott (1985). “The Equity Premium: A Puzzle.” Journal of Monetary Economics 15 (2): 145–161. 2Carhart, M. M. (1997). “On Persistence in Mutual Fund Performance.” The Journal of Finance 52: 57–82. 3Goyal, A. and Sunil Wahal (2008). “The Selection and Termination of Investment Management Firms by Plan Sponsors.” The Journal of Finance 63: 1805–1847.

βBeta

Persistent Returns1

αAlpha

Mean Reverting Returns3

+ = Total Return of an Active

Strategy

Common Compensated Factors

Persistent Returns2

+LOW VOLATILITY

MOMENTUM

VALUE

DIVIDEND YIELD

SIZE

QUALITY


Factors Have Driven Excess Returns for the Last 50 Years

1Excess monthly returns over T-Bills, annualized.Source: Carhart, Mark M. “On persistence in mutual fund performance.” The Journal of Finance 52.1 (1997): 57–82.

CommonStyle Factor

ExposureSkill

“Stock Picking”Annual

Excess Return¹

6.60% + –1.56% = 4.94%


Factors and Their Risk Premiums

Past performance is no guarantee of future results. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Factor returns are defined as the equally weighted top or bottom 40% of the MSCI World Index. Ranking is based on exposure to factor as defined by Barra (Value, Momentum, Volatility, Dividend Yield, Size) and Northern Trust Quality Score. Factors are winsorized to remove extreme 5% of outliers. Source: Northern Trust Quantitative Research, Data as of 12/31/2016

7.6%

13.2%

9.9%11.1%

10.0%

13.1%11.0%

0%

2%

4%

6%

8%

10%

12%

14%

MSCI WorldIndex

Value Size Momentum Low Volatility DividendYield

Quality

ANNUALIZED RETURN OF COMMON FACTORS (1997–2016)


Factors and Their Risk Premiums

Past performance is no guarantee of future results. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Factor returns are defined as the equally weighted top or bottom 40% of the MSCI World Index. Ranking is based on exposure to factor as defined by Barra (Value, Momentum, Volatility, Dividend Yield, Size) and Northern Trust Quality Score. Factors are winsorized to remove extreme 5% of outliers. Source: Northern Trust Quantitative Research, Data as of 12/31/2016

0.490.63 0.56

0.66

0.90

0.65 0.70

0%10%20%30%40%50%60%70%80%90%

100%

MSCI WorldIndex

Value Size Momentum Low Volatility DividendYield

Quality

SHARPE RATIOS OF COMMON FACTORS (1997–2016)

TAKING INTENTIONAL RISK AND BEING COMPENSATED FOR IT



Classic Style Box Construction Approach

Source: Northern Trust Quantitative Research, MSCI Barra. Actual investor data as of March 31, 2016.

EQUITY STYLE BOX

Large

Medium

Small

Value Blend Growth

Benchmark


Cancellation: The Most Common Problem

Note: “+” denotes an addition to factor exposure, while the “–” denotes a detraction from factor exposure.Source: Northern Trust Quantitative Research, MSCI Barra. Actual investor data as of March 31, 2016.

ACTUAL INVESTOR PORTFOLIO EXAMPLE

Strategies Growth Value Momentum Size VolatilitySmall-Cap Value – + – + –Small-Cap Growth + – + + –Small-Cap Growth + – + + –Mid-Cap Value – + – – –Mid-Cap Growth + – + + +Large-Cap Value – + – – –Large-Cap Value – + – – +Large-Cap Growth + – + – +Aggregate Portfolio Exposure 0 0 0 0 0


