ASSET CLASS ASSUMPTIONS & ESTIMATES
Capital market assumptions used herein reflect Neuberger Berman’s forward-looking estimates of the benchmark return or volatility associated with an asset class. Estimated returns and volatilities are hypothetical return and risk estimates generated by Neuberger Berman’s Institutional Solutions Group. Estimated returns and volatilities do not reflect the alpha of any investment manager or investment strategy/vehicle within an asset class. Information is not intended to be representative of any investment product or strategy and does not reflect the fees and expenses associated with managing a portfolio or any other related charges, such as commissions and surrender charges. Estimated returns and volatilities are hypothetical and generated by Neuberger Berman based on various assumptions and inputs, including current market conditions, historical market conditions and subjective views and estimates. Capital market assumptions shown reflect Neuberger Berman’s long-term (20+ years into the future) estimates and are reviewed and revised at least annually. Neuberger Berman also produces intermediate-term (5-7 years into the future) capital market assumptions. If Neuberger Berman’s intermediate-term (5-7 years into the future) capital market assumptions were used, the results presented would be different. Neuberger Berman’s capital market assumptions are derived using a building block approach that reflects historical, current, and projected market environments, forward-looking trends of return drivers, and the historical relationships asset classes have to one another. These hypothetical returns are used for discussion purposes only and are not intended to represent, and should not be construed to represent, predictions of future rates of return. Actual returns may vary significantly. Neuberger Berman makes no representations regarding the reasonableness or completeness of any such assumptions and inputs. Assumptions, inputs, and estimates are periodically revised and subject to change without notice. Estimated returns and volatilities should not be used, or relied upon, to make investment decisions.
Rate of Return Estimate: Rate of return or geometric return is a measure of average returns of an investment over a period of time. Geometric rate of returns are typically referred to as annualized compound rate of returns and are always less than or equal to the arithmetic mean return of the same time series. Geometric rate of returns are used for straight-line calculations within the analysis, for example, the cash flow calculations. In straight-line calculations, each year is represented as a gain, so the compound (geometric mean) rate of return is used to adjust for the amount needed to make up for a loss in a given year. For example, if you lose 5% in one year, and gain 5% the year after, you still have less than you started with at the beginning of year one.
Arithmetic Mean Estimate: Arithmetic mean or average return is calculated by dividing the sum of a series of numbers by the number of overall items. This is more typically thought of as an “average” of the data set. Arithmetic mean or average return ignores the impact of compounding in the context of analyzing investment returns and is the simple average of returns observed over a period of time. Arithmetic mean returns are used in this material and, if applicable, the Efficient Frontier, because, through randomization, losses and gains are being accounted for each year.
Standard Deviation: A statistical measure of the volatility based on the distribution of a set of data from its mean (average value). For example, a portfolio with an average return of 10% and a standard deviation of 15% would return a result between -5% and +25% the majority of the time (68% probability or 1 standard deviation), almost all of the time the return would be between -20% and +40% (95% probability or 2 standard deviations). If there were 0 standard deviation then the result would always be 10%. Generally, more aggressive portfolios have a higher standard deviation and more conservative portfolios have a lower standard deviation.
Index Definitions
USD Cash is represented by the Barclays Benchmark Overnight USD Cash Index, which measures the performance of a daily rolling money market deposit in USD.
Non-USD Cash is represented by the SDR Currency Index, which tracks the performance of the currencies in the International Monetary Fund’s Special Drawing Rights basket against the USD, namely USD (41.73%), EUR (30.93%), RMB (10.92%), JPY (8.33%) and GBP (8.09%).
Domestic Government Bond and Global Treasuries are represented by the Bloomberg Global Aggregate Treasuries Total Return Index measures the performance, in USD, of Treasury bonds from the Bloomberg Global Aggregate Bond Index, a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded worldwide.
TIPS are represented by the Bloomberg U.S. Government Inflation-Linked All Maturities Index includes publicly issued, U.S. Treasury inflation protected securities that have at least 1 year remaining to maturity on index rebalancing date, with an issue size equal to or in excess of $500 million.
Domestic Corporate Bond and Global Credit is represented by the Bloomberg Global Aggregate Credit Total Return Index, which measures the performance, in USD, of corporate bonds from the Bloomberg Global Aggregate Bond Index, a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded worldwide.
U.S. Agency MBS are represented by the Bloomberg U.S. Mortgage Backed Securities Index Total Return Index, which measures the performance, in USD, of fixed-rate agency mortgage backed passthrough securities guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
ABS and CMBS are represented by the Bloomberg ABS+CMBS Index, which tracks asset backed securities, agency mortgage backed pass-through securities, and investment grade commercial mortgage backed securities.
