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Appendix

Each year, we update our forecast of capital market returns for the next market cycle (measured as seven years). Future market returns are a function of the starting point, projected income, and projected adjustments to valuation.

We update our Capital Markets Forecast for asset classes and the corresponding strategy weights on an annual basis, but this does not mean these are tactical, one-year allocations. Instead, our updated weights contemplate the market’s actions during the preceding year and rely on mean reversion. Over the long term, markets show a strong tendency to mean revert to historical averages adjusted for underlying trends. This occurs because high profits and momentum attract investors and drive down future returns in highly valued asset classes. Our annual update includes answers to the following questions:

• What returns are realistic during the market cycle?

• What risks may have to be assumed to capture those returns?

• What minimum acceptable real rate of return is expected from diversification, and how can we bridge the gap between what is possible and what investors require?

• For portfolios supporting frequent distributions, what is a sustainable spending rate that minimizes the probability of permanently impairing capital after inflation?

• What opportunities do investments in private markets have to offer?

Based upon our updated projections, we restructure our strategic asset allocation targets in key areas to maximize the efficiency of our strategies and, therefore, to better meet our clients’ objectives over the next market cycle. Our forecast provides the quantitative blueprint for the steps we are taking to both manage risk and maximize opportunities in 2020 and beyond.