capital markets overview third quarter 2020

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Capital Markets Overview

Third Quarter 2020

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IMPORTANT DISCLOSURES (DISCLAIMER)

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3Please refer to important disclosures on page 2.

Capital Markets Overview 3Q’20

“Getting Ahead of the Band Wagon”Los Angeles Times – November 24, 1928

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4

Capital Markets Overview 3Q’20Content

TOPIC PAGE

Global Economic Summary 5

Global Market Results 29

US Equity Market 36

Non-US Equity Market 42

US Fixed Income Market 46

Non-US Fixed Income Market 50

Alternatives (Real Assets; Hedge Strategies) 51

Conclusions 55

Recommendations 56

Addendum: Managing Volatility 57

Please refer to important disclosures on page 2.

5

Fed left rates close to 0% and expects to be on hold until at least 2023

COVID cases rising

2Q GDP contracted 31.4% (annualized)WSJ survey of economists expect +24% for Q3

Unemployment (11.1% in June) remains elevatedJobless claims, around 1.5 million per week, have decelerated

Housing benefited from relatively low mortgage ratesMortgage purchase applications sharply higher

Unemployment (7.9% in September) down but remains elevatedJobless claims hovering around 800,000 / weekContinuing claims around 12 million

Capital Markets Overview 3Q’20Domestic (U.S.) Economic Summary


High degree of uncertainty remains

Source: Consultiva, Callan LLC

6

Euro zone 2Q GDP contracted nearly 12%; largest quarterly drop on record; UK -20% for the quarter...also largest ever

Japan 2Q GDP shrank nearly 8% for the quarter

OECD estimates are for global GDP to contract by 4.5% in 2020

Capital Markets Overview 3Q’20Non-U.S. Economic Summary


Source: Consultiva, Callan LLC

High degree of uncertainty remains

According to data from IMF, nearly $10 trillion in stimulusmeasures globally have been announced thus far

11% of global GDP

China one of few spots doing well with positive growthexpected for 2020

7


Capital Markets Overview 3Q’20Global Economic Scorecard

Sources: Bloomberg, International Monetary Fund, and Wells Fargo Investment Institute.

The pandemic sent the global economy into its deepest recession since the 1930s depression in 2Q.

Notes: Consumer confidence scale differs by region/country. Up or down arrow indicates an increasing or decreasing level from the previous quarter. GDP = gross domestic product. YoY = year over year.

Metric World U.S. Eurozone Japan China

GDP growth (%YoY) as of 6/30/20201 2.9 -9.0 -14.7 -9.9 3.2

Inflation (%YoY)as of 8/31/20201 3.6 1.3 -0.2 0.2 2.4

Manufacturing Index levelas of 9/30/2020

52.3 55.4 53.7 47.7 53.0

Central bank rate (%)as of 9/30/2020

– 0.00 – 0.25 0.00 (0.10) – 0.00 4.35

Consumer Confidence Index level

as of 9/30/20202

– 101.8 -13.9 32.7 116.4

Unemployment rate (%) as of 9/30/20203 – 7.9 8.1 3.0 3.8

1. World GDP and Inflation data as of 12/31/2019 2. China data as of 8/31/2020. 3. Eurozone and Japan data as of 8/31/2020. China data as of 6/30/2020.

8


Capital Markets Overview 3Q’20Contribution to Global GDP Growth

Sources: International Monetary Fund and Wells Fargo Investment Institute, as of December 31, 2019. G7 countries include Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. GDP=gross domestic product.

Developed markets

Emerging markets

U.S.15.1%

Brazil2.4%

U.K.2.2%. Germany

3.1%

France2.2%

Italy1.7%

Turkey1.7%

Russia3.1%

China19.3%

India8.0%

Japan4.1%

Mexico1.9%

Australia1.0%

Developed Markets: 40%• Eurozone: 11.4%• G7 Countries: 29.7%

Canada1.3%

Spain1.4%

South Korea1.6%

Indonesia2.6%

Thailand1.0%

Egypt1.0%

Emerging Markets: 60%• Emerging Americas: 7.3%• Emerging Asia: 34.2%• Emerging Europe: 7.1%• Middle East/North Africa: 6.4%• Sub-Saharan Africa: 3.1%

The coronavirus will most likely cut global economic growth in 2020.

9


Capital Markets Overview 3Q’20Global inflation lower but may have peaked

Sources: Bloomberg, FactSet, and Wells Fargo Investment Institute, as of August 31, 2020.

Inflation has bounced some from recent lows, but it still has slowed down globally .

-4

-2

0

2

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6

8

10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

CP

I year-

over-

year (%

)

U.S. Eurozone Japan BRIC

10


Capital Markets Overview 3Q’20U.S. Inflation Benign

Sources: BLS, FactSet, JP Morgan Asset Management (Guide to the Markets – U.S. Data as of Sept. 30, 2020).

U.S. inflation currently hovering around 1%.

11


Capital Markets Overview 3Q’20Manufacturing and Services Recovering

Sources: Bloomberg, Institute for Supply Management, IHS Markit and Wells Fargo Investment Institute, as of Sept. 30, 2020.

Service sector is recovering from a steep slump in Q2

12


Capital Markets Overview 3Q’20U.S. GDP Down

Sources: BEA, FactSet, JP Morgan Asset Management (Guide to the Markets – U.S. Data as of June 30, 2020).

Second quarter GDP shrank by 9.0% (annualized), driven by consumer spending.

13


Capital Markets Overview 3Q’20U.S. Federal Budget Deficit

Sources: Congressional Budget Office (CBO), BEA, Treasury Department, JP Morgan Asset Management (Guide to the Markets – U.S. Data as of Sept. 30, 2020). 2020 Federal Budget is based on the CBO Sept. 2020 Baseline Budget Forecast. CBO Baseline economic assumptions are based on the CBO July 2020 Update to Economic Outlook. Other spending includes, but is not limited to, health insurance subsidies, income security and federal civilian and military retirement. Note: Years shown are fiscal years (Oct. 1 through Sep. 30).