Complex Approach to Mimic an Index


EQUITY STYLE BOX

Large

Medium

Small

Value Blend Growth

Benchmark

Aggregate Portfolio


The Result: Low Active Risk at a High Fee


45bps

40bps

65bps

47bps

20bps

25bps

38bps

29bps

35bps

ACTIVE RISK NET OF FACTOR EXPOSURE

High fees not diversified away

4.30%

3.30% 3.25%2.80% 2.60% 2.50%

1.70%1.40%

0.60%

Small-CapValue

Small-CapGrowth

Large-CapValue

Mid-CapGrowth

Small-CapGrowth

Large-CapValue

Large-CapGrowth

Mid-CapValue

AggregatePortfolio

Over diversification deteriorated portfolio

active risk

THE SOLUTIONEMPLOY TARGETED RISK EXPOSURES AND MINIMIZE UNINTENTIONAL RISK



Portfolio Analysis — Case Study

Note: This representative portfolio analysis was selected in order to illustrate how factors have been implemented in this unique equal weighting approach that uses passive, fundamental active, and factor-based management.Source: Northern Trust Quantitative Research, MSCI, Barra (USE3/GEM2 used for domestic/global, respectively), Russell. Please see important information on Hypothetical Returns at the end of this presentation. For illustrative purposes only. Past performance is not indicative of future results. Returns reflect the reinvestment of dividends and other earnings and are shown before the deduction of investment management fees. Returns of the indexes also do not typically reflect the deduction of investment management fees, trading costs or other expenses. It is not possible to invest directly in an index. Indexes are the property of their respective owners, all rights reserved.The case study presented is intended to illustrate products and services available at Northern Trust. They do not necessarily represent experiences of other clients nor do they indicate future performance. Individual results may vary.

Expected Alpha 1.8%

Expected Active Risk 4.4%

Expected Information Ratio 0.41

ORIGINAL PORTFOLIO

Fundamental Active Passive


Portfolio Analysis — Case Study


-0.60

-0.40

-0.20

0.00

0.20

0.40

High Quality Negative Momentum Small Size Low Value High Volatility

Expo

sure

ORIGINAL PORTFOLIO FACTOR EXPOSURE

Positively Compensated Negatively Compensated

High Quality

Negative Momentum

Small Size

Low Value

High Volatility

IMMATERIAL EXPOSURE


Solution: Targeted Risk Exposures & Minimize Unintentional Risks


Expected Alpha 2.0%



ADDING TARGETED FACTORS

Fundamental Active

Passive

Factors


Solution: Targeted Risk Exposures & Minimize Unintentional Risks


-0.60

-0.40

-0.20

0.00

0.20

0.40

High Quality Negative Momentum Small Size Low Value High Volatility

Expo

sure

ORIGINAL PORTFOLIO FACTOR EXPOSURE

Positively Compensated Negatively Compensated

High Quality

Negative Momentum

Small Size

Low Value

High Volatility

IMMATERIAL EXPOSUREIMMATERIAL EXPOSURE

NEW PORTFOLIO FACTOR EXPOSURE

Positively Compensated

-0.60

-0.40

-0.20

0.00

0.20

0.40

High Quality Negative Momentum Small Size Low Value Low Volatility

Expo

sure

High Quality Positive

Momentum

Small Size

High Value

Low Volatility


The Result


Expected Alpha 1.8%



ORIGINAL PORTFOLIO

Fundamental Active

Passive

Expected Alpha 2.0%



ADDING TARGETED FACTORS

Fundamental Active

Passive

Factors

Relative Change

+11%

–38%

+80%

USING FACTORS TO EXECUTE ASSET ALLOCATION WITH PRECISION



Translating Top-Down Views Into Factors

Macro ViewsEconomic Growth

Inflation

Monetary Policy

Fiscal Policy

Tax Policy

Trade Policy

Structured MarketsEquity Beta

Credit Beta

Rates Beta

Commodity Beta

Illiquidity Beta

Currency Beta

FactorsSize

Value

Quality

Low Volatility

Momentum

Dividend Yield

Economic Growth

Inflation

Equity Beta

Quality

Low Volatility

Tax Policy

Equity Beta

Value


Factor Returns in Varying Interest Rate Regimes

Source: Northern Trust Quantitative Research, Factset, MSCI Barra. Russell 3000 Universe, January 1979 through December 2016. Returns are long/short factor mimicking portfolios.Hypothetical expected yields are developed annually by Northern Trust’s Capital Market Assumptions Working Group. There are risks involved in investing including possible loss of principal.There is no guarantee that the investment objectives of any fund or strategy will be met. Risk controls and models do not promise any level of performance or guarantee against loss of principal.1Regimes are defined in accordance with The Evolution of Monetary Policy Regimes in the U.S. by Jinho Bae, Chang-Jin Kim and Dong Heon Kim, the Institute of Economic Research, Korea University, 2011.Past performance is no guarantee of future results. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index.

-2.1

1.2

-0.5

4.9

-1.7-0.4

3.0

6.64.9

10.3

2.5

7.5

-4.0

0.0

4.0

8.0

12.0

Dividend Yield Low Volatility Momentum Quality Size Value

Annu

al E

xces

s R

etur

ns (%

)

Expansionary Regime1 Contractionary Regime1


Factor Returns in Low Equity Return Environments

Source: Northern Trust Quantitative Research, Factset, MSCI Barra. Russell 3000 Universe, January 1979 through December 2016. Returns are long/short factor mimicking portfolios.Hypothetical expected yields are developed annually by Northern Trust’s Capital Market Assumptions Working Group. There are risks involved in investing including possible loss of principal.There is no guarantee that the investment objectives of any fund or strategy will be met. Risk controls and models do not promise any level of performance or guarantee against loss of principal.Past performance is no guarantee of future results. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index.

