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Innovest’s Long-Term Outlook for the

Economy and Capital Markets

Privileged and Confidential

January 2019

Littleton Public Schools

© 2019 INNOVEST PORTFOLIO SOLUTIONS, LLC

PRIVILEGED AND CONFIDENTIAL

PORTFOLIO CONSTRUCTION: LOOKING FORWARD

Asset allocation

The largest impact on portfolio returns

Focusing on past returns

Dangerous for portfolio design

Opportunities

Uncovered by thoughtful research

Forecasts

Inevitably imprecise Used with permission.

2



ASSET ALLOCATION DRIVES INVESTMENT RETURNS

Over 90% of risk and return is determined by asset allocation.

Asset Allocation Policy: 91% Security Selection: 5%

Market Timing: 2% Other

Factors: 2%

Source: Brinson, Singer and Beebower; “Determination of Portfolio Performance II: An Update,” Financial Analyst Journal, May – June 1991.

Based on U.S. pension fund data 1977-1987. Past performance is no guarantee of future results.

A. Arnott, “Asset Allocation: Revisiting the Debate,” Morningstar Principia Commentary, 9/27/1997.

3



PERIODIC TABLE OF RETURNS 2008 - 2018

Source: Innovest Portfolio Solutions and Morningstar Direct.

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Annualized

Return

'09 -18

Annualized

Std. Dev.

'09 -'18

U.S. Fixed

IncomeMLPs MLPs MLPs

Emerging

MarketsU.S. Equity Real Estate Real Estate MLPs

Emerging

Markets

U.S. Fixed

IncomeU.S. Equity U.S. Equity

5.24% 85.05% 34.98% 16.99% 18.22% 33.55% 31.78% 4.23% 18.74% 37.28% 0.01% 13.18% 21.38%

Hedge

Funds

Emerging

MarketsReal Estate Real Estate Real Estate MLPs U.S. Equity

U.S. Fixed

IncomeU.S. Equity Int'l Equity

Hedge

FundsReal Estate

Emerging

Markets

-21.37% 78.51% 28.60% 9.24% 17.59% 29.48% 12.56% 0.55% 12.74% 25.03% -3.48% 12.20% 19.27%

Diversified

Portfolio

Diversified

Portfolio

Emerging

Markets

U.S. Fixed

IncomeInt'l Equity Int'l Equity MLPs U.S. Equity

Emerging

MarketsU.S. Equity Real Estate MLPs MLPs

-32.94% 32.43% 18.88% 7.84% 17.32% 22.78% 7.61% 0.48% 11.19% 21.13% -4.84% 10.69% 18.61%

U.S. Equity Int'l Equity U.S. Equity U.S. Equity U.S. EquityDiversified

Portfolio

Diversified

Portfolio

Hedge

Funds

Diversified

Portfolio

Diversified

PortfolioU.S. Equity

Diversified

PortfolioInt'l Equity

-37.31% 31.78% 16.93% 1.03% 16.42% 17.59% 6.76% -0.27% 7.64% 14.32% -5.24% 9.04% 16.27%

MLPs Real EstateDiversified

Portfolio

Diversified

Portfolio

Diversified

Portfolio

Hedge

Funds

U.S. Fixed

IncomeInt'l Equity Real Estate

Hedge

Funds

Diversified

Portfolio

Emerging

MarketsReal Estate

-38.55% 28.60% 14.54% -0.98% 12.64% 8.96% 5.97% -0.81% 7.24% 7.71% -6.38% 8.02% 14.01%

Real Estate U.S. Equity Int'l EquityHedge

Funds

Hedge

FundsReal Estate

Hedge

Funds

Diversified

Portfolio

U.S. Fixed

IncomeReal Estate MLPs Int'l Equity

Diversified

Portfolio

-39.20% 28.34% 7.75% -5.72% 4.79% 1.86% 3.37% -2.94% 2.65% 4.18% -11.94% 6.32% 10.43%