14


Capital Markets Overview 3Q’20U.S. Federal Debt Continues to Rise

Sources: U.S. Department of Treasury, Federal Reserve Bank of St. Louis - Data as of Sept. 30, 2020).

Federal Debt has increased to 23.6% of GDP.

Federal Debt has increased to $4.6 Trillion.

Note: Recession periods highlighted in gray.

15


Source: Bloomberg, and Wells Fargo Investment Institute, as of Sept. 30, 2020

Capital Markets Overview 3Q’20 U.S. Treasury Yield Spread Increase

• A steepening yield curve has historically pointed to better economic growth in the future. Therecent steepening trend could be a positive sign for future growth.

• Much of the yield curve out to five years has been trading below (or just over) the top end ofthe 0.00%–0.25% fed funds target. Longer-dated yields have been climbing due to bettergrowth prospects.

-300

-200

-100

0

100

200

300

400

1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Spre

ad (

in b

asis

po

ints

)

Yield curve steepness: difference between 10-year and 1-year U.S. Treasury yields

Note: Recession periods highlighted in gray.

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Source: U.S. Treasury Dept., Bloomberg

Capital Markets Overview 3Q’20 U.S. Treasury Yield Curve: Low-Rate Environment

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Source: U.S. Treasury Dept., Bloomberg

Capital Markets Overview 3Q’20U.S. Bond Market Sector Yields

18


Source: Bloomberg

Capital Markets Overview 3Q’20U.S. Corporate Bond Sector Yields

19


Capital Markets Overview 3Q’20Leading Economic Indicators

Sources: Bloomberg, Wells Fargo Investment Institute, as of August 31, 2020.

Tracking the components of the LEI

The Conference Board Leading Economic Index® (LEI) is a composite average of 10 leading indicators in the U.S. It is one of the key elements in the Conference Board's analytic system, which is designed to signal peaks and troughs in the business cycle.

INDICATOR CURRENT LEVEL LONG-TERM TREND

Leading Economic Index Improving Neutral

Average workweek Improving Improving

Unemployment claims (less are better) Improving Improving

New orders: consumer goods and materials Weakening Neutral

ISM New Orders Index Improving Improving

New orders: nondefense capital goods excluding aircraft Weakening Weakening

Building permits Neutral Weakening

S&P 500 Index Improving Improving

Leading Credit Index Weakening Weakening

Interest rate spread (10-year UST less federal funds) Improving Improving

Avg. consumer expectations for business and economic conditions Weakening Weakening

-25-20-15-10

-505

101520

'60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20

Ye

ar-o

ver-

year

ch

ange

(%

)

U.S. recessions Leading Economic Index

Leading economic indicators are still weak but showing improvement from Q2 lows

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Capital Markets Overview 3Q’20Global Markets Volatility

Sources: Bloomberg and Wells Fargo Investment Institute, as of Sept. 30, 2020.

Notes: S&P 500 volatility measured by the CBOE Volatility Index® (VIX®). Euro STOXX 50 volatility measured by the VSTOXX Index. Hong Kong Hang Seng volatility measured by the HSI Volatility Index. Nikkei volatility measured by the VNKY Index.

0

10

20

30

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50

60

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Ind

ex

leve

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U.S. recessions Euro Stoxx 50 volatility S&P 500 volatility Hong Kong Hang Seng volatility Nikkei volatility

Global equity markets have moved together when volatility spikes.Volatility spiked several times during this cycle.

Financial crisis

U.S. debt downgrade

Fed rate hikeTrade war

concerns

Coronavirus epidemic fears

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Capital Markets Overview 3Q’20U.S Market Volatility (S&P 500)

Sources: CBOE, FactSet, Standard & Poor’s, J.P. Morgan Asset Management (Guide to the Markets – U.S. Data as of Sept. 30, 2020).Drawdowns are calculated as the prior peak to the lowest point.

U.S. stock market recovered quickly from the worst major market pullback and volatility for last 10 years.

22


Capital Markets Overview 3Q’20Where are we?

Sources: Bloomberg and Wells Fargo Investment Institute, as of Sept. 30, 2020. Consumer price inflation as of August 31, 2020.

U.S. pushed into deep but brief recession. Fears over the spreading coronavirus and its potential economic impact have driven U.S. equities into a bear market.

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Capital Markets Overview 3Q’20U.S. Historical Performance (S&P 500) and Recessions

Sources: FactSet, NBER, Robert Shiller, JP Morgan Asset Management

How long and different will the recession be this time remains uncertain.

Recession periods: gray shaded areas

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Capital Markets Overview 3Q’20What can we expect in the U.S.?

Sources: Consultiva Investment Strategy Committee, Wells Fargo Investment Institute

Unemploy-ment

(falling with a reopening of the economy)

Inflation(remains below central

banks’ 2% target)

GDP growth(U.S. economy

recovering from a short but deep

recession)

Wage growth

(typically slows during a recession)

Consumer confidence

(rising but remains below pre-pandemic

levels)

Volatility(remains

elevated on uncertainties

over pandemic fallout)

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Capital Markets Overview 3Q’20What can we expect globally?

Sources: International Monetary Fund - World Economic Outlook Update October 2020

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Sources: International Monetary Fund - World Economic Outlook Update October 2020

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Sources: International Monetary Fund - World Economic OutlookUpdate October 2020

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Capital Markets 3Q’20Factors Affecting Global Economic Outlook

Sources: Consultiva Investment Strategy Committee, Wells Fargo Investment Institute

Global Economic Forces

Tailwinds

● Aggressive monetary and fiscal stimulus

● Low interest rates

● “Purchasing power” boost from lower inflation

● “Pent-up” demand created by the lockdown

● Promising coronavirus vaccine news

● Increased savings and stock-market wealth

Headwinds

● Rise in coronavirus infections

● Geopolitical risks (U.S. elections, Brexit, European Union discord, trade disputes)

● Rising bankruptcies, associated layoffs

● Consumer caution amid pandemic concerns

● Lingering weakness from earlier economic free fall

• World trade has started to show signs of slowing, and uncertainties surrounding trade policy between the U.S. and its major trading partners persist.