Equity Returns <6% Equity Returns >6%

4.2

7.9

4.0 4.9

-1.3

5.6

-4.2-7.1

-0.1

1.03.6

-1.4

-10.0

-5.0

0.0

5.0

10.0

DividendYield

Low Volatility Momentum Quality Size Value

Annu

al E

xces

s R

etur

ns (%

)

QUESTIONS



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FACTOR RESEARCH Articles & Webinars

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BLOGTimely market perspectives

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Important InformationThe information contained herein is intended for use with current or prospective clients of Northern Trust Investments, Inc. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Northern Trust and its affiliates may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, and its accuracy and completeness are not guaranteed. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor. Opinions and forecasts discussed are those of the author, do not necessarily reflect the views of Northern Trust and are subject to change without notice.

This report is provided for informational purposes only and 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. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, adviser risk and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe Northern Trust’s efforts to monitor and manage risk but does not imply low risk.

Past performance is no guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by Northern Trust. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For additional information on fees, please refer to Part 2a of the Form ADV or consult a Northern Trust representative.

Forward-looking statements and assumptions are Northern Trust’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.


Important InformationIf presented, hypothetical portfolio information provided does not represent results of an actual investment portfolio but reflects representative historical performance of the strategies, funds or accounts listed herein, which were selected with the benefit of hindsight. Hypothetical performance results do not reflect actual trading. No representation is being made that any portfolio will achieve a performance record similar to that shown. A hypothetical investment does not necessarily take into account the fees, risks, economic or market factors/conditions an investor might experience in actual trading. Hypothetical results may have under- or over-compensation for the impact, if any, of certain market factors such as lack of liquidity, economic or market factors/conditions. The investment returns of other clients may differ materially from the portfolio portrayed. There are numerous other factors related to the markets in general or to the implementation of any specific program that cannot be fully accounted for in the preparation of hypothetical performance results. The information is confidential and may not be duplicated in any form or disseminated without the prior consent of Northern Trust.

This information is intended for purposes of Northern Trust marketing of itself as a provider of the products and services described herein and not to provide any investment recommendations or advice within the meaning of the Department of Labor’s Final Fiduciary Rule (29 CFR §2510.3-21). Northern Trust is not undertaking to provide impartial investment advice or give advice in a fiduciary capacity to the recipient of these materials. To the extent that the recipient of these materials has authority to act on behalf of a benefit plan that is subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), Northern Trust provides information with the understanding that the recipient: (1) is a fiduciary under ERISA with respect to any plan transaction(s) contemplated herein and is responsible for exercising independent judgment in evaluating any such transaction(s); (2) is independent of Northern Trust; (3) is a bank or similarly regulated financial institution, insurance carrier, registered investment adviser, registered broker-dealer, or a plan fiduciary that holds, or has under management or control, total assets of at least $50 million; (4) is capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. Please advise Northern Trust immediately if any of the foregoing understandings is incorrect. Further, Northern Trust and its affiliates receive fees and other compensation in connection with the products and services described herein as well as for custody, fund administration, transfer agent, investment operations outsourcing and other services rendered to various proprietary and third party investment products and firms that may be the subject of or become associated with the services described herein.

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 investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

© 2018 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A.

Private and Confidential; For Institutional Investor Use Only

Prospective Low Returns and What To Do About ItPrepared specifically for NCPERS

Peter Hecht, Ph.D.

May 2018

Managing Director

Disclosures

32

The information set forth herein has been obtained or derived from sources believed by AQR Capital Management, LLC (“AQR”) to be reliable. However, AQR does not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does AQR recommend that the attached information serve as the basis of any investment decision. This document has been provided to you in response to an unsolicited specific request and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This document is intended exclusively for the use of the person to whom it has been delivered by AQR and it is not to be reproduced or redistributed to any other person. Please refer to the Appendix for more information on risks and fees. For one-on-one presentation use only. Past performance is not a guarantee of future performance. This presentation is not research and should not be treated as research. This presentation does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR.

