REDUCE RISK TARGET

RETURNSDiversified Strategies for DC

2

Diversified Strategies for DC

Many defined contribution (DC) schemes aim to help members target more stable performance and counter periods of poor or volatile returns.

Asset classes perform differently at different times. For example, growth assets like equities, provide better returns in favourable environments but considerably worse returns in stressed markets.

So, portfolios with a limited number of asset classes are likely to experience periods of underperformance or heightened market volatility.

By diversifying across multiple asset classes you can reduce the volatility of your portfolio and stabilise returns.

Asset Class Annual Returns, 2009-2017 (%)

Source: Morningstar Direct, as of 31 December 2017. Past performance is not a guarantee of future results.

2009 2010 2011 2012 2013 2014 2015 2016 2017High Yield57.3

REITs23.8

Gvnt. Bonds15.6

REITS24.1

Global Equities22.4

REITS21.9

REITS5.4

Commodities33.4

Global Equities13.3

REITS25.8

Commodities20.5

Corp Bonds7.2

High Yield19.1

High Yield6.7

Gvnt. Bonds13.9

Global Equities4.3

Global Equities29.6

High Yield7.2

Global Equities19.6

Global Equities16.3

Global Bonds6.4

Corp Bonds13.2

Corp Bonds0.7

Corp Bonds12.2

Global Bonds2.5

REITS24.8

REITS5.1

Corp Bonds10.3

High Yield15.7

High Yield3.4

Global Equities11.8

REITS0.3

Global Equities11.3

Gvnt. Bonds0.6

Global Bonds21.8

Corp Bonds4.4

Commodities5.9

Global Bonds8.9

Global Equities-5.8

Gvnt. Bonds2.7

Gvnt. Bonds-3.9

Global Bonds6.8

Corp Bonds0.4

High Yield 15.0

Gvnt. Bonds1.8

Gvnt. Bonds-1.2

Corp Bonds8.3

REITS-7.5

Global Bonds-0.3

Global Bonds-4.4

High Yield2.7

High Yield-0.8

Corp Bonds10.9

Global Bonds-1.9

Global Bonds-4.8

Gvnt. Bonds7.2

Commodities-12.7

Commodities-5.4

Commodities-11.2

Commodities-11.9

Commodities-20.3

Gvnt. Bonds10.1

Commodities-7.1

WHY DIVERSIFY?

3State Street Global Advisors

Two Approaches to DiversificationWe believe there are two approaches that are suitable for DC schemes:

The Active ApproachThe right assets at the right time.

The Indexed ApproachOptimise asset class weights to maximise diversification.

Fund Asset Mix Asset Allocation Investment Strategy

Dynamic Diversified EquitiesBondsAlternatives

Dynamic The fund uses proven market-aware intelligence and portfolio management skill to dynamically change asset allocations to target an optimised balance of risk and return.

Strategic Diversified EquitiesBondsAlternatives

Strategic The fund seeks long-term returns similar to equities but with lower volatility by using long-term forecasts to optimise asset class weights and maximise diversification.

Diversified Alternatives BondsAlternatives

Strategic The fund invests across a wide range of alternative asset classes, markets and securities to diversify away from equities and reduce the overall volatility of the portfolio.

State Street Global Advisor’s Diversified Funds

Diversification can be achieved using a variety of approaches but, in DC, schemes need solutions that can be delivered at a low cost for members.

In the past, this has made introducing diversification difficult as it has been implemented either direct or through active investments which can both be expensive.

Today, there are ways diversification can be implemented at low cost in both an active and indexed approach.

HOW TO DIVERSIFY

4

Diversified Strategies for DC

EUPHORIA

LOW RISK AVERSION

NORMAL

HIGH RISK AVERSION

CRISIS

The Dynamic Diversified fund offers DC schemes an innovative, cost-efficient and liquid solution that targets both growth and capital preservation. Indexed components allow it to remain nimble, enabling quick and decisive shifts to ensure we run the most optimal asset allocation mix for the prevailing risk environment.

Key Facts• Liquid diversified growth fund targeting cash +4%1

per annum• Reduces volatility with market-responsive dynamic

asset allocation • Significant shifts in asset allocation via skilfully

managed in-house index funds• Asset mix is actively optimised throughout the life

of the investment• Combines the best of active and passive

The Right Assets at the Right Time The objective for this fund is to vary portfolio risk according to market volatility. When risk is rising, caution is required and the fund moves into safer asset classes. When markets are expected to be calmer, we can comfortably add more growth-seeking assets.