CLOs are represented by the J.P. Morgan Collateralized Loan Obligation Index, which Tracks debt from broadly-syndicated, arbitrage floating-rate U.S. CLOs.
Global High Yield is represented by the Bloomberg Global High Yield Index, which is a multi-currency measure of the performance of the global high yield debt market which brings together the Bloomberg U.S. High Yield, Pan-European High Yield, Emerging Markets Hard Currency High Yield Indices.
Local Projects are represented by the ICE Bank of America U.S. High Yield Energy Index, which tracks the performance of below investment grade, but not in default, U.S. dollar denominated corporate bonds publicly issued in the U.S. domestic market by companies in the energy sector, and includes issues with a credit rating of BBB or below, as rated by Moody’s and S&P.
Emerging Markets Debt is represented by the J.P. Morgan Emerging Markets Bond Index (EMBI) Global Index, which measures total returns for traded hard currency debt instruments in the emerging markets; and the JPMorgan Corporate Emerging Markets Bond Index (CEMBI), which is a market-capitalization weighted index of corporate bonds issued by entities in emerging countries.
Developed Market ex-U.S. Equities are represented by the MSCI World Ex U.S. Index, which tracks the performance of large- and mid-cap stocks across 22 developed markets countries.
Emerging Market Equities are represented by the MSCI Emerging Markets Index, which tracks the performance of large- and mid-cap stocks across 24 emerging markets countries.
U.S Equities and Domestic Equities are represented by the respective Bloomberg Equity Large & Mid Cap Indices.
Domestic Real Estate, Core Real Estate and Value-Added Real Estate is represented by the NCREIF Property Index, which provides a historical measurement of unleveraged property-level returns and is comprised exclusively of operating properties acquired, at least in part, on behalf of tax-exempt institutions and held in a fiduciary environment. It is a market value-weighted index including apartment, hotel, industrial, office and retail properties.
Hedge Funds are represented by HFRI Fund Weighted Composite Index, designed to track the equal-weighted performance reported by the hedge fund managers listed within the HFR Database, which report in U.S. dollars monthly, net of all fees performance and assets under management, and have either (a) $50 million assets under management or (b) at least $10 Million assets under management on the last reported month prior to the index rebalance, and have been actively trading for at least 12 months.
Commodities and Gold are represented by the Bloomberg Commodity Index, which is designed to be a highly liquid and diversified benchmark for commodities investments. The index provides broad-based exposure to commodities as an asset class, since no single commodity or commodity sector dominates the Index. This index is composed of futures contracts on 20 physical commodities traded on U.S. exchanges, with the exception of aluminum, nickel and zinc, which are traded on the London Metal Exchange (LME).
Private Equity is represented by their respective sectors in the Cambridge Associates LLC U.S. Private Equity Index, which tracks the pooled horizon return, net of fees, expenses, and carried interest, of 1,468 U.S. private equity funds (buyout, growth equity, private equity energy and subordinated capital funds), including fully liquidated partnerships, formed between 1986 and 2017.
Private Infrastructure Equity – Infrastructure/Other is represented by the Cambridge Associates Infrastructure Index, a horizon calculation based on data compiled from infrastructure funds, including fully liquidated partnerships. Private indexes are pooled horizon internal rate of return (IRR) calculations, net of fees, expenses, and carried interest.
Private Debt is represented by the Credit Suisse Leveraged Loan Index, which tracks the investable market of the U.S. dollar denominated leveraged loan market. It consists of issues rated “5B” or lower, meaning that the highest rated issues included in this index are Moody’s/S&P ratings of Baa1/BB+ or Ba1/BBB+. All loans are funded term loans with a tenor of at least one year and are made by issuers domiciled in developed countries.
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This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment.
The hypothetical model portfolios shown are for illustrative purposes only and are based upon various assumptions, projections or other information generated by Neuberger Berman regarding investment outcomes. Growth rate assumptions and projections are hypothetical and do not reflect actual investment results and are not guarantees of future results. Calculations are based upon asset allocation models and capital market assumptions, which are updated periodically. Changes in assumptions would impact the hypothetical results shown. The estimates do not reflect actual investment results and are not guarantees of future results. Results are gross of fees and do not reflect the fees and expenses associated with managing a portfolio. If such fees and expenses were reflected, results shown would be lower. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
Any target returns/risk referenced reflect client established return/risk objectives. There is no guarantee that any target returns/risk will be achieved or that an investment strategy will be successful. Actual returns and risk may vary significantly.
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