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2019-01-16 Council Packet - Work Session
AGENDA CITY COUNCIL WORK SESSION JANUARY 16, 2018 – 5:00 P.M. KENAI CITY COUNCIL CHAMBERS 210 FIDALGO AVE., KENAI, AK 99611 http://www.kenai.city A. Call to Order B. Introduction (Mayor Gabriel) C. Introduction of Alaska Permanent Capital Management Representative (Administration) D. Presentation of Investment Methodology & Recommendations regarding Permanent Fund Investments (Alaska Permanent Capital Management) E. Council Discussion F. Public Comment (limited to 3 minute per individual; 20 minutes aggregate) G. Adjournment All meetings are open to the public and participation is encouraged. Agendas and supporting documents are posted on the City’s website at www.kenai.city . For additional information, please contact the City Clerk’s Office at 907-283-8231. APCM VIEWS Economic ins ig hts and market persp ective Multi Asset Strategies Team at Alaska Permanent Capital Management "VOTING MACHINE" "In the short run~ the market is a voting machine but in the long run it is a weighing machine." -Benjam i n Graham TRUSTED ADVISORS • MORE EXPERTS • BEDER ACCESS "WEIGHING MACHINE" ,/ / // / / / Winter 2019 / In Brief In 2018, positive fundamental forces were overwhelmed by policy and late-cycle dynamics, a risk we noted in the 2018 Views. This backdrop created vo latility that ha s been largely absent in the post-Crisis equity rally. APCM 's team of analysts shifted portfolios to a more defensive stance throughout the year to acknowledge the deterioration of high euphoria that started the year. The December selloff pulled US equities into negative territory and deepened the international equity downturn while bonds provided modest support to diversified portfolios. 5% 0% -5% -10% -11.3 -15% -14.6 -13.8 -20% -11.1 2018 Asset Class Performance as of De cember 31, 2018 I I -4.4 -3.8 -8.5 -8.0 traditional measures of excesses associated with recessions are not worrisome, but further escalation of trade disputes and monetary policy missteps can derail consensus growth expectations (Economics section pg. 1 -3) and are important risks to the outlook. U.S. corporate earnings are projected to grow 5 .6% year-over-year (YoY) in line with the post-crisis average. We note that the U.S. and emerging markets are best positioned to deliver on consensus expectati ons wh i le developed market expectations may be overly optimistic (pg. 6-7). Corporate leverage is elevated enough to cause some concern , but credit fundamentals generally look so lid with ample interest coverage suggesting 1.9 0 .0 0 .6 • - 3.2 I this is not a near term risk , though continue d monitoring is warranted (pg. 5-6). In o ur opinion, stock and bond valuations are reflecting the wide dispersion of potential outcomes around consensus growth expectations (pg. 8-10). The market is currently pricing in no rate hikes Emergi'lg Morhh MSO lnl'I Equity CorTWnOdili ~ Md Cop S&P400 Smol Cop lnfro~•uc:..,re large Cop Rto~ Estot• Flxed Income TIPS Co$h In,, Bond' in 2019 relati ve to two hikes indicated by th e Federal Reserve. Equity prices reflect doubts MSO EAfE Bloom beog S&P 600 STOXX Gbbol S&P 500 S&P U S REIT Bordoy• Bordoys 0..S AS E 90 Doy Bo«:loy s C.....odity &ood Agg<ego!e Yea< US. TIPS Jb;I Globol Agg Emerging lnfrcntuc!Ute This backdrop continues as we enter 2019 but asset prices have now acknowledged risks to the outlook as multiple contra ction was among the top-10 worst in all regions since 1988. The global eco nom i c backdrop is changing as we move away from the global expansion that was not only sy nchronized but also higher than estimates of long term potential. Growth is now slowing and more divergent. Policy concerns linger as central banks attempt to guide economies towards a soft landing and trade tensions remain. We see the slow down in g loba l grow th expectations more fully reflected in asset prices than a year ago. However, we expect policy twists and turns to continue to cause bouts of volatil ity. Re c ent economic data has been softer, but slowing is not a recession . Importantly, data is still supportive of consensus g rowth expectations. For the moment, U·US Hedged th a t corporations can deliver on co nsen sus earnings expectations. Investor se ntiment turned from euphoric to cautious throughout 2018 as the market sell off deepened. However, the current expansion seems largely devoid of the kinds of excesses that derailed the last two expansions, indicating that market valuations can potentially recover to align with fundamentals. However, if policy risks continue to escalate, we no te that the U.S . financial system is substantially more resilient given post-Crisis reforms . This increase in res il ie ncy is offset b y policy co nstraints driven by the zero lower bound and the growing fisca l deficit. Given this backdrop we can build a case for modestly positive stock market returns in 2019. Returns are drive n by earnings growth p lus d iv idend y ield and the change in valuations. The challenge is , earnings expectations TRUSTED ADVISORS • MORE EXPERTS • BETIER ACCESS and valuations can change quickly as investors digest incoming news. Digesting news doesn't mean utilizing objective research and a prudent decision-making framework to make investing decisions -that's our job. Instead in a world of lightning fast algorithmic trading, investors usually react quickly based a qualitative opinion and emotion . This is understandable, we have been through a lot and although the financial crisis occurred 10 years ago the pain is still fresh in our minds and investment losses have big implications for our