0.9%

InflationCashEquivalents

CommoditiesHedgeFunds

PrivateEquity

RealEstate

Non-U.S.Fixed

HighYield

LongDuration

TIPSU.S.Fixed

DefensiveGlobalex-U.S.Equity

EmergingMarketEquity

DevelopedNon-U.S.

Equity

Small/MidCap

LargeCap

BroadU.S. Equity

Projected Return(10-year geometric)

Projected Risk(Standard deviation)

Equities Fixed Income Other

7.6%

21.5%

28.0%

20.2%

23.0%

18.3%

11.5%

9.4%

11.4%

5.3%3.8%

2.3%

18.3%

8.9%

33.1%

16.5%

19.0%

7.5% 7.9% 7.5% 7.9%

6.2%

2.8% 3.0% 3.0%4.1%

5.1%

2.8%

8.5%

5.1%

3.1%2.0%

1.5%2.3%

7.8%

Private Equity

Hedge Funds

Real Estate

High Yield

TIPS

U.S. Fixed Income

Global ex-U.S. Equity

Broad U.S. Equity

10-year projected return 10-year projected standard deviation

14%

11%

52%

8%5%7%3%

21%

17%

35%

5%8%9%5%

25%

20%

26%

4%10%

9%6%

9.2%

5.8% 6.3%

11.1%

6.7%

13.0%

6.2% 7.1% 7.5%

17.0%

0%

20%

40%

60%

80%

100%

18%

14%

39%

5%6%

6%

4%8%

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

0%

20%

40%

60%

80%

100%

Mix 1 Mix 2 Mix 3 Mix 4 Mix 5

22%

17%

30%

5%5%

8%

5%8%

26%

21%

22%

5%3%

9%

6%8%

30%

24%

13%

5%2%

10%

7%9%

34%

27%

4%5%

1%

12%

8%9%

0%

5%

10%

15%

20%

15.0%

10-Year Return and Risk Projections

0

10

20

30

40

50

1963 1973 1983 1993 2003 2013

S&P 500 P/E Ratio

+ 2 Std. Dev.

- 2 Std. Dev.

Long-Run Average

28.9

18.217.1

5.3

Callan’s ExpectationsU.S. Equity 7.6%: U.S. markets enjoyed robust returns in 2013. The economic outlook is now stronger. Long-term fundamentals build to just shy of 8%: 2.5%-3.5% real GDP growth, 5%-6% nominal earnings growth, and 2.0%-2.5% dividend yield. Global ex-U.S. Equity 7.8%: Developed and emerging markets will rebound from disappointments in 2013. The small premium over U.S. equity is largely due to emerging markets. U.S. Fixed Income 3.0%: Interest rates will rise, and bonds will suffer capital loss before higher yields kick in. Cash yields will move toward 3.0% and 10-year Treasury yields will reach 5%—a reversion to mean. We project an upward sloping yield curve, but a very slim risk premium for bonds over cash (1.0%). Real Estate 6.2%: Reflects downward pressure on income returns at 4%-5% with increased competition for investment by those hungering for yield. Hedge Funds 5.1%: Unchanged from 2013 for T-bills plus 3%.

0%

1%

2%

3%

4%

5%

6%

7%

Source: Barclays07 08 09 10 11 12 13060504030201

Capital Market ProjectionsEach year Callan develops long-term capital market projections, detailing expected returns, standard deviations, and correlations for major asset classes. These projections are the cornerstone for strategic planning. This charticle sum-marizes key figures from Callan’s 2014 capital market projections, and offers a high-level view into how we generated the numbers.

Mixing It Up: Projected Risk and Return of Different Asset Class MixesThe exhibit below uses Callan’s projections to create a generic range of efficient, conservative to aggressive portfolios.

Barclays Aggregate Index Daily Yield to Worst1/02/2001 to 12/31/2013

Price to Earnings Ratio for S&P 500

2014

Source: Standard & Poor’s

Source: Callan

Broad U.S. Equity 1.00

Large Cap 0.99 1.00

Small/Mid Cap 0.96 0.94 1.00

Non-U.S. Equity 0.85 0.85 0.82 1.00

Emerging Markets Equity 0.86 0.86 0.84 0.86 1.00

Global ex-U.S. Equity 0.88 0.88 0.85 0.99 0.93 1.00

Defensive -0.39 -0.39 -0.39 -0.37 -0.38 -0.39 1.00

U.S. Fixed -0.11 -0.10 -0.13 -0.10 -0.15 -0.12 0.69 1.00

TIPS -0.05 -0.05 -0.07 -0.05 -0.06 -0.05 0.44 0.58 1.00

High Yield 0.61 0.61 0.58 0.58 0.57 0.60 -0.10 0.03 0.03 1.00

Non-U.S. Fixed -0.07 -0.07 -0.08 0.00 -0.06 -0.02 0.38 0.40 0.30 0.05 1.00

Real Estate 0.73 0.73 0.72 0.65 0.65 0.67 -0.12 -0.02 0.01 0.55 0.02 1.00

Private Equity 0.94 0.94 0.91 0.90 0.90 0.93 -0.41 -0.18 -0.09 0.62 -0.05 0.72 1.00