The views expressed reflect the current views as of the date hereof and neither the speaker nor AQR undertakes to advise you of any changes in the views expressed herein. It should not be assumed that the speaker will make investment recommendations in the future that are consistent with the views expressed herein, or use any or all of the techniques or methods of analysis described herein in managing client accounts. AQR and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this presentation.

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the speaker guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision.

There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Target allocations contained herein are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different than that shown here. This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.

The information in this presentation may contain projections or other forward‐looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, andis only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this presentation, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Performance of all cited indices is calculated on a total return basis with dividends reinvested.

The investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Please note that changes in the rate of exchange of a currency may affect the value, price or income of an investment adversely.

Neither AQR nor the speaker assumes any duty to, nor undertakes to update forward looking statements. No representation or warranty, express or implied, is made or given by or on behalf of AQR, the speaker or any other person as to the accuracy and completeness or fairness of the information contained in this presentation, and no responsibility or liability is accepted for any such information. By accepting this presentation in its entirety, the recipient acknowledges its understanding and acceptance of the foregoing statement.

Rear View Mirror InvestingPutting historical returns in perspective

Source: AQR, http://deffinity.com/wp-content/uploads/2016/04/Riders-on-the-Storm-Dont-drive-looking-in-the-rear-view-mirror.png 33

Rolling 5-Year Performance Metrics of Global Stocks, Global Bonds and a 60/40 PortfolioFeb 1990 – Dec 2017

Source: AQR, Bloomberg. Global Stocks is the MSCI World Index, Global Bonds is the Barclays Global Aggregate Hedged, 60/40 is 60% MSCI World and 40% Barclays Global Agg. Cash rate used to calculate the Sharpe ratio is the Merrill Lynch 3-month treasury bill index. 34

5-Year PerformanceRisk-adjusted returns have been extraordinary

-10%

0%

10%

20%

MSCI World Global Agg 60/40

Excess Returns (vs. Cash)

Excess Returns MSCI World Global Agg 60/40 Volatility MSCI World Global Agg 60/40 Sharpe Ratio MSCI World Global Agg 60/4090% 12% 4% 8% 90% 19% 4% 12% 90% 1.0 1.7 1.275% 10% 4% 7% 75% 17% 3% 10% 75% 0.8 1.3 1.0Median 5% 3% 5% Median 14% 3% 9% Median 0.5 1.0 0.625% -2% 2% 1% 25% 12% 3% 7% 25% 0.0 0.8 0.110% -5% 2% -1% 10% 10% 3% 7% 10% -0.2 0.7 -0.1Most Recent 11% 3% 8% Most Recent 10% 3% 6% Most Recent 1.1 1.1 1.3Percentile 87% 41% 84% Percentile 6% 16% 5% Percentile 95% 59% 95%

This Year 50th-75th Percentile 25th-50th Percentile 10th-90th Percentile

-10%

0%

10%

20%


Volatility (Risk)

-1.0

0.0

1.0

2.0


Sharpe Ratio (Risk-adjusted Return)

Capital Market Assumptions

Source: AQR, https://aer.eu/wp-content/uploads/2017/02/Private-Social-Networks-in-20-Years.jpg 35

Focus on the FutureForward looking returns drive investment decisions today

Expected Real Return of U.S. and Global 60/40 Stock/Bond Portfolio*January 1900–December 2017

* Earnings data through 9/30/2017.Source: AQR, Bloomberg, Robert Shiller’s Data Library, Ibbotson Associates (Morningstar), Kozicki-Tinsley (2006), Federal Reserve Bank of Philadelphia, Blue Chip Economic Indicators, Consensus Economics. U.S. 60/40 is 60% U.S. stocks represented by the Standard&Poor’s 500 Index and 40% long-dated Treasuries represented by 10-year Treasuries. Global 60/40 is 60% MSCI World and 40% GDP-Weighted 10-year Real Yields. Global 60/40 begins in December 1989. The equity yield is a 50/50 mix of two measures: 50% Shiller E/P * 1.075 and 50% Dividend/Price + 1.5%. U.S. bond yield is 10-year real Treasury Yield over 10-year inflation forecast. Scalars are used to account for long term real Earnings Per Share (EPS) Growth. Please read important disclosures in the Appendix. 36

Current EnvironmentLow expected returns for 60/40 stock/bond

0%

2%

4%

6%

8%

10%

12%

14%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

US 60/40 Real Return Global 60/40 Real Return Long-term Average

1.5%(2nd percentile)

2.1%(0th percentile)