• Some currency volatility is expected (for example, the U.S. dollar and Chinese yuan).

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Source: Callan LLC, FTSE-Russell, MSCI, Bloomberg, FTSE, JP Morgan

Capital Markets Overview 3Q’20Performance 3Q: Equity, Fixed Income and Currency

(6%) (4%) (2%) 0% 2% 4% 6% 8% 10% 12%

Russell:3000 Index

Russell:1000 Index

Russell:Midcap Index

Russell:2000 Index

MSCI:ACWI ex US

MSCI:ACWI ex US Mid Cap

MSCI:ACWI ex US Small Cap

MSCI:World ex US

MSCI:EAFE

MSCI:EM

Blmbg:Aggregate

Blmbg:Intmdt Gov/Credit

Blmbg:Long Gov/Credit

Blmbg:HY Corp Cash Pay

Blmbg:Glb Agg xUSD

FTSE:Non-USD WGBI

JPM:GBI-EM Global Divsfd

Blmbg:US Dollar Index

Returns for 1 Quarter Ended September 30, 2020

9.2%

9.5%

7.5%

4.9%

6.3%

7.7%

10.5%

4.9%

4.8%

9.6%

0.6%

0.6%

1.2%

4.6%

4.1%

4.6%

0.6%

(3.6%)

E

Q

U

I

T

Y

F

I

X

E

D

CURRENCY

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Source: Callan LLC

Capital Markets Overview 3Q’20 Performance 3Q: Real Assets and Hedge Strategies

(20%) (15%) (10%) (5%) 0% 5% 10% 15%

FTSE:NAREIT Equity Index

FTSE:EP/NA Dev ex US

FTSE:EP/NA Emerging

Blmbg:Commodity TR Idx

S&P GSCI

S&P:1200 Energy Idx

S&P:Gold Spot Price Ix

HFRI Fund Wtd Comp

HFRI Fund of Funds Index

HFRX Global Hedge Fd Idx

Returns for 1 Quarter Ended September 30, 2020

1.4%

3.9%

(0.4%)

9.1%

4.6%

(15.8%)

5.3%

4.1%

4.2%

2.7%

COMMODITIES

R

E

I

T

s

H

E

D

G

E

F

U

N

D

S

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Capital Markets Overview 3Q’20S&P 500: Over/Under Valued (Forward P/E Ratio)

Sources: FactSet, FRB, Robert Shiller, S&P, Thomson Reuters, JP Morgan Asset Management (Guide to the Markets – U.S. Data as of Sept. 30, 2020).

U.S. market went from overvalued to undervalued and back to overvalued.

32


Capital Markets Overview 3Q’20S&P 500: Inflection Points

Sources: Compustat, FactSet, Federal Reserve, Standard & Poor’s, JP Morgan Asset Management

Price/Earnings Ratio collapsed back to October 2007, rebounded and continued upward.

33


Capital Markets Overview 3Q’20S&P 500 and MSCI-ACWI ex-U.S.: Inflection Points

Sources: FactSet, MSCI, Standard & Poor’s, JP Morgan Asset Management

Non-U.S. equities remain at a lower valuation than U.S. equities.

34


Capital Markets Overview 3Q’20 Performance Since December 2017

Sources: Callan LLC

2018 2019 2020$0.70

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

Growth of a Dollar for 2 3/4 Years Ended September 30, 2020

Gro

wth

of

a D

olla

r

$1.33 - S&P:500

$0.98 - MSCI:EAFE

$1.00 - MSCI:EM

$1.16 - Blmbg:Aggregate

$1.09 - FTSE:Non-USD WGBI

$1.10 - JPM:EMBI Global Divsfd

$1.05 - 3 Month T-Bill

“Curbing Investor Enthusiasm”

35


Capital Markets Overview 3Q’20 Performance Since Financial Crisis (December 2008)

Sources: Callan LLC

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

Growth of a Dollar for 11 3/4 Years Ended September 30, 2020

Gro

wth

of

a D

olla

r

$4.76 - S&P:500

$2.09 - MSCI:EAFE

$2.53 - MSCI:EM

$1.63 - Blmbg:Aggregate

$1.26 - FTSE:Non-USD WGBI

$2.52 - JPM:EMBI Global Divsfd

$1.07 - 3 Month T-Bill

“Curbing Investor Anxieties”

36


Capital Markets Overview 3Q’20 Performance Summary: US Inflation & Global Equity

Sources: Bloomberg, Callan LLC, DJ, MSCI, Nasdaq, Russell, S&P, US Dept. of Labor

Returns (%) for Periods Ended September 30, 2020

Last Qtr. YTD Last Yr. Last 3 Yrs. Last 5 Yrs. Last 10 Yrs.

Inflation

US DOL:CPI All Urban Cons 1.0 1.3 1.4 1.8 1.8 1.8

US DOL:CPIU Core 1.0 1.6 1.7 2.1 2.0 1.9

Global Markets

MSCI:ACWI 8.1 1.4 10.4 7.1 10.3 8.5

MSCI:ACWI Hedged USD 7.0 1.7 9.8 8.2 10.8 9.7

Blmbg:Glb Agg 2.7 5.7 6.2 4.1 3.9 2.4

Blmbg:Glb Agg Hdg 0.7 4.7 4.1 5.1 4.3 3.9

US Equity

S&P:500 8.9 5.6 15.1 12.3 14.1 13.7

Russell:2000 Index 4.9 (8.7) 0.4 1.8 8.0 9.9

DJ:30 Industrials 8.2 (0.9) 5.7 10.0 14.0 12.7

NASDAQ 11.2 25.3 41.0 21.0 20.6 18.2

PR Stock Index 4.0 (29.8) (23.1) 8.7 8.8 4.0

Non-US Equity

MSCI:ACWI ex US 6.3 (5.4) 3.0 1.2 6.2 4.0

MSCI:World ex US 4.9 (7.1) 0.2 0.6 5.3 4.4

MSCI:EAFE 4.8 (7.1) 0.5 0.6 5.3 4.6

MSCI:EM 9.6 (1.2) 10.5 2.4 9.0 2.5

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Performance was concentratedTop five stocks (Facebook, Apple, Amazon, Microsoft andAlphabet/Google) in the S&P 500 account for 23% of the Index and33% of the quarter’s performanceS&P would be negative y-t-d without these stocks