Int'l EquityHedge

Funds

U.S. Fixed

IncomeInt'l Equity

U.S. Fixed

Income

U.S. Fixed

Income

Emerging

Markets

Emerging

MarketsInt'l Equity

U.S. Fixed

IncomeInt'l Equity

U.S. Fixed

Income

Hedge

Funds

-43.38% 11.47% 6.54% -12.14% 4.21% -2.02% -2.19% -14.92% 1.00% 3.54% -13.79% 3.48% 3.87%

Emerging

Markets

U.S. Fixed

Income

Hedge

Funds

Emerging

MarketsMLPs

Emerging

MarketsInt'l Equity MLPs

Hedge

FundsMLPs

Emerging

MarketsHedge Funds

U.S. Fixed

Income

-53.33% 5.93% 5.70% -18.42% 4.21% -2.60% -4.90% -31.74% 0.51% -8.81% -14.58% 3.17% 2.84%

High

Low

U.S. Equities: Russell 3000, MLPs: Alerian MLP Infrastructure, Real Estate: Wilshire US REIT, U.S. Fixed Income: BbgBarc US Agg, Int'l Equity: MSCI EAFE, Emerging Markets: MSCI EM, Hedge Funds: HFRI Fund of

Funds Composite

Diversified Portfolio: Russell 3000: 31%, MSCI EAFE: 18%, MSCI EM: 6%, BbgBarc US Agg: 10%, Wilshire US REIT: 7%, Alerian MLP Infrastructure: 7%, HFRI Fund of Funds Composite: 15%, CSFB Leveraged

Loans: 6%

High

Low

4



SUMMARY: INNOVEST’S LONG-TERM OUTLOOK

Slowing global growth, diverging global monetary policy, and trade

policy interject uncertainty.

Equities are reasonably priced, but we are late in an economic cycle.

Modestly higher bond yields point to better fixed income returns.

The most effective investment strategy:

• Periodically confirm investment objectives and risk tolerance

• Remain diversified and focused on the long-term

• Remember that market timing is an exercise in futility

• Employ rebalancing techniques

1

2

3

4

5



INNOVEST’S CAPITAL MARKETS PROCESS

GLOBAL ECONOMICS

ASSET CLASS PROJECTIONS

ASSET ALLOCATION STUDIES

Monetary Policy Employment & Wages Debt Levels

Returns Volatility Correlations

Valuations

Earnings Growth

Dividend Yields

Nominal and Real Rates

Inflation

Credit Spreads

Quantitative Analysis

Valuations

Qualitative Assessments

Equities Fixed Income Diversifiers

Inflation Fiscal Policy & Politics

Portfolio Risk Portfolio Range of Returns Opportunities

ASSET CLASS FUNDAMENTALS

Customized to Meet Client Objectives

6



• Markets expect tighter monetary policy and somewhat higher global central bank

rates, which has historically led to slower economic growth.

• The unwinding of quantitative easing by the central banks adds uncertainty for the

global economy.

GLOBAL ECONOMICS: GLOBAL GROWTH SLOWING

Market Expectations for Future Central Bank RatesGlobal GDP Growth Slowing

Sources: IMF/Haver Analytics, 10/31/18

Sources: Eaton Vance, Bloomberg, Factset, 12/31/18

7



0 5000 10000 15000 20000 25000

Canada

Brazil

Italy

U.K.

France

India

Germany

Japan

China

USA

Billions of USD

2003 GDP

2018 GDP

• The U.S. Leading Economic

Index (LEI) is composed of 10

factors, including

unemployment claims, capital

spending and the yield curve.

• At the end of 2018, the LEI index

remained positive, but there are

indications that we are in the

late stages of what is on track to

be the longest economic

expansion since World War II.

• Emerging markets are

increasingly prominent in global

GDP.

GLOBAL ECONOMICS

Leading Economic Indicators (% YOY)

Sources: The Conference Board, Haver Analytics, DB Global Research, 12/31/18

World GDP by Country

Sources: World Economic Outlook, Innovest Portfolio Solutions 10/31/18

8



EQUITIES: VALUATIONS

• Despite reasonable valuations, monetary policy and the length of the economic

cycle lead us to be slightly more cautious about future equity returns.