5.0%

Expected Real Return of U.S. Stocks and Bonds January 1900–December 2017

* Earnings data through 9/30/2017.Source: AQR. Data description: The real equity yield is an average of the Shiller earnings yield (using 10-year earnings) scaled by 1.075 (embedding an annual EPS growth of 1.5%) and dividend yield plus 1.5% (roughly the long-run real growth of dividends-per-share and earnings-per-share). The universe of stocks represented is the S&P 500. The real bond yield is the yield on long-term U.S. Treasury bonds minus long-term expected inflation based on Blue Chip Economic Indicators, Consensus Economics and the Federal Reserve Bank of Philadelphia. Before survey data became available in 1978, expected long-term inflation is based on statistical estimates and on 1-year ahead Livingston inflation forecasts. This is one set of estimates of ex-ante real yields for equities and bonds, but other reasonable specifications should tell broadly the same story. Please read important disclosures in the Appendix 37

Current EnvironmentLow expected returns for both stocks and bonds

-5%

0%

5%

10%

15%

20%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

U.S. Equity Real Return Equity Average U.S. Treasury Real Return Treasury Average



What Can I Do About It?

There are many things to consider, but what are the low-hanging fruit?

Source: AQR, Penrose, Colorado Chamber of Commerce. 38

ChallengePortfolio

Constraints ImprovePortfolio

Construction

Add Alternative

Beta

Add MoreAlpha

Do Nothing

TakeMore Risk

Today’s Focus

Challenge Your Portfolio Constraints

Source: AQR. For illustrative purposes only. https://static.vecteezy.com/system/resources/previews/000/108/676/non_2x/free-food-pyramid-vector.png 39

Lean on your managers and financial intermediaries to help overcome your constraints:• Higher risk versions of the same strategy• Risk parity• Portable alpha• 130/30 strategies

Learn how to eat a risk-adjusted return

Inefficient Portfolio(Current)

Efficient Portfolio(Potential)

Risk

Expe

cted

Ret

urn

rf

• Be skeptical and humble; question everything.

• Assume markets are efficient when facing off against alpha managers.

• Make sure you are properly resourced.

• Invest in first class ex-ante risk and ex-post performance attribution systems. Test your manager.

• These are necessary — not sufficient —conditions

Source: AQR, F2F Studios. 40

Add More AlphaSome guiding principles

Finding a lowly correlated investment is easy!

What isn’t easy is finding one that also produces a unique return stream that is high on average and consistent!

Source: AQR 41

Add More Alpha (cont…)Low correlation strategies still need to be “special”

Bingomachine

Pete’s Daughter

“I can deliver uncorrelated

returns!”

Manager 1 Expected Outperformance Year 1 Year 3 Year 5 Year 10 Year 15

0.0% 50.0% 50.0% 50.0% 50.0% 50.0%

1.5% 55.0% 58.7% 61.2% 65.6% 68.8%

3.0% 60.0% 67.0% 71.5% 78.9% 83.7%

4.5% 64.8% 74.5% 80.2% 88.5% 93.0%

6.0% 69.4% 81.0% 87.2% 94.6% 97.5%

Add More Alpha (cont…)

What if a manager passes your rigorous process?Even if we know a manager has a performance edge over another, it is still very likely that the “better” manager could underperform over multi-year horizons. E.g., assume two managers operate at 10% volatility each and are 0.3 correlated. There is still a greater than 40% chance for the manager with a 1.5% annual return edge to underperform the other even over 3 years!

Be more patient

Source: AQR. For illustrative purposes only. 42

Probability of Manager 1 Outperforming Manager 2

U.S. Equity 10-Year Returns Sorted by Starting CAPE Valuation*January 1900 – December 2015

Cumulative Excess Return of Timing StrategyJanuary 1900 – December 2015

*Cyclically Adjusted Price/Earnings ratio. Sources: AQR, Robert Shiller’s data library for CAPE, which is here: http://www.econ.yale.edu/~shiller/data.htm. U.S. equity market returns from Global Financial Data (GFD), Ibbotson/Morningstar and Datastream. U.S. Equity is the S&P 500 Index from 1926, and prior to 1926 a reconstruction of the S&P 500 available on Robert Shiller’s website which uses dividends and earnings data from Cowles and associates, interpolated from annual data. Realized equity return calculations (right chart) rebalances monthly, applying a tactical weight of between 50% and 150% depending on latest Shiller E/P vs. a rolling 60-year sample. Returns are gross of transaction costs and fees, and excess of cash. For further details, see https://www.aqr.com/library/aqr-publications/market-timing-sin-a-little. These are not the returns of actual portfolios that AQR currently manages and are for illustrative purposes only. Hypothetical performance results have certain inherent limitations, some of which are disclosed in the Appendix. 43

Add More Alpha (cont…)Market timing — be tactical or humble?