Small cap trailed large capSmall cap sharply lower than large cap y-t-d

Growth continued to outpace value across market capsGrowth, value dispersion near all-time high (driven by Tech)Growth stock P/E near 2x historical average across market caps

Consumer Discretionary (15.1%), Industrials (12.5%), Materials (13.3%)were top three sectors, followed closely by Technology (12.0%)

YTD, pandemic punishing some sectors while rewarding othersOnline retailers soared 60%; home improvement up over 30%, buthotels/cruise lines, airlines, and commercial REITs dropped over 40%Energy -48% amid declining crude and natural gas prices

Capital Markets Overview 3Q’20U.S. Equity: Markets Results


U.S. equity market continued to rebound from the first quarter plunge. However, returns among constituentspainted starkly different pictures

Source: Consultiva Investment Strategy Committee, Callan LLC

Russell 3000

Russell 1000

Russell 1000 Growth

Russell 1000 Value

S&P 500

Russell Midcap

Russell 2500

Russell 2000

U.S. Equity: Quarterly Returns

9.2%

9.5%

13.2%

5.6%

8.9%

7.5%

5.9%

4.9%

U.S. Equity: Nine-Month Returns

Russell 3000

Russell 1000

Russell 1000 Growth

Russell 1000 Value

S&P 500

Russell Midcap

Russell 2500

Russell 2000

5.4%

6.4%

24.3%

-11.6%

5.6%

-2.3%

-5.8%

-8.7%

Last Quarter

8.9%15.1%

10.4%

-19.7%

4.4% 5.9%12.0%12.5% 13.3%

1.9%6.1%

Services

Communication

Discretionary

Consumer

Staples

Consumer Energy Financials Health Care Industrials

Technology

Information Materials Real Estate Utilities

38


Source: Callan LLC, S&P

Capital Markets Overview 3Q’20 U.S. Equity: Economic Sectors (S&P 500)

39


Sources: FactSet, Bloomberg, S&P, BH&M

Capital Markets Overview 3Q’20 U.S. Equity: Performance Attribution (S&P 500)

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Capital Markets Overview 3Q’20 U.S. Equity: Growth Sector Stocks Performance

COMPANY ECONOMIC SECTOR 3Q’20 2020 2019 2018Facebook Communication Services 15.3% 27.6% 56.6% -25.7%Apple Information Technology 27.2% 58.8% 89.0% -5.4%Amazon Consumer Discretionary 14.1% 70.4% 23.0% 20.3%Microsoft Information Technology 3.6% 34.3% 57.6% 20.3%Google (Alphabet) Communication Services 4.0% 9.9% 29.1% -1.8%Netflix Communication Services 9.9% 54.5% 20.9% 39.4%

High Flying Growth Stocks: “FAAMG” plus Netflix

Source: Consultiva Investment Strategy Committee, StockCharts.com

41


Source: Standard & Poor’s (S&P), Russell, Wilshire Atlas, Atlanta Capital Mgmt as of 6/30/20

Capital Markets Overview 3Q’20 U.S. Equity: Quality Sectors

• High quality stocks outperformed in large and medium cap value sectors in the quarter.

• Lower quality stocks outperformed among small caps and growth style sectors. 4th Quarter Year 2018

1st Quarter

42

U.S. dollar faced broad-based weaknessLost ground versus most developed market currencies; -4%vs euro, pound and Australian dollar and -2% vs yen

Solid performance across non-U.S. developed marketsReturns positive across markets but some remain down YTDSmall caps continued to outperform largeAs in the US, growth outperformed valueTechnology and Consumer Discretionary sectors led, whileEnergy lagged

Emerging market equity returns were mixedEmerging Asia gained 12% while Latin America and EmergingEurope fell 1.3% and 5.2%, respectivelyBRIC country performance varied (Brazil: -3%; Russia: -5%;India: +12% and China +13%)Consumer Discretionary, Information Technology, andMaterials were best performing sectorsMany emerging market currencies appreciated vs the U.S.dollar, with the Turkish lira (-11%), the Russian ruble (-9%)and the Brazilian real (-3%) being notable exceptions

Capital Markets Overview 3Q’20 Non-U.S. Equity: Market Results


Outside of the U.S., equity market returns were positive across developed and emerging markets, but both remaindown year-to-date.


MSCI ACWIMSCI World

MSCI ACWI ex USAMSCI EAFE

MSCI Emerging MarketsMSCI:ACWI ex US Growth

MSCI:ACWI ex US ValueMSCI ACWI ex US Small Cap

MSCI Europe ex UKMSCI UK

MSCI Pacific ex JapanMSCI JapanMSCI China

MSCI Frontier Markets

Global Equity: Quarterly Returns

8.1%

7.9%

6.3%

4.8%

9.6%

10.2%

2.3%

10.5%

5.9%

-0.2%

2.0%

6.9%

12.5%

8.3%

MSCI ACWIMSCI World

MSCI ACWI ex USAMSCI EAFE

MSCI Emerging MarketsMSCI:ACWI ex US Growth

MSCI:ACWI ex US ValueMSCI ACWI ex US Small Cap

MSCI Europe ex UKMSCI UK

MSCI Pacific ex JapanMSCI JapanMSCI China

MSCI Frontier Markets

Global Equity: Nine-Month Returns

1.4%

1.7%

-5.4%

-7.1%

-1.2%

7.3%

-17.6%

-3.6%

-3.8%

-23.4%

-11.3%

-0.7%

16.4%

-8.8%

43


Source: Callan LLC, MSCI

Capital Markets Overview 3Q’20 Non-U.S. Equity: Economic Sectors (MSCI-ACWI ex-US)