DM = Developed Markets; EM = Emerging Markets

Valuations refer to NTMA P/E for U.S. and Developed Markets, and P/B for

Emerging Markets. Sources: FactSet, MSCI, Standard & Poor’s, Thomas

Reuters, and J.P. Morgan Asset Management, 12/31/18

Returns are 12-month and 60-month annualized total returns, measured monthly,

beginning December 31, 1993. 𝑅2 = 44%. Sources: FactSet, Standard & Poor’s, Thomas

Reuters, and J.P. Morgan Asset Management, 12/31/18

Global ValuationsCurrent and 25-year historical valuations

Forward P/E and 5yr. Annualized Returns S&P 500 Total Return Index

14.4x as of 12/31/18

9



• Equities tend to move in cycles.

In recent time periods:

– Growth stocks have

outperformed value stocks.

– U.S. stocks have outperformed

international stocks.

• Timing of a reversal is uncertain.

• Diversified style and geographic

exposure is recommended.

EQUITIES: CYCLICALITY OF RETURNS

U.S. Equities represented by S&P 500 Index returns. International (Developed) Equities represented by

MSCI EAFE Index returns. Sources: Morningstar, Innovest Portfolio Solutions, 12/31/18

Value Equities represented by Russell 3000 Value Index returns. Growth Equities represented by Russell

3000 Growth Index returns. Sources: Morningstar, Innovest Portfolio Solutions, 12/31/18

Value vs. Growth Equities

U.S. vs. International Developed Equities

10



FIXED INCOME: INTEREST RATES

• Higher interest rates have historically resulted in higher fixed income returns over

subsequent five-year time periods.

• Higher bond yields lead us to raise our expectations for future returns.

• Despite being relatively flat, the yield curve has not yet inverted (when short-term rates are

higher than the 10-year yield). Inversions typically occur in the latter stages of economic

cycles.

Sources: Bloomberg Barclays, FactSet, J.P. Morgan Asset Management. 11/30/18

Historical Bond Yields and Their Subsequent

Five-Year Returns Yield Curve Over Time

Source: US Department of Treasury, 12/31/18

0

1

2

3

4

5

6

3mo 6mo 1yr 2yr 3yr 5yr 7yr 10yr

Tre

asu

ry Y

ield

cu

rve R

ate

s

2/27/2007 Most inverted curve prior to the last bear market

3/9/2009 The starting date of the current bull market

12/31/2018

11



ALTERNATIVES: VOLATILITY

• Private Equity, Hedge Funds, Real Estate, and Reinsurance have consistently

exhibited less volatility than equities.

• Alternative investments generally have low correlations and less market sensitivity (beta) to global equities.

Source: Morningstar. In both charts, asset classes are represented by various

indices as follows: Cambridge Associates US Private Equity (Private Equity),

HFRI Fund Weighted Composite Index (Hedge Funds), NCREIF Fund ODCE

(Real Estate), Bloomberg Barclays Aggregate Bond Index (Domestic Fixed

Income), and Swiss RE Global Cat Bond Index (Reinsurance).

Historical volatility chart displays each respective index’s rolling trailing 3-

year standard deviations from July 2003 through June 2018.

12



LONG-TERM PROJECTIONS EXPECTED RETURNS OVER A 5-10 YEAR PERIOD

Projections (%)