DYNAMIC DIVERSIFIED FUND

Indicative weights for illustration purposes only.

Asset mix changes dynamically to suit the market regime.

More growth assets when it’s safe.

More defensive assets when it’s not.

Equity Volatility

Currency Volatility

Credit Spreads

Growth Moderate DefensiveDMGOPTIMISE THE ASSET MIXDETERMINE MARKET REGIME

Model Optimising

Total Asset Allocation Refinements From Team

G

G

G

MG

G

M

M

M

M

D

D

D

D

Investment Process

Defensive Assets

CASH SHORT-DATED GOVERNMENT BONDS IMPLIED VOLATILITY

Moderate Assets

GOVT BONDS LONG DATEDCREDIT

Growth Assets

COMMODITIES EQUITIESEM BONDSCONVERTIBLE BONDSHIGH YIELD BONDS INFRASTRUCTURE PROPERTY

WHY INVEST IN THE FUND?Forward-looking, dynamic asset allocation

Absolute return focus

Sophisticated risk management and drawdown limitation

Established track record

Long-only and unleveraged

Experienced team using a disciplined framework

5State Street Global Advisors

The Strategic Diversified fund seeks to achieve long-term returns similar to equities but with lower volatility. We use our experience as a leading indexation manager to gain broad asset-class exposure using predominantly index building blocks. This enables the fund to be both diversified and cost-effective.

Key Facts• Targets Cash + 3-4% per annum• Broad diversification to reduce volatility• Bespoke methodology focuses on downside risk• Lower cost structure than active portfolios• Liquid, daily, cost-effective fund access

Building a Better Portfolio We believe the right asset allocation rather than stock selection has the largest impact on portfolio returns. This fund was created using our long-term expected return forecasts and estimated correlation of each asset class. We then optimise the asset allocation on a quarterly basis. This approach aims to maximise diversification as well as the risk and return characteristics of the fund.

STRATEGIC DIVERSIFIED FUND

Source: SSGA, 31 December 2017. Target asset allocations shown are as of the date indicated and are subject to change.

Target Asset Allocation

Diversification

Absolute Return

Target Volatility Triggers1

Equity Buy/Write2

MODEL OPTIMISINGTEAM INSIGHTS

4% Real Estate

Developed Equities 44.5%

Emerging Equities 5.5%

Emerging Market Bonds 9%

12% Absolute Return

4% Infrastructure

6.5% Commodities

8.5% High Yield Bonds

6% Corporate Bonds

QUARTERLY

Integrated Risk ManagementAsset Class Expected Returns

Asset Class Risks

Constraints

Investment Process

WHY INVEST IN THE FUND?Access to broad diversification

Focus on risk reduction

Targets equity like returns

Established track record

Low cost

1Target Volatility Triggers are in-built monitoring and adjustment mechanisms which help to limit the impact of market volatility. Should volatility move above the pre-set target level, equity exposure is automatically reduced and switched into cash. 2Equity Buy/Write is an investment strategy involving the purchase of an equity and the sale of a call option on that equity. It is designed to generate additional income from the option premium and can also reduce the risk of the investment.

6

Diversified Strategies for DC

DIVERSIFIED ALTERNATIVES FUNDThe Diversified Alternatives Fund seeks to reduce the volatility of your total portfolio and achieve a strong balance of risk and return. It aims to do this by providing exposure to a range of alternative asset classes that have a low correlation to equities.

Key Facts• Targets Cash +2.5% per annum• Diversified exposure to non-equity growth assets• Low correlation to equities to maximise

diversification benefits• Optimised to minimise downside risk• Liquid, daily, cost-effective fund access

Targeted, Cost-effective Diversification We created this fund using our long-term expected return forecasts and estimated correlation of each asset class. It was designed to be included in a predominantly equity based portfolio to help maximise the risk and return characteristics of the overall portfolio.

Source: SSGA, 31 December 2017. Target asset allocations shown are as of the date indicated and are subject to change.