44


Sources: FactSet, Bloomberg, MSCI, BH&M

Capital Markets Overview 3Q’20 Non-U.S. Equity: Performance Attribution (MSCI-World)

45


Sources: FactSet, Bloomberg, MSCI, BH&M

Capital Markets Overview 3Q’20 Non-U.S. Equity: Performance Attribution (MSCI-EM)

46


Capital Markets Overview 3Q’20Performance Summary: Global Fixed Income

Sources: Callan LLC, Bloomberg, FTSE, JPM, BoA-ML, S&P



US Fixed Income

Blmbg:Aggregate 0.6 6.8 7.0 5.2 4.2 3.6

Blmbg:Treasury 0.2 8.9 8.0 5.5 3.7 3.1

Blmbg:Agency 0.4 5.4 5.3 4.2 3.1 2.5

Blmbg:Securitized 0.2 3.9 4.5 3.8 3.1 3.1

Blmbg:Credit 1.5 6.4 7.5 6.2 5.7 4.9

Blmbg:Intmdt Gov/Credit 0.6 5.9 6.3 4.4 3.4 2.9

Blmbg:Long Gov/Credit 1.2 14.2 12.9 10.2 8.8 7.4

Blmbg:Municipal 1.2 3.3 4.1 4.3 3.8 4.0

S&P:LSTA Perf Levg Loan 4.3 (0.5) 1.4 3.3 4.2 4.5

Blmbg:HY Corp Cash Pay 4.6 0.6 3.3 4.2 6.8 6.5

ML:Pref Stock Fixed Rate 4.9 2.3 4.3 5.0 6.2 6.3

FTSE:3 Mo T-Bill 0.0 0.6 1.0 1.6 1.2 0.6

Non-US Fixed Income

Blmbg:Glb Agg xUSD 4.1 4.8 5.5 3.1 3.6 1.3

Blmbg:Glb Agg xUSD Hdg 0.7 3.0 1.8 4.9 4.3 4.1

FTSE:Non-USD WGBI 4.6 5.7 5.6 3.5 3.9 1.3

FTSE:Non-USD WGBI Hdg 1.0 3.8 1.8 5.5 4.6 4.2

JPM:EMBI Global Divsfd 2.3 (0.5) 1.3 3.5 6.1 5.4

JPM:GBI-EM Global Divsfd 0.6 (6.3) (1.4) 0.2 4.8 0.5

47

Treasury yields were largely unchanged10-year UST yield closed the quarter at 0.69%, up 3 bps from June 30 but off sharply from year-end level of 1.92%Record low yield for 10-year of 0.52% hit in early AugustExpectations are for no rate hikes until at least 2023TIPS did well as inflation expectations rose from 1.34% to 1.63%

Bloomberg Barclays Aggregate was roughly flatCorporate and Commercial Mortgage-Backed (CMBS) sectors performed bestCorporate supply ($1 trillion y-t-d) hit a record as companies rushed to take advantage of ultra-low interest rates

Risk-on sentiment and strong equity markets helped high yield Downgrade/upgrade ratio for high yield higher than 2008Default rate trended higher but below GFC level; recovery rate at record lows (outsized influence by retail and energy)

Municipals helped by favorable supply/demand dynamics Robust demand and muted supply of tax-exempt municipals Issuance in taxable municipals sharply higherTax revenues better than expected, but challenges remain and stimulus uncertain (but needed)

Capital Markets Overview 3Q’20 U.S. Fixed Income: Markets Results


U.S. Treasury yields held steady over the course of 3Q in spite of strong equity markets and better-than-expectedeconomic data.


Blmberg Barclays Gov/Cr 1-3 Yr

Blmberg Barclays Aggregate

Blmberg Barclays Long Gov/Cr

S&P/LSTA Leverage Loans

Blmberg Barclays High Yield

Blmberg Barclays TIPS

Blmbg:Muni 1-10 Yr

Blmbg:Municipal

U.S. Fixed Income: Quarterly Returns

0.2%

0.6%

1.2%

4.1%

4.6%

3.0%

1.1%

1.2%

Blmberg Barclays Gov/Cr 1-3 Yr

Blmberg Barclays Aggregate

Blmberg Barclays Long Gov/Cr

S&P/LSTA U.S. Leveraged Loans

Blmberg Barclays High Yield

Blmberg Barclays TIPS

Blmbg:Muni 1-10 Yr

Blmbg:Municipal

U.S. Fixed Income: Nine Month Returns

3.1%

6.8%

14.2%

-0.7%

0.6%

9.2%

3.2%

3.3%

48


Sources: FactSet, Bloomberg, S&P, BHM

Capital Markets Overview 3Q’20 U.S. Fixed Income: Performance Attribution (BB Aggregate)

49


Source: Bloomberg Barclays (BB), ICE Bank of America (BofA) Merrill Lynch (ML), Atlanta Capital Mgmt as of 6/30/20

Capital Markets Overview 3Q’20 U.S. Fixed Income: Short-term Bond Sectors

Corporates and lower quality issues outperformed in the short-term bond sector.

4th Quarter

NOTE: “Treasury” is represented by ICE BofA ML 1-3 Year Treasury Index. “Agency” is represented by ICE BofA ML 1-3 Year Agency Index. “Corporate” is represented by ICE BofA ML 1-3 Year Corporate Index. “Securitized” is represented by BB 1-3 Year Securitized Index and includes MBS, CMBS, & ABS). “AAA” is represented by the AAA-rated component of the BB 1-3 Year Aggregate. “AA” is represented by the AA-rated component of the BB 1-3 Year Aggregate. “A” is represented by the A-rated component of the BB 1-3 Year Aggregate. “BBB” is represented by the BBB-rated component of the BB 1-3 Year Aggregate.

After plunging over 30% in the 2nd quarter, theeconomy reopened and is likely to post the largest gainever in the 3rd quarter.

The Fed signaled their intent to support financialmarkets and to hold interest rates near zero through2023. Bond yields touched all time lows in the quarterbut were little changed from already low levels.

Against this backdrop, ‘BBB’ rated bonds outperformed‘AAA’ bonds by about 1% in the quarter.