lives and the organizations we work for. At APCM, we recognize these challenges and take our role in this process very seriously. The following quote from Warren Buffett's mentor, Ben Graham provides a foundation for our portfolio recommendations as we begin 2019 . "/n short run, the market is a voting machine, but in the long run it is a weighing machine." Despite all of the volatility, the consolation for investors is that while totally unpredictable voting behavior can make or break near term returns, the intrinsic value of an asset is ultimately determined by fundamentals and prices will converge toward this over a long time horizon . The detailed analysis in the following pages leaves us with the conclusion that there are still signs of posi tive fundamentals. Our current recommendation is to maintain equity exposure to strategic targets as late cycle returns can still be rewarding (see chart on right). This recommendation is based upon fundamentals and valuation while recognizing macro policy risks . Recent slowing economic growth led to depressed investor sentiment-a contrarian indicator-but slow growth is not a recession. We would need to see a furthe r deterioration in economic data before recommending a more defensive position . The equity risk premium at its current level of 5.96% is in the top decile of historical measures. Viewed purely on this basis the equity market is more undervalued than over valued right now so investors should eventually be compensated for accepting the discomfort of today 's volatility levels. Trade and late-cycle policy risks are high, but the risks are double-sided. Progress on global trade disputes would be a market positive and escalation a negative. A pause by the Federal Reserve would support risk assets while overly restrictive policies and a hard landing would increase volatility. The balance of fundamentals and associated risks support our neutral recommendation . Within fixed income we favor cash relative to international bonds given risk adjusted returns (pg . 9) and remain neutral on TIPS and U.S . bonds. Bond yields are low and there are dynamics which can exert upward pressure on yields (lower prices) but bonds still provide an adequate ballast to offset equity volatility despite the risks of higher yields. Finally, we must recognize that we have transitioned out of the post crisis low volatility regime and we expect more normal levels of volatility with spikes of volatility as late cycle dynamics play out and trade disputes continue . To acknowledge this reality, we recommend owning some alternatives given low correlations to stocks and bonds, and controlling risk exposure within asset classes by owing higher quality assets and reducing tactical exposure to higher risk positions . % 40 35 30 25 20 15 10 5 Q1 S&P 500 RETURN S BY BULL MARKET QUINTILE B e.a;t:J., ;the. nu dcf1 e. qua.Jl.,t,liu ~ Q2 Q3 Q4 Q5 ANNUALIZED RETURNS; DASHED LI NE DENOTES A GGREG ATE RE TURN. QUINTI LES DE FINED BY LENGTH OF BULL MARKET IN DAYS . APCM pays close attention to economic and market data throughout the year and will reach out to you should the market environment materially change. Your team of analysts at APCM will provide an update to this in-depth analysis in July. Brandy Niclai -CIO, Multi-Asset Strategies TRUSTED ADVISORS • MORE EXPERTS • BETIER ACCESS Economic Cycle "In 2017, 58% of countries, accounting for 75% of world GDP in purchasing-power-parity terms, experienced a pickup in year-over-year (YoY) growth rates. In 2018, 52% of economies, accounting for 47% of world GDP, are projected to register a pickup in annual growth rates. For 2019, the corresponding numbers are 54% of economies, accounting for 32% of global GDP." -IMF World Economic Outlook, October 2018. U.S.: Can We Land t h e Fiscal High? 2018 Recap The economy performed broadly in line with consensus expectations during 2018 . Economic growth gained momentum throughout the year with Q3 GDP coming in at 3 .0% YoY vs . 2.3 % YoY at the same time last year, above potential GDP of 2 .0%. Consumption (70% of the economy) contributed 2.0% of that growth, while an uptick in business investment and government spending contributed 0.9% and 0.4% respectively. Net trade detracted from GDP as consumers pulled spending forward in anticipation of higher tariffs. Real GDP Year-ove r-year % change 10% • RealGDP YoY % chg : 8% QoQ %chg: 6% 4% 2% 0% -2% -4 % -6% 73 7 8 '83 '88 '93 '98 '03 '08 The labor market tightened further and drew the unemployment rate lower by 0.4% over the year to 3.7%, well below the natural rate of 4 .5-5.0 %. Wage pressures showed signs of life at 2 .8 % YoY vs . the 2 .3 % average since 2008. Productivity averaged 1.9%, which partially offset wage i ncreases and contained unit labor costs . Inflation crept up through most of the year as core PCE touched the Fed's target of 2.0% before it fell to the current level of 1.8%. Modest inflation growth helped the Fed ma i ntain rate normalization -the Fed Funds rate increased four times, broadly in line with the dot plot going into the year, ending the year at 2 .5 %, and the Fed continued to reduce its balance sheet as planned . Consensus Outlook The current ex pansion is ex pected to continue through 2019, but the ra nge of forecasts for GDP growth ( 1.75% - 3 .10%) are quite broad. Consumption, the primary driver of economic growth in the U.S ., is expected to contribute 2 .6 % -2 .9 % to YoY growth, helped by net ta x refunds in 2019 of $70 -75B, which could odd 0.3% to GDP. Although business investment growth has li kel y peaked ofter the 2017 ta x cut incentivized spending, con sen sus ex pectations of 4 .0 %+ YoY growth will contribute to above trend GDP growth as wage growth incenti v izes further investment to boost productivity. The effects of Components of GDP 3018 nomi nal GDP, USO trillions 3Q18 $23 3.0 % $21 3.9% Housm 3.4% $19 14.1"1'0 Investment ex-housing $1 7 $15 $13 $11 $9 $7 $5 $3 $1 '13 '18 -$1 -3.2% Net exports Source: BEA, FactSet, J.P. M orgon Asse t Management. Values may not sum to 100% due to rounding. Quarter-over-q uarter changes are at an annualized rate. Average rep res en ts the annualized growth rate f or the full p eriod. Expansion averag e refers to the period starting in the t hird quart er of 2009. TRUSTED ADVISORS • MORE EXPERTS • BETIER ACCESS recent fiscal stimulus have started to wane, but should contribute modestly toward GDP growth next year. The projected 2019 deficit is $981 billion, up from $804 billion for fiscal year 2018. While net trade is expected to modestly detract from GDP, this is aligned with the historical overage (-0.2%). Unemployment is expected to continue to fall, with consensus between 3.4% and 3.6% vs . today's level of 3.7%. A tighter labor market should continue to put upward pressure on inAation, and nearly all entities surveyed expect core PCE to rise to 2.1 % (Fed target 2 .0%) and CPI expected to range from 2.1 % to 2.7%. The Fed's data dependency for policy decisions will allow for a cautious approach to monetary policy. As growth slows toward potential, the Fed can adjust its approach as it did in December, when the number of anticipated rote hikes in 2019 lowered from three to two. Expectations for the 3-month T-Bill range from 2.8% to 3.4% and 2.5% to 3.7% for 10-yeor rotes. APCM's Cyclical View We expect the U.S. economy to deliver on consensus estimates for positive, albeit slower growth given a health consumer and expectations for modest corporate earnings growth. However, if restrictive trade policies overwhelm the impacts of stimulative reforms and policy makers ore not able to successfully withdraw excess liquidity, headwinds may be stronger than expected. As tax reform and federal government spending stimulus wane, economic momentum will continue to taper towards a more sustainable rote ( 1.75% -2%). Consumer and business spending ore key to this outlook. We look for the impact of wage growth to be dampened by productivity gains, but still outpace inAation, and business investment to align with economic growth. A further escalation of tariffs, a deepening of the equity market selloff and/ or Fed policy missteps could trip up the economy, but for the moment, traditional measures of excesses associated with recessions ore not worrisome. Near term recession risks remain low, but an erosion of sentiment could lead to a deterioration of this outlook. APCM's Secular View Longer term , unfavorable demographics are one headwind to long term economic growth. The eventual outcome of immigration reform could materially impact the number of available workers as immigrants ore expected to be 3,4 of the projected growth in the working age population. High debt levels are an additional headwind for growth. The IMF projects that additional fiscal stimulus will keep the federal deficit at 5% of GDP over the next 3 years. However, meaningful business investment stemming from tax reform has the potential to be a catalyst to increase productivity levels. Recent data indicates that more capital spending is necessary to further improve productivity levels. Growth in working-age population Percent increase in civilian non-institutional population ages 16-64 1.8% m • Native born 1.5% 1 .2% 0.9 % 0 .6% 0 .3% 00% '78-'87 '88-'97 '98-'07 '08·'17 Source: J.P. Morgan Asset Management. Developed Markets: Divergent Growth Expectations 2018 Recap Census forecast ---+ '1 8-'27 At the start of 2018, consensus expectations for the Euro Area were strong, but a large portion of that growth was brought forward into 4Q 17. This resulted in downward revisions to 2018 growth. After more than a year of well above trend growth, the synchronized global expansion slowed and began to diverge in 2018, and key contributors (Euro area and U.K.) disappointed consensus expectations. While growth was expected to slow toward potential as output gaps continued to dose, this occurred at a faster rate than anticipated . In the EU , a combination of slower global trade and thus export growth (particularly after the surge in late 2017) and idiosyncratic factors (continued budgetary woes in Italy, disruption in Germany's auto industry from regulatory changes, and labor protests and weather in Fronce) have resulted in 2018 GDP expectations of 2.0%, below the 2.4% growth in 2017 and peak consensus 2018 growth expectations during Q 1 of 2.2%. The U.K. is projected to finish the year with 1.3% GDP growth YoY, modestly below the peak expectation of 1.5%. Downgrades from that peak began in Moy as BREXIT uncertainty continued to weigh on confidence and dampen spending . In TRUSTED ADVISORS • MORE EXPERTS • BEDER ACCESS Japan, trade concerns and severe weather resulted in a contraction in Q3, although growth is expected to rebound enough for the economy to grow at 0 .9% in 2018, 0.3% below projections at the beginning of the year, but 0 .1 % better than late 2017 expectations. Consensus Outlook As major economies run above potential, high capacity utilization will begin to constrain supply and the growth rate of developed international economies are projected approximately 45% of regional growth in 2019. The recent slowdown in Euro Area growth reflects the global soft patch in trade and capital spending, and tightening financial conditions in Italy. However, the