Target Asset Allocation

5.5% Real Estate

Emerging Market Bonds 15%

Corporate Bonds 18%

High Yield Bonds 20%

22.5% Absolute Return

4.5% Infrastructure

14.5% Commodities

WHY INVEST IN THE FUND?Access to broad, non-equity diversification

Focus on risk reduction

Established track record

Low cost

Diversification

Absolute Return

MODEL OPTIMISINGTEAM INSIGHTS

QUARTERLY

Integrated Risk Management

Asset Class Expected Returns

Asset Class Risks

Constraints

Investment Process

7State Street Global Advisors

Your DC PartnerAt SSGA, our DC expertise runs deep. Drawing upon a global perspective, we help scheme sponsors and service providers solve local challenges. Understanding that every employer, scheme and service provider may be unique, we bring extensive resources to the table to help you design, implement and manage the best possible solutions.

With 30 years of DC experience and £367 billion* in global DC assets, our dedicated team is passionate about retirement and committed to creating better outcomes for scheme members.

*As at 31 December 2017. State Street Global Advisors is the investment management arm of State Street Corporation.

To understand more about diversified strategies for DC, please contact: ukdc@ssga.com | ssga.com/ukdc

ssga.com

Marketing Communication. For Institutional use only. Not for use with the public.

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The information provided does not constitute investment advice as such term is defined under the Markets in Financial Instruments Directive (2014/65/EU) and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

Investing involves risk including the risk of loss of principal.

The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA’s express written consent.

Investing in the Managed Pension Fund is effected by means of an insurance policy written by Managed Pension Funds Limited, a member of the State Street group of companies. This document should not be construed as an invitation or inducement to engage in investment activity. The Managed Pension Fund is available to pension schemes (including overseas schemes) registered with HM Revenue and Customs for the purposes of Chapter 2 of Part IV of the Finance Act 2004. This document should therefore only be circulated to the Trustees of such schemes and their advisers who are deemed to be professional persons (this includes professional clients and eligible counterparties as defined by the Financial Conduct Authority). It should not be circulated to or relied upon by any other persons. In particular scheme members should consult with their employer or scheme trustee. Please note that neither State Street Global Advisors Limited or Managed Pension Funds Limited offer actuarial services and any investment service undertaken by those firms with an objective of matching projected pension fund liabilities does not include, or take responsibility for, the calculation of projected liabilities. Any illustrations exclude the impact of fees, and actual investment returns may differ from projected cashflows, these projected cashflows are not projections of any future benefit payable under a specific policy.

This document should be read in conjunction with its Strategy Disclosure/Supplemental/Policy Document. All transactions should be based on the latest available Strategy Disclosure/Supplemental/Policy Document which contains more information regarding the charges, expenses and risks involved in your investment.

Government bonds and corporate bonds generally have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns.

Asset Allocation is a method of diversification which positions assets among major investment categories. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.

Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.

Investing in high yield fixed income securities, otherwise known as “junk bonds”, is considered speculative and involves greater risk of loss of principal and interest than investing in investment grade fixed income securities. These Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.

Investing in commodities entail significant risk and is not appropriate for all investors. Commodities investing entail significant risk as commodity prices can be extremely volatile due to wide range of factors. A few such factors include overall market movements, real or perceived inflationary trends, commodity index volatility, international, economic and political changes, change in interest and currency exchange rates.

This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.

There are risks associated with investing in Real Assets and the Real Assets sector, including real estate, precious metals and natural resources. Investments can be significantly affected by events relating to these industries.

Investing in REITs involves certain distinct risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of credit extended. REITs are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs, especially mortgage REITs, are also subject to interest rate risk (i.e., as interest rates rise, the value of the REIT may decline).

Standard deviation is a historical measure of the volatility of returns. If a portfolio has a high standard deviation, its returns have been volatile; a low standard deviation indicates returns have been less volatile. Standard Deviation is normally shown over a time period of 36 months, but the illustrations noted above may reflect a shorter time frame. This may not depict a true historical measure, and shouldn’t be relied upon as an accurate assessment of volatility.

Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations.

Investments in small/ mid-sized companies may involve greater risks than in those of larger, better known companies.

Investing in foreign domiciled securities may involve risk of capital loss from unfavorable fluctuation in currency values, withholding taxes, from differences in generally accepted accounting principles or from economic or political instability in other nations.

Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.

Diversification does not ensure a profit or guarantee against loss.

This communication is directed at professional clients (this includes eligible counterparties as defined by the Financial Conduct Authority) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description (including retail clients) should not rely on this communication.

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