Corporate bonds, boosted by a 43% allocation to‘BBBs’, gained 0.74%. Agency and Treasury bondsreturned 0.20% and 0.10%, respectively. Securitizedreturns, which were negatively impacted by GinnieMae loan modification buyouts, were -0.03%. Asset-backed securities, a sub-sector of the Securitizedsector, returned 0.69%.

50

Falling rates helped global fixed income returnsCentral banks continued to act aggressively to provide support viarate cuts, asset purchase programs, and other forms of stimulusBroad-based U.S. dollar weakness dampened hedged returns in thequarterUS dollar lost 4% versus the Australian dollar, euro and the Britishpound and 2% versus the yenOver 70% of global sovereign debt has negative real yields, a recordhigh, according to data from JP Morgan

Emerging market debt indices made up groundEmerging market debt indices posted positive returns but remaindown from year-endUS dollar denominated index (EMBI Global Diversified) performedbetter as U.S. rates fell; returns were mixed across the 70+constituents but most were positiveLocal currency index (GBI-EM Gl Div) of roughly 20 countries was upslightly but returns varied widelyRussia: -8%; Brazil: -3%; Mexico and S. Africa: +6%Many emerging market currencies appreciated vs the U.S. dollar,with the Turkish lira (-11%), the Russian ruble (-9%) and theBrazilian real (-3%) being notable exceptions.Staggered inclusion of China bonds continued with the weight risingto 7% in the JPM GBI-EM Global Diversified Index.

Capital Markets Overview 3Q’20 Non-U.S. Fixed Income: Markets Results


Broad-based U.S. dollar weakness dampened hedged returns in the quarter. Emerging market debt indices postedsolid results but remain down from year-end.

Source: Source: Consultiva Investment Strategy Committee, Callan LLC

Blmberg Barclays Gl Aggregate

Blmberg Barclays Gl Agg (hdg)

Blmberg Barclays Gl Agg ex US

Blmbg:Glb Agg xUSD Hdg

Blmberg Barclays Gl High Yield

JPM EMBI Global Diversified

JPM GBI-EM Global Diversified

JPM CEMBI

Global Fixed Income: Quarterly Returns

2.7%

0.7%

4.1%

0.7%

4.3%

2.3%

0.6%

2.7%

Blmberg Barclays Gl Aggregate

Blmberg Barclays Gl Agg (hdg)

Blmberg Barclays Gl Agg ex US

Blmbg:Glb Agg xUSD Hdg

Blmberg Barclays Gl High Yield

JPM EMBI Global Diversified

JPM GBI-EM Global Diversified

JPM CEMBI

Global Fixed Income: Nine Month Returns

5.7%

4.7%

4.8%

3.0%

-0.6%

-0.5%

-6.3%

3.5%

51


Capital Markets Overview 3Q’20 Performance Summary: Alternatives

Sources: Callan LLC, Alerian, Bloomberg, DJ, FTSE NAREIT, Hedge Fund Research, S&P-GS



Other Investments

Blmbg:TIPS 3.0 9.2 10.1 5.8 4.6 3.6

Alerian:MLP Index (16.3) (46.2) (48.4) (20.8) (11.6) (4.2)

DJB:Glbl Infrastructure (1.7) (13.3) (9.8) 1.1 5.4 7.9

FTSE:NAREIT Equity Index 1.4 (17.5) (18.2) 0.2 3.9 7.9

FTSE:EP/NA Global ex US 3.1 (19.0) (12.4) (0.7) 4.1 3.8

Blmbg:Commodity TR Idx 9.1 (12.1) (8.2) (4.2) (3.1) (6.0)

S&P GSCI 4.6 (33.4) (27.8) (9.5) (7.9) (8.8)

S&P:Global Natural Res 2.0 (17.9) (10.2) (3.4) 6.0 (0.4)

S&P:Gold Spot Price Ix 5.3 24.5 28.7 13.8 11.2 3.8

HFRX Global Hedge Fd Idx 2.7 1.6 4.2 1.5 2.1 1.1

HFRI Fund Wtd Comp 4.1 0.5 4.0 2.7 4.0 3.6

HFRI Fund of Funds Index 4.2 2.5 5.6 2.8 3.1 2.9

S&P:Listed Pri Eq Idx 2.9 (13.7) (5.5) 4.0 10.6 10.2

Blmbg:US Dollar Index (3.6) (2.6) (5.5) 0.3 (0.5) 1.8

52

Capital Markets Overview 3Q’20Real Assets: Market Results


Real asset returns were mixed in the third quarter.

Falling oil prices hurt MLPs while gold hit an all-time intradayhigh in August ($2,005/ounce).

Alerian MLP: -16.3%S&P Gold Spot Price: +5.3%

The Bloomberg Commodity Index gained 9.1% with all sub-components except Energy up sharply.

REITs were mixed (FTSE Nareit: +1.4%) for the quarter and YTDperformance is striking:

Lodging/Resorts (-49%); Regional Malls (-54%); Office (-30%);and Shopping Centers (-45%) are suffering from COVID-19lockdownsData Centers (+26%) and Industrial (+9%) saw gains

Source: Consultiva Investment Strategy Committee, Callan LLC, FactSet

53


Source: FTSE NAREIT

Capital Markets Overview 3Q’20U.S. REITs: Sector Performance (FTSE-NAREIT Equity)

54

The HFRI Fund Weighted Composite gained 4.1% in Q3With more beta tailwind, Equity Hedge continued to recover better than other stylesWith less-liquid exposures, Event Driven and Relative Value still have not fully recovered losses from 1Q20

Top-down Macro, which includes trend-following, was modestly positive

Capital Markets Overview 3Q’20Hedge Strategies: Performance (HFRI)


Strong equities reward risk-on hedge funds albeit posting mixed declines in September, as investor risk tolerance fellover uncertainty regarding additional coronavirus spreading in Europe and the U.S., the strength of the U.S.economy and the upcoming U.S. election.

Source: Hedge Fund Research Inc.