continuation of supportive monetary policy and positive wage growth should support aggregate demand, backing consensus growth expectations. Manufacturing PMI, OECD leading economic indicators and confidence measures will provide cues that growth is on the projected path . Slow progress in negotiating a BREXIT deal poses a threat to the U.K. to decline toward their potential. The EU is expected to grow at approximately the 2019 Projected GDP Growth % Contribution to lnt'I Dev. GDP Growth economy spending and decisions same pace as 2018 Japan 0 .9% over the next year ( 1.9%), primarily Germany 1.9% 14.6% driven by consumer ~------------------------ will be key to realized growth . Recent economic data from Japan points to softer U.K. demand as wage 8.1% 1.6% 8 .6% growth reaches the France ~------------------------growth in export 1 .0% orders, supporting the more moderate consensus growth picture. Japan's growth path will be influenced by the imposition of the consumption tax hike schedule to be implemented in October of 2019. highest level since Italy the Global Financial -------------------------so urce: IM F Wo rld Eco no mic Update, Oc tober 2018. Crisis (2.5 % YoY). However, growth within the EU is expected to diverge with Germany and Spain supporting the growth picture ( 1.9% and 2.2%, respectively), while France and Italy create headwinds for the Bloc with expectations of 1.6% and 1.0%, respectively. The ECB is expected to begin the process of policy normalization by ending asset purchases in December, and while overnight deposit rates remain negative (-0.4%), they are expected to move up to -0.25% over the course of the year. The U .K. is ex pected to continue to grow at long term potential ( 1.5%). The BOE is expected to raise rates twice in 2019, effectively doubling the number of hikes within the last decade. Expectations for Japan are also in line with long term potential (0.9%), as protectionism and a planned tax increase weigh on the outlook. The ability to deliver on potential growth is key to keeping inflationary pressures alive, which will enable the BOJ chair, Kuroda, to continue to hint toward policy normalization as the economy creeps closer to the central bank's still distant price goal (2%). APCM's Cyclical View The largest five the U.K., France, developed space economies (Japan, Germany, and Italy) in the international are expected to provide APCM's Secular View Longer term , unfavorable demographics and high debt levels create headwinds for growth. Cohesive structural policies designed to lift long term potential output in the Euro Area are difficult given the divergent economic needs of individual countries. Japan 's growth is dependent on its ability to balance debt to a more sustainable level while prioritizing demand-friendly structural reforms . The cyclical upturn creates an opportunity for policy makers to promote higher productivity and investment in human capital. Emerging M arkets : The Lion's Share of Global GDP, But Look Out for Rhinos 2018 Recap In spite of multiple headwinds, which include rising U.S. rates, a strong dollar, trade tensions, and domestic policy missteps, emerging market economies are on track to deliver aggregate 2018 growth of 4.7% YoY, just shy of expectations going into the year (4.9%). TRUSTED ADVISORS • MORE EXPERTS • BETIER ACCESS China 's economy continues to moderate, with growth expected to come in at 6 .5 % YoY, the government's official target. Tighter financial conditions have constrained growth, but this deleveraging is healthy given the current reliance on credit. The full impact of the trade war has not yet w eighed on the economy, but the government has already begun to provide monetary and fiscal support to keep the country on it's projected growth path . India's growth continues to edge up with GDP projected to ex pand by 7.3 % this year as the economy benefits from pro-growth structural initiatives. The ASEAN 5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) are ex pected to provide support to global GDP with 5.3 % growth as these economies continue to benefit from slower, but still elevated levels of trade activity. Global working-age populatlon grow th Annualised % change 1 ,2 1 .0 0 ,8 0 ,6 0.4 0 .2 0 ,0 -0.2 -0.4 -0 ,6 -0 ,8 • 1980-2 000 • 2000-2020 • 2 0 20-2040 -1,0 us UK Eurozon e Source: 1. P. Morgan Asse t Management. Credit growth to GDP g r owth J apa n Broad cre dit measure•, ratio, ye ar-over-year change . 3-month moving average 4 .5x 4 .0x Rapid rebound In CPI & PPI 3 .5x u5tip •i9 u:1 3 .0x rate hik.es BAS h. 2 .5x 'ion 2 .0x 1.5x 1 .0x 0.5x Global Fi nancial Crisis O.Ox '07 '06 '09 '10 '11 '12 Source: J.P. Morgan As set M anogement. Cons e ns us Outlook Emerging markets are expected to be the primary source of global growth in 2019, with aggregate ex pansion of 4.7% next year. A downward revision of 0 .4 % has already been applied in anticipation of protectionist policies. The slowdown in China is ex pected to continue with growth projections at 6.2 %. India is projected to grow at 7.4%. The ASEAN-5 are ex pected to grow at a slightly low er pace (5 .2 %), as trade tensions impact the growth outlook. Trade growth is ex pected to moderate to 4.0% ne x t y ear, reflecting a downward revision of 0 .5 %. Though trade is declining from cycl ical highs of 5 .2%, the slowdown is likely due to a combination of factors including pay back from very strong trade in late 2017 and weaker capital spend ing g iven a more uncertain global environment. While the 25 % pull back in oil prices (from $60 to $45 bbl) is beneficial for commodity importers such as India, lower prices will hamper the