• Simple sorting or regression analyses imply a hindsight bias...• Backtest timing strategy shows no outperformance in the past 60 years• Richening trend since 1950s, causing the strategy to be underinvested • Stark illustration of the challenges: in the 1990s, the strategy gets strong “overvalued” signal not in 1999 or even 1996, but

in 1991 – a painful case of “early equals wrong”

0%2%4%6%8%

10%

Above 22.0(Richest)

17.8 to 22.0 13.7 to 17.8 10.7 to 13.7 Below 10.7(Cheapest)

Annu

aliz

ed E

xces

s R

etur

n

1

5

50

500

1900 1920 1940 1960 1980 2000

Cum

ulat

ive

Exce

ss

Ret

urn

Buy & Hold Value Timing Value Outperformance


Even if PE added value historically (which may not be the case — see below), that doesn’t mean it’s good on a prospective basis. The PE market is much more mature today…

Public Market Equivalent (PME) is a method of evaluating private equity performance by discounting the PE cash flows at the public benchmark’s return. In the above, a PME greater than 1 means that private equity outperformed the reference benchmark using this methodology.

Private equity and illiquids

Source: Financial Analysts Journal (Vol. 72, No. 4). The information above can be found in Table 3 from “A Bottom-Up Approach to the Risk-Adjusted Performance of the Buyout Fund Market” (L’Her et al., 2016). 44

UnadjustedS&P 500

Size-AdjustedS&P 600

Size- and Leverage-Adjusted S&P 600

Vintage PME PME PME1986 1.33 1.47 1.28

· · · ·· · · ·· · · ·

2008 0.99 0.95 0.84VW average, 1986–2008 1.17* 1.04 0.97

Privates Beat Publics Publics Beat Privates

MSCI World(Net)

AQR Global Enhanced Equity (GF)

AQR Global Enhanced Equity (GF) (Levered 2x)

AQR Global Enhanced Equity (GF) (Levered 2x)

(Smoothed)Geometric Return (ann.) 7.3% 8.8% 12.2% 11.7%Volatility (ann.) 14.9% 15.0% 25.6% 8.3%

Cumulative Gross of Fee Return: MSCI World versus AQR Global Enhanced (Levered/Smoothed)November 2003 – September 2017

• We start with a long-only AQR strategy, our Global Enhanced Equity Composite, compared to MSCI World.

• We then lever this strategy 2:1*• Then we smooth the returns.** “Reported”

(smoothed) NAV = average of last 12 month “True” (unsmoothed) NAV.

• The final result is an illustrative example that shows how leverage and smoothing can make any strategy look great.

* The 2x leverage is calculated in the following manner: 1) invest $200 at the start of the period ($100 of equity and $100 borrowed at the risk free rate), 2) each month, NAV in the account is calculated as the cumulative growth of the $200 investment minus the cumulative growth of the $100 borrowed, 3) the monthly return is the month-over-month change in the NAV of the account.** We first create a smoothed NAV that at each month is equal to the average of the past 12 months’ NAV. Returns are then calculated as in 3) above but using this smoothed NAV instead of actual NAV.Source: AQR, Bloomberg. This analysis is for illustrative purposes only. Hypothetical data has inherent limitations, some of which are disclosed in the Appendix. The data shown is supplemental to GIPS® compliant presentation for the AQR Global Enhanced Equity GIPS Composite found in the Appendix. 45

Add More Alpha (cont…) Is this an alpha-generating illiquid strategy?

Public EquityHomemade

Private Equity

$0

$500

2004 2006 2008 2010 2012 2014 2016MSCI World (Net)AQR Global Enhanced Equity (GF)AQR Global Enhanced Equity (GF) (Levered 2x)AQR Global Enhanced Equity (GF) (Levered 2x) (Smoothed)


Beta to Barclays High Yield Corporate Index (Unadjusted /Smoothed and Adjusted)

Is my prestigious credit manager’s beta 0.5 or 1.1?

Correcting less liquid strategies for price smoothing

Source: AQR. Charts are for illustrative purposes only. Not to be construed as a recommendation or investment advice. Not representative of a portfolio that AQR currently manages. 46

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Unadjusted Beta Adjusted Beta Ave. Unadjusted Beta Ave. Adjusted Beta

1.1

0.5

There are no silver bullets in investing

That being said, don’t allow perfection to become the obstacle to progress

What are the low-hanging fruit?