Asset Class

2019

5-10 yr

Projection

2018

5-10 yr

Projection Change

Standard

Deviation

Broad Domestic Equity 6.25% 6.75% -0.50% 22.75%

Large Cap (U.S.) 6.00% 6.50% -0.50% 21.89%

Small/Mid Cap (U.S.) 6.50% 7.00% -0.50% 26.98%

International Equity 6.75% 7.00% -0.25% 26.35%

Int'l Small Equity 7.25% 7.50% -0.25% 29.82%

Global Equity 6.75% 7.00% -0.25% 24.53%

Emerging Market Equity 7.75% 8.00% -0.25% 32.40%

Domestic Fixed Income 3.50% 2.50% 1.00% 3.96%

Defensive Fixed Income 3.00% 1.75% 1.25% 2.37%

Float. Rate Corp Loans 5.75% 5.25% 0.50% 15.75%

High Yield Fixed Income 4.25% 4.25% 0.00% 16.65%

TIPS 3.25% 2.50% 0.75% 6.07%

Stable Value 2.75% 1.50% 1.25% 0.67%

Muni Fixed Income 2.75% 2.25% 0.50% 5.41%

Defensive Muni F.I. 2.25% 1.25% 1.00% 1.82%

Emerging Market Debt 5.00% 4.00% 1.00% 14.68%

Global Fixed Income 2.25% 1.50% 0.75% 7.02%

International Fixed Income 1.00% 0.75% 0.25% 11.10%

Projections (%)

Asset Class

2019

5-10 yr

Projection

2018

5-10 yr

Projection Change

Standard

Deviation

Commodities 4.00% 4.00% 0.00% 25.44%

Low Correlated Hedge 4.75% 5.25% -0.50% 9.16%Liquid Low Correlated

Hedge 4.25% 4.75% -0.50% 9.15%

Hedge Funds 6.25% 6.75% -0.50% 11.12%

Private Equity 8.25% 9.00% -0.75% 14.31%

Listed Private Equity 6.75% 7.50% -0.75% 46.39%

Illiquid Credit 7.25% 7.25% 0.00% 11.03%

Real Estate 6.00% 6.25% -0.25% 11.92%

Domestic REITs 5.25% 5.75% -0.50% 36.88%

Global REITs 5.75% 5.75% 0.00% 31.95%

Reinsurance 6.00% 6.00% 0.00% 8.04%

MLPs (pre-tax) 9.75% 9.50% 0.25% 22.89%

MLPs 7.50% 7.25% 0.25% 22.89%

Cash Equivalents 1.75% 1.25% 0.50% 1.08%

Inflation 2.25% 2.25% 0.00% 0.00%

See important disclosures at the end of this document.

13



LONG-TERM PROJECTED RISK AND RETURNS


Capital Markets Projections Risk vs. Return Scatter

Chart

Source: Innovest Portfolio Solutions.

14

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17



Appendix

18



PROJECTED VOLATILITY

• Based on each asset class’s worst five-year standard deviation over the past 20

years.

• Combining low-correlated assets in a portfolio: helps to reduce the volatility

of the portfolio.

• Focus: the whole portfolio.

• Portfolio rebalancing: a proven way to manage volatility.

19



PROJECTED CORRELATIONS


Combining asset classes with low correlations can provide

potentially lower portfolio volatility. Correlations measure the

degree of co-movement between asset classes. Projected

correlations uses 20 years of historical data to encompass

multiple market cycles and economic conditions.