con tinued recovery of major ex porters (Brazil, Russia , and Venezuela). Political uncertainty is likely to play a key role for commodity ex porters in the following year, as the impa ct of elections in Brazil and sanction s on Russia become clearer. APCM's Cyclical Vi ew The five largest emerging markets economies (China, India, Russia , Indonesia, and Brazil) are expected to provide approx imately 70% of regional growth . Re ceding ex ternal headwinds and policy stimulus out of Ch ina will underpin the consensus growth outlook. A potential pause in Fed tightening, a weaker outlook for the dollar, and softer oil prices would redu c e external pressures for EM -a reversal from 2018 . We anti cipate the intensity of easing measures in China will be calibrated to the evolution of trade ten sion s. We look for policy support to Interbank liquidity crunch I' " $1la«>W b tighten In '13 '14 '15 '16 '17 '18 TRUSTED ADVISO RS • MORE EXP ER TS • BETIER ACCESS create a modest pickup in credit growth but avoid creating further risks to financial stability. ASEAN 5 countries will be inAuenced by the path of global trade, currently projected to soften but remain a positive contributor to growth. Additionally, how trade talks and tariffs play out will impact global supply chains and economic growth in the region. Brazil and Russia will be hampered by lower oil prices and political uncertainty. APCM's Secular View Longer term , as a group, emerging markets are ex pected to outpace developed economies given more favorable demographics and room for productivity improvements. Investment spending financed by local capital resources will lessen dependence on ex ternal financing from advanced economies. Improved health and educational initiatives, as well as policies to increase labor force participation, could also lift potential and address demographic challenges in key emerging economies (e .g . China and Russia). Earnings & Corporate Health Corporate Health: Cap ita l Allocation Dec isi ons Hold The Key 2018 Recap Mix ed outcomes in corporate balance sheets and cash Aow statements have left corporate health largely unchanged throughout the year. Increases in topline growth and profitability outpaced the growth of debt which improved broad leverage metrics, but higher interest ex penses have begun to reverse the years long trend of improving debt service capacity. In the U.S., while the overall level of corporate health appears to be broadly unchanged, a closer look reveals that there has been a shift in the underlying composition of debt. According to the Federal Reserve Financial Stability Report, during much of the e x pansion the run up in debt was c oncentrated in companies with low leverage and high levels of cash on the balance sheet. Recently, debt issuance has shifted to companies with high leverage, high interest expense ratios, and low earnings and cash holdings. In spite of the increase in leverage for these riskier firms, debt service costs are at the low end of their Exports Year-over-year change, 6-month moving average 30% 25% 20% 15% 10% 5% ·5% -10% -15% -20% '12 '13 '14 '15 Sovrce: J.P. Morgan Asset Management. '16 '17 '18 historical range. Although interest coverage ratios have declined throughout the year, they remain in healthy territory for now at 9.8x. Changes were driven by increased interest expense, which outpaced EBIT growth. While capital e xpenditures increased noticeably throughout the year ( 14 % YoY), the largest use of cash continued to be share repurchases (+40% YoY). Although it is still too soon to tell, early indicators of the capital deepening required to increase capacity are lacking . Internationally, debt levels continued to improve in the Euro Area generally, but remain elevated in several economies (e .g. France and Spain). Leverage at nonflnancial firms in China remain high by historical measures, but decreased slightly throughout the year to end slightly above 150% of GDP. Current ratios in all regions are above 1, which indicates that companies have adequate liquidity to finance short term obligations. DUPONT FORMULA Re t urn on Equi ty = Profit Margin X Asset Turnover X Leverage Return on equity remained above long term averages and improved broadly in each of the major regions, with the largest gains in the U.S. Improvements were driven by TRUSTED ADVISORS • MORE EXPERTS • BETTER ACCESS a combination of increased asset efficiency and higher profit margins. Leverage ratios were broadly unchanged, so the improvement in corporate profitability was not enhanced by leverage. Consensus Out look Increasing interest expenses and wage pressures will be key to corporate health in the following year to ensure that profitability continues to outpace debt growth and interest coverage ratios remain adequate. 2-7. Gross Balance Sheet Leverage of Public Nonfinancial Corporations though this is the highest figure since November 2016. However, recent CFO surveys i ndicate nearly half of financial decision makers expect a recession in 2019, and 84% expect one by 2020. Investors will monitor financial reports relative to the survey data to see if this negative sentiment has an impact on capital allocation decisions. APCM's Cycl i ca l Vi ew We note that a corporation's financial vulnerabi l ity can be broken into the following components: debt service capacity, leverage, rollover, and profitability. A slow down in profitability 1 (driven by either GDP or productivity) will make deteriorating Perc ent 50 fundamentals associated with rising interest Quarterly expenses more acute . 