Source: AQR, Penrose, Colorado Chamber of Commerce. 47

Concluding Thoughts

ChallengePortfolio

Constraints ImprovePortfolio

Construction

Add Alternative

Beta

Add MoreAlpha

Do Nothing

TakeMore Risk

Disclosures

Index Definitions

49

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure the large and mid cap equity market performance of 23 developed countries.

The S&P 500 Index consists of 500 large U.S. companies listed on the NYSE and Nasdaq and is designed to measure U.S. large cap equity market performance.

The Barclays Aggregate Index measures the investment grade, USD-denominated fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS, ABS, and CMBS.

Performance Disclosures

50

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is intended exclusively for the use of the person to whom it has been delivered and it is not to be reproduced or redistributed to any other person.

Broad-based securities indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index.

There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH, BUT NOT ALL, ARE DESCRIBED HEREIN. NO REPRESENTATION IS BEING MADE THAT ANY FUND OR ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN HEREIN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY REALIZED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS THAT CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS, ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. The hypothetical performance results contained herein represent the application of the quantitative models as currently in effect on the date first written above and there can be no assurance that the models will remain the same in the future or that an application of the current models in the future will produce similar results because the relevant market and economic conditions that prevailed during the hypothetical performance period will not necessarily recur. Discounting factors may be applied to reduce suspected anomalies. This backtest’s return, for this period, may vary depending on the date it is run. Hypothetical performance results are presented for illustrative purposes only. In addition, our transaction cost assumptions utilized in backtests, where noted, are based on AQR Capital Management, LLC’s, (“AQR”)’s historical realized transaction costs and market data. Certain of the assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered. Changes in the assumptions may have a material impact on the hypothetical returns presented. Actual advisory fees for products offering this strategy may vary.

Performance DisclosuresAQR Capital Management, LLC Global Enhanced Equity Composite 10/31/2003 – 12/31/2016

51

* MSCI World Index (Net of Dividends)

This presentation cannot be used in a general solicitation or general advertising to offer or sell interest in its Funds. As such, this information cannot be included in any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and cannot be used in any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

AQR claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. AQR has been independently verified for the period August 1998 through December 2016. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The Global Enhanced Equity Composite has been examined for the periods from its inception through December 31, 2016. The verification and performance examination reports are available upon request.

Firm Information: AQR Capital Management, LLC (“AQR”) is a Connecticut based investment advisor registered with the Securities and Exchange Commission under the Investment Advisors Act of 1940. AQR conducts trading and investment activities involving a broad range of instruments, including, but not limited to, individual equity and debt securities, currencies, futures, commodities, fixed income products and other derivative securities.

For purposes of firm-wide compliance and firm-wide total assets, AQR defines the “Firm” as entities controlled by or under common control with AQR (including voting right). The Firm is comprised of AQR and its advisory affiliates, including CNH Partners, LLC (“CNH”).

Upon request AQR will make available a complete list and description of all of Firm composites, as well as additional information regarding the policies for valuing portfolios, calculating performance, and preparing compliant presentations.

Past performance is not an indication of future performance.

Year Gross Return Net Return Benchmark * Number of Dispersion Composite Benchmark * Composite Total Firm Carve-Out

% % Return % Portfolios % 3-Yr StDev % 3-Yr StDev % Assets ($M) Assets ($M) %

2003 7.25 7.18 7.87 1 N/A N/A N/A 244.85 8,661.37 100

2004 18.35 17.88 14.72 2 N/A N/A N/A 395.34 11,830.59 100

2005 13.31 12.86 9.49 4 N/A N/A N/A 725.60 17,972.28 100

2006 22.32 21.84 20.07 11 N/A 8.25 7.64 4,601.10 30,288.30 100

2007 6.39 5.96 9.04 13 0.92 8.69 8.10 5,096.50 34,495.05 100

2008 -38.59 -38.84 -40.71 13 0.50 17.30 17.02 2,811.25 19,207.22 52

2009 31.30 30.79 29.99 12 0.91 21.73 21.40 3,518.41 23,571.55 33

2010 13.06 12.61 11.76 12 0.40 23.82 23.72 4,628.95 32,701.21 N/A

2011 -3.16 -3.55 -5.54 11 0.38 20.22 20.15 4,044.75 43,540.99 N/A

2012 17.08 16.62 15.83 11 0.18 16.46 16.74 4,462.67 71,122.42 N/A

2013 30.11 29.60 26.68 12 0.44 13.56 13.54 5,425.11 98,302.69 N/A

2014 6.67 6.25 4.94 16 0.33 10.07 10.23 7,723.99 122,655.99 N/A

2015 1.71 1.30 -0.87 18 0.40 10.22 10.80 8,623.28 142,173.39 N/A

2016 5.52 5.10 7.51 20 0.40 10.48 10.92 9,383.16 175,089.36 N/A

Performance DisclosuresAQR Capital Management, LLC Global Enhanced Equity Composite 10/31/2003 – 12/31/2016