• Correlation of 1.0: The two asset classes move in the same

direction, in lockstep

• Correlation of (1.0): The two asset classes move in the

exact opposite direction

• Correlation of 0.0: No relationship in the movement of the

two asset classes

Large Cap 1.0

Mid/Small Cap 0.9 1.0

International Equity 0.9 0.9 1.0

Emerging Mkt Equity 0.8 0.8 0.8 1.0

Domestic Fixed Inc. (0.4) (0.4) (0.3) (0.3) 1.0

Defensive Fixed Inc. (0.4) (0.4) (0.3) (0.3) 0.8 1.0

Muni Fixed Income (0.2) (0.2) (0.1) (0.1) 0.8 0.4 1.0

High Yield Fixed Income 0.7 0.7 0.7 0.7 (0.1) (0.2) 0.2 1.0

Float. Rate Corp Loans 0.6 0.6 0.6 0.6 (0.2) (0.2) 0.2 0.9 1.0

Stable Value (0.2) (0.1) (0.1) (0.0) 0.3 0.6 0.1 (0.1) (0.0) 1.0

Low Correlated Hedge 0.7 0.8 0.7 0.8 (0.4) (0.3) (0.1) 0.6 0.6 0.0 1.0

Liquid Low Corr Hedge 0.7 0.8 0.7 0.8 (0.4) (0.3) (0.1) 0.6 0.6 0.0 1.0 1.0

Private Equity 0.8 0.7 0.7 0.7 (0.4) (0.4) (0.2) 0.5 0.5 (0.1) 0.8 0.8 1.0

Illiquid Credit 0.7 0.7 0.7 0.7 (0.1) (0.2) 0.2 1.0 0.9 (0.1) 0.6 0.6 0.5 1.0

Commodities 0.2 0.3 0.4 0.4 (0.1) (0.0) 0.0 0.4 0.5 0.1 0.5 0.5 0.3 0.4 1.0

MLPs 0.3 0.4 0.3 0.4 0.1 0.1 0.2 0.6 0.6 0.1 0.4 0.4 0.3 0.6 0.5 1.0

Real Estate 0.2 0.1 0.1 (0.0) (0.1) (0.1) (0.2) (0.1) (0.0) (0.2) 0.2 0.2 0.4 (0.1) 0.2 (0.1) 1.0

Global REITs 0.7 0.8 0.8 0.7 (0.1) (0.2) 0.1 0.7 0.6 (0.1) 0.6 0.6 0.5 0.7 0.4 0.4 0.1 1.0

Reinsurance 0.2 0.2 0.3 0.3 0.0 (0.2) 0.1 0.4 0.3 (0.4) 0.2 0.2 0.2 0.4 0.2 0.2 (0.0) 0.3 1.0

Cash Equivalents (0.1) (0.1) (0.1) (0.1) 0.2 0.6 0.0 (0.2) (0.1) 0.7 0.1 0.1 0.1 (0.2) 0.1 0.1 0.3 (0.1) (0.3) 1.0

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20



Given the complexity of the financial markets, individual circumstances, and risk-reward trade-offs of portfolio construction, we believe it is not

prudent or advisable to rely solely on forecasts and quantitative modeling. The material herein has been prepared for informational purposes

only and is not intended to provide, and should not be relied on for, tax, accounting, or legal advice. No representation is being made as to

whether any investment product, strategy, or security is suitable or appropriate for an investor’s particular circumstances. Assumptions,

opinions, and forecasts herein constitute our judgment and are subject to change without notice.

While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The statistical analysis herein was

prepared by Innovest Portfolio Solutions LLC with data provided by Investment Metrics (IM). Innovest and IM assume no responsibility for the

accuracy of these valuations or return methodologies. Reasonable care has been taken to assure the accuracy of the MPI computer software

and database. Innovest and IM disclaim responsibility, financial or otherwise, for the accuracy and completeness of this report. © Copyright

2019 by Innovest Portfolio Solutions LLC and Investment Metrics.

Asset Class Projections

Expected returns are the long-term projected total rate of return (income and capital gains) for each asset class and is shown in annualized

form. Innovest’s 2017 long-term research on the capital markets includes, but is not limited to, resources from Aon Hewitt, Bank of New York

Mellon, Callan Associates, Horizon Actuarial Services, JP Morgan Asset Management, Merrill Lynch Global Institutional Consulting, Morgan

Stanley Wealth Management, SEI, UBS, Voya Investment Management, Wells Fargo Investment Institute, and Willis Towers Watson.

Volatility

Standard deviation is a statistical measure of the variability of potential returns around the expected return. Approximately 68% of the returns

are expected to fall within plus or minus one standard deviation of the expected return in any single year. Standard deviation is also

represented in annualized form. We utilize the single five year period with the highest standard deviation over a 20-year period for each asset

class. For asset classes without a 20-year history, we use the longest data series available.

Correlations

Our projections of asset class correlations are based on 20-year historical correlations between asset classes, as they incorporate several

economic and market cycles. The illiquid credit correlation projection uses the Bloomberg Barclays Corporate HY Bond Index as its proxy

benchmark, which gives it a perfect correlation of 1.0 with high yield fixed income.

DISCLOSURES

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