4 5 Corporate health in the year to come will be 4 0 based upon key capital allocation decisions. We look to monitor the o verall leverage in the 35 system , how much companies re invest {capital 3 0 expenditures), how well they reinvest (return on investments is greater than cost), and uses of 25 repatria ted cash. 20 1 Eri k Feyen, No rbert Fiess, Igor Zuccardi Huertas, and Lara Lambert, 2000 2003 2 006 2009 2012 201 5 2018 Which Emerging Markets and Developing Economies Face Corporate Source: Federal Reserve Boord staff calculations based on S&P Global, Compustat. Note: Gross Balance Sheet Vulnerabilities? A Novel Moni toring Framework, Th e leveroge is the ratio of the book value of total deb t to the book value of total assets. World Ban k Group Policy Researc h Work i ng Paper 8198. 2-8. Interest Expense Ratio for Public Nonfinancial Corporations APCM's Sec u lar Vi ew Percent Longer term , meaningful investment to i ncrease 40 production capacity (e.g . replace aging 35 equipment and struc tures) is c rucial to reversing the trend of weak productivity g ro w th in both 3 0 Qua rter ly Ri sky firms A ll firm s 2000 2003 200 6 2009 2012 2015 2018 Source: Federal Reserve Boord staff calculations based on S&P Global, Compustot. Note: Calculated as the ratio of total interest to EB/TOA. Going forward, surveys still indicate that the highest incremental uses of cash for U.S. companies are reinvestment and capital expend itures, followed by debt reduction. Share repurchases were the lowest scoring use of cas h with 9 % of respondents indicating this preference, advanced and emerging e conomies. 2 5 2 0 Earnings: The U.S. and Emerg ing Markets Are We ll Pos iti oned To 1 5 Del iver 1 0 5 2018 Recap Global earnings missed consensus estimates from the beginning of the y ear. Stellar earnings in the U.S . could not make up for disappointing international results . The U.S . drove globa l earn i ngs growth by beating already lofty year-over-year e x pectations . La rge compan ies ' earnings growth ended up 32 .2 % vs. 26% expectations, TRUSTED ADVISORS • MORE EXPERTS • BEITER ACCESS Earnings Growth mid size companies' estimates were 34% but actual earnings came in at 43 .9% and small companies' earnings were expected to come in at 44 % but actual growth was 65%. EPS, yoy change, consensus estimates 70% 60% 50% 43.9% 40% 32 .2% 30% 20% II 8.2 % 10% 0 % 7.4% • 65 .0% 15.8% • 2018 •2019 11 .7 % )/ 6 .9 % 8 .2 '7o • II Overseas, earnings ex pectations were revised down after 4Q 17 data was released, however earnings still missed ex pectations for l Q 18 as economic growth slowed earlier than expected. This led to further estimate revisions as economic data and growth rates were assimilated by the markets. Developed economies are expected to end the year at 15.8% vs. U.S. Large U.S. Mid Cap U.S. S ma II lnt'I Dev. E.M. Cap Cap Source: Bloomberg, LP 29% consensus at the beginning of the year, due to a combination of stronger than expected 2017 earnings and downward revisions to 2018 expected earnings. Earnings growth in emerging markets followed a similar pattern, with current 2018 earnings growth of 11.7% YoY vs . 27% consensus expectations at the beginning of the year. In China, earnings growth slowed sharply as many companies faced a liquidity squeeze caused by tough financial reforms. Consensus In spite of net negative earnings revisions across the globe, earnings growth is ex pected to remain respectable with the MSCI All Country World Index (ACWI) expected to have earnings growth of 7.9% in 2019. U.S. large companies' earnings are expected to grow by 8.2%, with mid sized companies posting growth of 7.4% and small companies growing by 12.5%. Overseas, developed and emerging market earnings are expected to grow by 6 .9 % and 8 .2 % respectively. In developed countries, double digit earnings in Germany ( 11. l %), and strong earnings in France (9.6%) are expected to overwhelm lackluster earnings growth in Japan (3.3%) and average earnings in the U.K. (6.8%). This high level of dispersion between countries also applies to emerging markets. China and India are e xpected to provide much of the earnings growth at 14.0% and 22.7% YoY, respectively. South Korea and Taiwan are expected to weigh on EM earnings with growth expectations of 0.8% and 2 .6%, respectively. APCM 's Cycl i ca l View The majority of consensus 2019 estimates are in line with the moderate growth picture. We see U .S. and emerging market companies best positioned to deliver on expectations while European estimates may be too optimistic. In the US, indicators suggest that current high margins can be maintained as long as economic growth comes in above the pace of wage inAation and the ris ing cost of debt service . In China, recent earnings have been propped up by commodity prices allowing earnings to outpace GDP. However, in 2018 earnings began to converge as commodities sold off. Going forward we expect earnings will deliver on expectations as 30% of the index are State Owned Enterprises (SOEs) and we expect policy support in 2019 will lift aggregate demand. European earnings expectations seem too complacent vis-a-vis rising wages as inAation is now running above GDP growth, causing input prices to rise faster than output prices, which will exert downward pressure on profit margins and earnings per share . APCM's Secu lar Vi ew GRINOLD-KRONER MODEL E(Re) ::::: ~ -~S + i + g + ~PE Grinold-Kroner (2002) derived the above equation which can be utilized to formulate the long term ex pected return of equity markets. The expected long TRUSTED ADVISORS • MORE EXPERTS • BETIER ACCESS term growth rate of real GDP can be utilized as an estimate for the expected real total earnings growth rate (g in