52

Composite Characteristics: The Global Enhanced Equity Composite (the “Composite”) was created in September 2009. Accounts included invest in developed markets across the world. The Composite strategy utilizes a set of valuation, momentum and economic factors based on proprietary security selection models geared to assist the underlying portfolios in meeting their investment objective. The Composite is denominated in USD. The Composite benchmark is the MSCI World Index (Net of Dividends) (the “Benchmark”). The index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of 23 developed markets' country indices throughout the world. Benchmark returns are not covered by the report of independent verifiers.

From inception to November 30, 2008, all accounts included represent the Stock Selection segment of portfolios that are managed to the firm’s Global Equity Composite. From December 1, 2008 forward, the Composite includes all dedicated Global Equity Stock Selection portfolios as well as the Stock Selection segment of portfolios that are managed to the firm’s Global Equity composite. Percent that is carve-out noted above represents the percent of the Composite made up of the Global Stock Selection segment. Prior to December 31, 2009, cash is allocated to the carve-out segment based on a target cash allocation. Beginning January 1, 2010, all accounts are managed with their own cash balance. Further detail on carve-out calculation methodology and cash allocation to carve-out segment returns is available upon request.

New accounts that fit the Composite definition are added at the start of the first full calendar month after the assets come under management, or after it is deemed that the investment decisions made by the investment advisor fully reflect the intended investment strategy of the portfolio. Composites will exclude terminated portfolios after the last full calendar month performance measurement period that the assets were under management. The Composite will continue to include the performance results for all periods prior to termination. Effective for periods beginning July 1, 2010 through February 28, 2015, the Composite defined a significant cash flow as an external cash flow within a portfolio of 50%. Additional information is available uponrequest.

Calculation Methodology: All portfolios except mutual funds and UCITS are valued monthly and intra-month for large cash flows as defined by firm policy. The Modified Dietz calculation methodology is used when calculating monthly and intra-month returns. Mutual funds and UCITS are valued daily and performance is calculated on a daily basis. Gross of fees returns are calculated gross of management and performance fees, administrative and custodial costs and net of transaction costs beginning January 1, 2010. Prior to January 1, 2010, gross of fees returns are gross of management and performance fees, and net of administrative, custodial, and transaction costs. Additional information regarding fees and the calculation of gross and net performance is available upon request.

Composite net of fees returns are calculated by deducting the maximum management or advisory fee charged by AQR from the gross composite monthly returns to all portfolios in the Composite. The standard model management fee per annum for this Composite is specified below. Composite assets may have been exposed to the impact of performance fees.

The dispersion measure is the equal-weighted standard deviation of accounts in the Composite for the entire year. Dispersion is not considered meaningful for periods shorter than one year or for periods during which the Composite contains five or fewer accounts for the full period. The three-year annualized ex-post standard deviation measure is inapplicable when 36 monthly returns are not available.

Fees: Returns are calculated net of all withholding taxes on foreign dividends. Accruals for fixed income and equity securities are included in calculations. AQR’s management or advisory fees are described in Part 2A of its Form ADV. In addition, AQR funds may have a redemption charge up to 2.00% based on gross redemption proceeds that may be charged upon early withdrawals. Consultants supplied with gross results are to use this data in accordance with SEC, CFTC and NFA guidelines.

AQR’s asset-based fees for portfolios within the Composite may range up to 0.40% of assets under management and are generally billed monthly or quarterly at the commencement of the calendar month or quarter during which AQR will perform the services to which the fees relate.

Other Disclosures: AQR may engage in leveraged, derivative, and short positions in order to meet its performance objectives. The use of these positions may have a material impact on performance results. Additionally, there may be subjective unobservable inputs used in the valuation of certain financial instruments utilized by certain AQR managed investment vehicles. The risks inherent to the strategies employed by accounts included are set forth in the applicable offering documents and other information provided to potential subscribers, from where more detailed information regarding the extent to which leverage, derivatives, and short positions can be obtained. These are available on request, if not provided along with this presentation itself.

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