Alternative Investment Opportunities Through a Slowing Economy

FIGURE 2 : The Long-Term Outlook for Asset Classes Has Changed ASSET CLASS 2023 SRE 2022 SRE Developedmarket equities 7.0% 3.8% Emergingmarket equities 12.9% 8.1% Investment-gradefixed income 4.6% 1.8% High-yield fixedincome 7.4% 2.6% Emergingmarket fixed income 7.8% 3.6% Cash 3.4% 0.9% Hedge funds 9.1% 4.1% Private equity 17.6% 11.6% Real estate 10.6% 8.8% Commodities 2.4% 1.5% Source: Citi Global Wealth Investments’ data as of October 31, 2022. Strategic Return Estimates (“SRE”) based on indices are Citi Global Wealth Investments’ forecast of returns over a 10-year time horizon for specific asset classes (to which the index belongs). 2022 SREs are based on data as of October 31, 2021. Indices are used to proxy for each asset class. Cash refers to the US Cash SRE. The forecast for each specific asset class is made using a proprietary methodology that is appropriate for that asset class. Equity asset classes use a proprietary forecasting methodologybased on the assumption that equity valuations revert to their long-term trend over time. The methodology isbuilt around specific valuation measures that require several stages of calculation. Assumptions on the projected growth of earnings and dividends are additionally applied to calculate the SRE of the equity asset class. Hedge Fund and Private Equity SREs are linked to equity SREs. Fixed Income asset class forecasts use a proprietary forecasting methodology that isbased on current yield levels. Other asset classes use other specific forecasting methodologies. SREs are in USdollars. SREs are generally updated on an annual basis, however they may be updated off cycle based on market conditions or methodology adjustments. Strategic Return Estimates are no guarantee of future performance. SREs do not reflect the deduction of client fees and expenses. Future rates of return cannot bepredicted with certainty. Investments that pay higher rates of return are often subject to higher risk and greater potential loss in an extreme scenario. The actual rate of return on investments can vary widely. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index. All SRE information shown above is hypothetical, not the actual performance of any client account. Hypothetical information reflects the application of a model methodologyand selection of securities in hindsight. No hypothetical record can completely account for theimpact of financial risk in actual trading. At an asset class level, the long-term outlook forprivate equity, real estate and hedge funds now looksmuch brighter. Based onCiti GlobalWealth Investments’ Adaptive ValuationStrategies (“AVS”) methodology, the forecasted Strategic Return Estimates (“SREs”) annualized ten-year returns for private equity, real estate and hedge funds are 17.6%, 10.6% and 9.1%, respectively ( FIGURE 2 ). These SREs stood at 11.6%, 8.8% and 4.1% at mid-year 2022. The 2022 selloff and continuedpublicmarket weakness has led to valuationsbecomingmore normalized, or in some cases at historic lows. These cheaper valuations may potentially lead to improved return expectations. The private equity SRE is 17.6%. This is derived from small-cap public equityvaluations, which continue to be at historically inexpensive levels, despite the recent large-cap rally. In the short term, we are experiencing fewerdeals withhigher financing costs. Nevertheless, in the long run, current lower valuations would lead tomore favorable and rewarding opportunities for long-term investors. The SRE for real estate is 10.6%, reflecting the current valuation environment in certain commercial real estate sectors, suchas office and retail. The SRE for hedge funds is 9.1%, led by the long/short equity and event-driven sub-asset classes. OVERVIEW | WEALTHOUTLOOK 2023 | MID-YEAR EDITION │ ALTERNATIVE INVESTMENTS | 5