the equation). To increase the robustness of this estimate, ex cess corporate growth can be added to the real GDP estimate . Excess corporate growth may be positive or negative, depending on whether the sectoral composition of the index companies is viewed as higher or lower growth than that of the overall economy. As a part of APCM's investment management process, these inputs are thoroughly reviewed and analyzed each year to help our clients confirm that the strategic allocation initially selected to meet established investment goals is still appropriate given current economic and financial market conditions. Valuations Equity Risk Premium: Still Supportive of Equities Over Fixed Income 2018 Recap In 2018, stocks fell on uncertainty over trade disputes, late cycle concerns, and tighter financial conditions. Prices fell more than ex pected earnings, which resulted in multiple contraction that was among the top l 0 worst in all regions since 1988 according to MSCI data. Forward earning s on the major indices are all positive, leaving price correction as the primary driver of the change in multiples. The ACWl 's forward P /E ha s come in nearly 18 %from 16.3 x to 13.4x. lnthe U.S., large companies are trading at 14.7x, below the long term average of 16.l x . Mid sized companies with a valuation of 14 .4x are now trading at a 3 % discount to their larger peers, 5 % below their long term average premium. Small companies are still trading at a premium to mid and large companies with an absolute valuation of 15.7x . Overseas, developed companies are trading at 12 .4 x after starting the year at 15 .0 x and emerging markets 25 2 0 15 10 5 0 16.3 MSCIACWI are trading at a l 0.9x vs 12 .8 x in January. When looking at P /B, developed economies are now at 1.5 having come in nearly 13 % this year and are trading at a 75% discount to their long term average. P /B on emerging markets has also come in significantly from 1.8 to 1.5, although this index is only trading at a 5 % discount to it's long term average. The yield on the Agg. increased over 60bps, from 2.7% to 3.3%. Although this is still well below the long term average yield of 6.7%, it's well above the l 0 year average of 2 .8 %. Higher yields modestly reduced duration on the index from 5.95 to 5 .87, well above the long term average of 4.79. Within the Agg., the curve Aattened as the 2/10 spread came in from 54 bps to 20 bps (LT. avg. 93 bps). Credit spreads have widened out substantially to 242, slightly above the long term average of 235, after starting the year at 170bps and dipping below 150 in early February. TIPS have also become more attractive, with the 10 year breakeven falling from 2 % to 1.74%, with much of the decline in inflation expectations coming during the 4th quarter. Wh ile yields on international bonds are broadly in line with where they started the year ( 1.02% vs 1.01 %), duration has ticked up from 7.16 to 7.73 . Cash equivalents continue to be increasingly competitive with other fi x ed income assets as the yield on a 3 month T-Bill increased by over a percent from 1.3 % to 2 .4 %. The recent market movements have made stocks more attractive to bonds on a relative basis -the earnings yield on stocks has increased while the yield on the l 0 year Forward P/E Ratios •Start of Year 2 1.0 •End of Year 19 .7 1 8 .4 15.0 U.S. Large U.S. Mid U.S. S ma ll lnt'I De v. E.M . Ca p Ca p Ca p Source: Bloomberg, LP. TRUSTED ADVISORS • MORE EXPERTS • BEDER ACCESS Treasury has declined, widening the spread between the two by over 1 % over the year to end at 317 bps. For alternatives, commodity prices remain near lows, with the Bloomberg Commodity Index still below 1 standard deviation from its historical price as uncertainty about global growth, and thus future demand, weighs on industrial metals and oil. REITs are one of the only asset classes to end the year more expensive than they began, with a price to FFO of 17.3x vs 17x at the beginning of the year, but broadly in line with where REITs have traded post GFC. Consensus To summarize a "consensus" valuation we focus on a comparison of expected levels of key determinants of valuation measures (i.e. inflation, rate expectations) relative to implied levels currently priced into the markets. As of 12/31 /2018, the 10-year treasury yield was 2.7% while the 10-year inflation breakeven was 1.7% which leaves 1 % for real GDP growth and term premia. The estimated long-term sustainable growth rate is currently 2%. Market implied inflation of 1.7% is lower than survey- based measures which indicate expected inflation of 2 .1 to 2.4%. The market is also pricing in few rate hikes relative to the Federal Reserve's expectations. The Fed dot plot median expectations are 2 rate hikes in 2019 and 1 rate hike in 2020. The market-based Fed futures implied policy curve is indicating no rate hikes in 2019 and 1 rate drop in 2020. stocks ore modestly positive but analysts ore currently revising year end expectations downward . APCM's Cyclical View Markets are currently pricing in lower growth and inflation expectations relative to the consensus economic outlook, leading to fewer expected rate hikes from the Federal Reserve . Absent an exogenous shock or deteriorating fundamentals, consensus economic growth expectations should be realized and asset prices and valuations would recover to reflect reality. Relative measures of valuation currently indicate that U.S. mid cap stocks and developed international stocks are modestly attractive relative to U.S. large caps on a forward P /E basis. Stocks remain attractive versus bonds as the earnings yield on stocks (6.5%) is higher than the bond