55


While certain sectors of the economy have rebounded more quickly than many expected, thetrajectory of the recovery is still unclear. Rising COVID-19 cases in the U.S. and Europe, stallednegotiations around much-needed fiscal stimulus, and election-related volatility are top ofmind as we enter the fourth quarter. While the third quarter rewarded investors with mostlypositive returns, September results were largely in the red as these concerns were reflected inmarket performance. In Europe and the United Kingdom, renewed uncertainty around Brexitfurther added to investor caution.

There is no consensus as to the forward-looking shape of the recovery. Some argue that a “V”scenario is in the works, but an equal number wonder whether this is sustainable given all ofthese headwinds. The newest alphabetic indicator—“K” —refers to the uneven aspect of therecovery, with certain segments of the population being hit much harder than others.

The alphabet soup of recovery scenarios (V, W, L, U, or K) reflects a myriad of best guesses,and while hints of a “V” scenario were evident this summer, its likelihood has been dampenedby rising COVID-19 cases and a knock-on effect on consumer confidence and demand,especially in hard-hit sectors of the economy. A tense election further adds to the potential formarket volatility. Yields in fixed income are unquestionably paltry, with some questioningwhether the asset class can play the role it has traditionally served. Equity valuations areexpensive by multiple metrics, with the financial health of many businesses highly uncertain.

Capital Markets Overview 3Q’20Conclusions

Source: Consultiva Investment Strategy Committee

56


While the economic picture remains fluid and uncertain, we continue to recommend prudentasset allocation and risk assessment, based on future capital needs for plan sponsors,institutions and individual investors.

Each crisis has its own unique causes and trajectory, and this crisis is no different. We shallcontinue to explore opportunities for rebalancing as assets shift in weight relative to overallstrategies. We believe rebalancing is fundamental to a well-executed long-term investmentstrategy.

We believe that higher quality assets are favored across asset classes.

We believe that due diligence reviews and an adherence to a well-developed investmentpolicy remains the most prudent course for long-term investors and as a game plan before,during, and after extreme market events. .

We believe that continued fiduciary education is paramount.

Capital Markets Overview 3Q’20Recommendations

Sources: Consultiva Investment Strategy Committee

57

57

Capital Markets Overview 3Q’20Value of Diversification: Sample GAA Model

Annual Returns for Last 11 Years (including 2019)

S&P:500

15.06%

S&P:500

2.11%

S&P:500

16.00%

S&P:500

32.39%

S&P:500

13.69%

S&P:500

1.38%

S&P:500

11.96%

S&P:500

21.83%

S&P:500

(4.38%)

S&P:500

31.49%

S&P:500

5.57%

Russell:2000 Index

26.85%

Russell:2000 Index

(4.18%)

Russell:2000 Index

16.35%

Russell:2000 Index

38.82%

Russell:2000 Index

4.89%

Russell:2000 Index

(4.41%)

Russell:2000 Index

21.31%

Russell:2000 Index

14.65%

Russell:2000 Index

(11.01%)

Russell:2000 Index

25.52%

Russell:2000 Index

(8.69%)

MSCI:EAFE

7.75%

MSCI:EAFE

(12.14%)

MSCI:EAFE

17.32%

MSCI:EAFE

22.78%

MSCI:EAFE

(4.90%)

MSCI:EAFE

(0.81%)

MSCI:EAFE

1.00%

MSCI:EAFE

25.03%

MSCI:EAFE

(13.79%)

MSCI:EAFE

22.01%

MSCI:EAFE

(7.09%)

MSCI:EM

18.88%

MSCI:EM

(18.42%)

MSCI:EM

18.23%

MSCI:EM

(2.60%)

MSCI:EM

(2.19%)

MSCI:EM

(14.92%)

MSCI:EM

11.19%

MSCI:EM

37.28%

MSCI:EM

(14.57%)

MSCI:EM

18.44%

MSCI:EM

(1.16%)

Blmbg:Aggregate

6.54%

Blmbg:Aggregate

7.84%

Blmbg:Aggregate

4.21%

Blmbg:Aggregate

(2.02%)

Blmbg:Aggregate

5.97%

Blmbg:Aggregate

0.55%

Blmbg:Aggregate

2.65%

Blmbg:Aggregate

3.54%

Blmbg:Aggregate

0.01%

Blmbg:Aggregate

8.72%

Blmbg:Aggregate

6.79%

xUSD

Blmbg:Glb Agg

4.95%

xUSD

Blmbg:Glb Agg

4.36%

xUSD

Blmbg:Glb Agg

4.09%

xUSD

Blmbg:Glb Agg

(3.08%)

xUSD

Blmbg:Glb Agg

(3.09%)

xUSD

Blmbg:Glb Agg

(6.02%)

xUSD

Blmbg:Glb Agg

1.49%

xUSD

Blmbg:Glb Agg

10.51%

xUSD

Blmbg:Glb Agg

(2.15%)

xUSD

Blmbg:Glb Agg

5.09%

xUSD

Blmbg:Glb Agg

4.77%

Divsfd

JPM:EMBI Global

12.24%

Divsfd

JPM:EMBI Global

7.35%

Divsfd

JPM:EMBI Global

17.44%

Divsfd

JPM:EMBI Global

(5.24%)

Divsfd

JPM:EMBI Global

7.43%

Divsfd

JPM:EMBI Global

1.18%

Divsfd

JPM:EMBI Global

10.15%

Divsfd

JPM:EMBI Global

10.26%

Divsfd

JPM:EMBI Global

(4.26%)

Divsfd

JPM:EMBI Global

15.04%

Divsfd

JPM:EMBI Global

(0.51%)

Equity Index

FTSE:NAREIT

27.96%

Equity Index

FTSE:NAREIT

8.29%

Equity Index

FTSE:NAREIT

18.06%

Equity Index

FTSE:NAREIT

2.47%

Equity Index

FTSE:NAREIT

30.14%

Equity Index

FTSE:NAREIT

3.20%

Equity Index

FTSE:NAREIT

8.52%

Equity Index

FTSE:NAREIT

5.23%

Equity Index

FTSE:NAREIT

(4.62%)