Hedge Funds 0.75 0.75 0.73 0.69 0.71 0.72 -0.13 0.12 0.08 0.53 0.02 0.58 0.72 1.00

Commodities 0.16 0.16 0.17 0.16 0.17 0.17 -0.28 -0.10 0.10 0.10 -0.08 0.18 0.16 0.17 1.00

Cash Equivalents -0.04 -0.03 -0.08 -0.01 -0.10 -0.04 0.35 0.10 0.07 -0.11 0.00 -0.06 0.00 -0.07 0.07 1.00Inflation -0.05 -0.06 -0.01 -0.11 0.03 -0.07 -0.36 -0.32 0.13 0.07 -0.22 0.17 -0.06 0.21 0.47 0.15 1.00

Broad Large Cap

Sm/MidCap

Non-U.S.Equity

Em Mkts Globalex-U.S.

Defens. U.S.Fixed

TIPS HighYield

Non-U.S.Fixed

RealEstate

Private Equity

HedgeFunds

Comm. CashEquiv.

Inflation

Correlation Expectations (10 Years)

Historical Returns

Average Annual Returnsfor periods ended 12/31/2013

2008 2009 2010 2011 2012 2013 5 Years 10 Years 15 YearsBroad U.S. Stock Market

Russell 3000 -37.31 28.34 16.93 1.03 16.42 33.55 18.71 7.88 5.32

Large Cap U.S. Stocks

S&P 500 -37.00 26.47 15.06 2.11 16.00 32.39 17.94 7.41 4.68

Small Cap U.S. Stocks

Russell 2500 -36.79 34.39 26.71 -2.51 17.88 36.80 21.77 9.81 9.67

Non-U.S. Stock Markets

MSCI EAFE US$ -43.38 31.78 7.75 -12.14 17.32 22.78 12.44 6.91 4.54

MSCI Emerging Markets -53.18 79.02 19.2 -18.17 18.63 -2.27 15.15 11.52 11.22

Fixed Income

Barclays Aggregate 5.24 5.93 6.54 7.84 4.21 -2.02 4.44 4.55 5.23

Citi Non-US 10.11 4.38 5.22 5.17 1.51 -4.56 2.27 4.10 4.47

Real Estate

NCREIF -6.46 -16.86 13.11 14.26 10.54 10.98 5.68 8.64 8.86

Hedge Funds

CS Hedge Fund Index -19.07 18.57 10.95 -2.52 7.67 9.73 8.67 6.37 7.55

Private Equity

Post Venture Cap Index -53.77 88.25 20.37 -7.43 5.26 32.28 23.91 6.98 2.77

Commodities

DJ UBS Commodities Index -36.61 18.72 16.67 -13.37 -1.14 -9.58 1.41 -0.73 3.25

Cash Market

90-Day T-Bill 2.06 0.21 0.13 0.10 0.11 0.07 0.12 1.68 2.33

Inflation

CPI-U* 0.09 2.72 1.50 2.96 1.74 1.50 2.08 2.37 2.37

We forecast three primary figures for multiple asset classes: a mean rate of return, a corresponding range defined by standard deviation, and the correlations between asset classes. These figures represent our best thinking for long-term expectations and establish a mid-point within a wider range of potential outcomes. We use the projections to model portfolios for our clients.

Multiple elements of the capital markets influence the projections—returns relative to inflation, equity valuations, risk premiums, GDP growth, and many other factors. These projections incorporate advanced quantitative modeling as well as qualitative feedback and the economic expertise of Callan’s consulting professionals. Our 2014 numbers reflect our optimism for the economy, for inflation, and for the capital markets.

About Callan

Founded in 1973, Callan Associates Inc. is one of the largest independently owned investment consulting firms in the country. Headquartered in San Francisco, Calif., the firm provides research, education, de-cision support, and advice to a broad array of institutional investors.

For more information, please contact your Callan consultant.

San Francisco | 800.227.3288

Atlanta | 800.522.9782Chicago | 800.999.3536Denver | 855.864.3377New Jersey | 800.274.5878

www.callan.com

Published March 2014

© 2014 Callan Associates Inc. *CPI-U data are measured as year-over-year change through 12/31/2013.

About These Projections

Returns for major asset classes over the past six calendar years reveal pockets of short-term vola-tility. Returns for longer, cumula-tive time periods remain the focus for institutional investors.

Short-Term & Long-Term

In the past, particularly in stressed markets like 2008, correlations among asset classes have risen. Among the risky asset classes, correlations are high and will remain high.

Callan revisits and adjusts our correlation expectations annually. Recently we have made risky, equity-like asset classes more correlated looking forward. Interest-ingly, stocks and bonds have exhibited tremendous negative correlation over time. Other uncorrelated asset classes have been commodities, TIPS, and to some extent many absolute return strate-gies. We believe real estate will maintain a diversification benefit, but it’s harder to measure given the valuation process.

Source: Callan