Equity Index

FTSE:NAREIT

26.00%

Equity Index

FTSE:NAREIT

(17.54%)

TR Idx

Blmbg:Commodity

16.83%

TR Idx

Blmbg:Commodity

(13.32%)

TR Idx

Blmbg:Commodity

(1.06%)

TR Idx

Blmbg:Commodity

(9.52%)

TR Idx

Blmbg:Commodity

(17.01%)

TR Idx

Blmbg:Commodity

(24.66%)

TR Idx

Blmbg:Commodity

11.77%

TR Idx

Blmbg:Commodity

1.70%

TR Idx

Blmbg:Commodity

(11.25%)

TR Idx

Blmbg:Commodity

7.69%

TR Idx

Blmbg:Commodity

(12.08%)

FTSE:3 Mo T-Bill

0.13%

FTSE:3 Mo T-Bill

0.08%

FTSE:3 Mo T-Bill

0.07%

FTSE:3 Mo T-Bill

0.05%

FTSE:3 Mo T-Bill

0.03%

FTSE:3 Mo T-Bill

0.03%

FTSE:3 Mo T-Bill

0.27%

FTSE:3 Mo T-Bill

0.84%

FTSE:3 Mo T-Bill

1.86%

FTSE:3 Mo T-Bill

2.25%

FTSE:3 Mo T-Bill

0.56%

Index

HFRI Fund of Funds

5.70%

Index

HFRI Fund of Funds

(5.72%)

Index

HFRI Fund of Funds

4.79%

Index

HFRI Fund of Funds

8.96%

Index

HFRI Fund of Funds

3.37%

Index

HFRI Fund of Funds

(0.27%)

Index

HFRI Fund of Funds

0.51%

Index

HFRI Fund of Funds

7.77%

Index

HFRI Fund of Funds

(4.09%)

Index

HFRI Fund of Funds

8.39%

Index

HFRI Fund of Funds

2.47%

GAA Model

CWM-Sample

12.35%

GAA Model

CWM-Sample

(1.52%)

GAA Model

CWM-Sample

13.51%

GAA Model

CWM-Sample

12.28%

GAA Model

CWM-Sample

4.57%

GAA Model

CWM-Sample

(1.45%)

GAA Model

CWM-Sample

6.68%

GAA Model

CWM-Sample

15.82%

GAA Model

CWM-Sample

(6.29%)

GAA Model

CWM-Sample

19.61%

GAA Model

CWM-Sample

1.83%

ex US

FTSE:EP/NA Global

15.89%

ex US

FTSE:EP/NA Global

(17.50%)

ex US

FTSE:EP/NA Global

38.98%

ex US

FTSE:EP/NA Global

2.12%

ex US

FTSE:EP/NA Global

3.61%

ex US

FTSE:EP/NA Global

(3.50%)

ex US

FTSE:EP/NA Global

1.78%

ex US

FTSE:EP/NA Global

26.45%

ex US

FTSE:EP/NA Global

(7.06%)

ex US

FTSE:EP/NA Global

23.01%

ex US

FTSE:EP/NA Global

(18.99%)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 3 Qtrs. 2020

Disclosure: The CWM Sample Global Asset Allocation (GAA) Model returns are annualized, calculated utilizing indices and assuming reinvestment of income plus capital appreciation (depreciation) and realized gains (losses). Performance is reported on a gross of fees basis and is not necessarily indicative of future performance, which could differ substantially. Please refer to important disclosures on page 2.

Sources: Consultiva Investment Strategy Committee, Callan LLC, Bloomberg, FTSE, HFR, JP Morgan, MSCI, Russell, S&P

58

58

Words of Wisdom for Market Volatility


✓ Don’t try to time the market, market uncertainty is always present to some degree.

✓ Volatility is a normal part of market behavior, may present opportunities for investors.

✓ Albeit painful for some asset classes, market corrections may present opportunities for investors to purchase high-quality stocks at reasonable prices.

✓ Disregard short-term forecasts, think long-term and stay the course.

✓ Managing downside volatility is critical to long-term performance, as it seeks to allow a portfolio to recover quickly after a shattering event.

✓ Modest tactical shifts have the potential to take advantage of short-term investment opportunities or help mitigate short-term risks.

✓ A diversified portfolio has the potential to provide more consistent returns with lower volatility as each asset class has a unique set of characteristics.

✓ Recognize that the more you lose in a downturn, the longer it normally takes to recoup those losses.

✓ Regularly rebalancing can add value to portfolio performance.

✓ Keep your emotions in check and make a habit of investing regularly.


59

59

Turning Market Volatility into Opportunity


1. DIVE DEEP INTO THE PORTFOLIO STRUCTURE liability streams, specific mandates, types of managers, investment vehicles, and expenses per plan/fund type.

2. EXAMINE THE PORTFOLIO FROM THE BOTTOM UP in terms of asset classes, private capital lockup periods, and scheduled drawdowns.

3. REVIEW BROAD AND SUB-STYLE LEVEL ASSET CLASSES within the complete asset pool to make sure there is diversification to hedge against any risk.

4. ALIGN IPS (investment policy statement) with an appropriate asset allocation.

5. ASSESS LIQUIDITY requirements for meeting expense obligations.

6. EXPLORE FUTURE CAPITAL COMMITMENT ADJUSTMENTS to improve cash and liquidity for short-term financing options.

7. RESET FUTURE PERFORMANCE EXPECTATIONS and review their impact on any funding shortfall.

8. MANAGE THE ASSET POOL HOLISTICALLY starting with beta policy, investment structure, IPS and cash flow.

9. THINK TACTICALLY for the next 12 to 18 months to identify investment opportunities based on asset class diversification and appropriate manager selection.

10. Partner with an investment advisor/consultant to research all options and build a consensus view for the future.


www.consultiva.com

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San Juan, PR 00918Tel. (787) 763-5868

Consultiva Wealth Management, Corp. - [email protected] © 2020 CONSULTIVA Wealth Management, Corp.

capital markets overview third quarter 2020

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