yield by 3.8% vs. the long-term average of 2.7%. Within fixed income, the yield on a T-Bill is 2.4% which looks attractive relative to international bonds with a yield of 1.1 % and a duration of 7.8. The diversified Bloomberg Barclays Aggregate Index is yielding 3.2% with a duration of 5.9 providing modest protection against equity risks. APCM 's Secu lar View Research concludes 2 that starting valuations explain approximately 40% of realized returns. A look back at historical returns would indicate that periods of higher than average valuations are associated with lower than average returns and vice versa. Today valuations are fair, which suggests that long term returns will be primari ly driven by earnings growth and dividend yields. Implfed Fed Funds Tar get Rate Evaluating the Equity Risk Premium (ERP) can indicate investors current appetite for risk . Today investors demand higher compensation to hold global equities based upon the market implied ERP relative to the fundamental equity risk premium. 3.60 ,,_ __ _._ _________ ___ Consensus earnings expectations for global !! 3.40 &. ~ 3.20 .... l'O ';;; 3.00 "'C c: .z 2.80 "'C QJ .... 2.60 al ! 2.40 2.20 FOllC Hcmbe<s' OOt Projcotlons for meetino oate 12/19/2018 FOHC Dots Median <; OlS • 1.otest Value o Feo FtJnas Futures -Utest V•!Ue • -• • --• 2.00 '----.,..,.,...-------..-------~-----~------~ 2018 2019 2020 2021 longer Term Source: Bloomberg, LP. Proiection Year End TRUSTED ADVISORS • MORE EXPERTS • BETIER ACCESS The implied equity risk premium does suggest investors will be adequately compensated for the risk of stocks as current levels are above historical measures. 2 Joseph Davis, Ph. D., Roger Aliaga-Diaz, Ph.D., Char les J. Thomas, CFA, "Forecast ing stock returns: What signals matter, and what do they say now?," Vanguard Research, October 2012. Market Environment for Risk M a rke t Environment: Financia l System Hea lt h, Econo mi c Cond itions, Asset Valuations, and Market Technica ls Throughout a long investment horizon, our team focuses on identifying signs of market turbulence {a condition in which asset prices, given their historical patterns of behavior, behave in an uncharacteristic fashion) in order to fine tune long term strategic allocations by scaling exposure to risk for the current environment. Spikes in volatility can occur due to a "shock", a sudden change to financial or economic conditions, which are typically surprises and inherently difficult to predict, or financial "excesses " can build to unsustainable levels, leading to asset repricing or economic contraction . Assess m e nt of t he Fi na nci al Sy stem Recent research from the Federal Reserve 3 notes that vulnerabilities tend to build up over time and are the aspects of the financial system that are most expected to cause widespread problems in times of stress. Below is a summary of their findings . • Valuation pressures are generally elevated, particularly with respect to business debt. • Borrowing by households has risen roughly in line with household incomes. However, debt owned by businesses relative to GDP is historically high, and there are signs of deteriorating credit standards . •The nation's largest banks are strongly capitalized, and leverage of broker-dealers is substantially below pre-crisis levels. • Funding risks are low relative to pre-Crisis levels. Banks hold more liquid assets and money market funds are less vulnerable to destabilizing runs by investors . Near term risks to the system include BREXIT and Euro Area fiscal challenges, slower growth in China and rising debt levels in emerging markets, trade tensions, and geopolitical uncertainty. 3 Board of Governors of the Federal Reserve System, Financial Stability Report: November 2018. Economic Excess and Imbalance Indicators Do Not Suggest Crisis Looms Private Household Corporate Labor Asset Current Sector Savings Financing Market Prices Account Balance Rate Gap Slack Deficit Household and Households are Capital expenditures Unemployment at Global stocks are The US. current business income decidedly more are aligned vvith 3 . 7% exceeds fairly valued while account deficit as a is still greater than prudent as savings economic growth CBO's estimate of U.S. home prices percent of GDP spending, rates (6.3%) are well and are not overly full employment, have leveled off (2.0%) has remained suggesting growth above housing reliant on debt. but wage growth is throughout the stable over the last is sustainable. bubble lovvs (2.5%). still modest. year. several years. Michael T. Kiley (2018). "What Macroeconomic Conditions Lead Financial Crises?," Finance and Economics Discussion Series 2018-038. Washington: Board of Governors of the Federal Reserve System TRUSTED ADVISORS • MORE EXPERTS • BETIER ACCESS U.S. Late Cy cle Ec ono m ic In d icato rs and Asse t Valu atio n If the current economic expansion lasts until July of 2019, it will be the longest on record for the U .S., and will eclipse the expansionary period that began in March 1991 and ended in March of 2001. It is widely known that the current expansion has been long but weak. The relatively weak post-Crisis growth has tempered measures of economic ex cesses or imbalances that historically have preceded a recession . Market Tec h ni cal s Today 's market environment is risk -off as volatility is elevated, correlations are high, and dispersion is low. • The Aood of liquidity after the financial crisis dampened equity volatility for almost 9 years ( 17.7 vs . 19.5 historical avg.). That changed in 2018 as investors became concerned about late cycle risks, Federal Reserve policy, and trade risks. While the average volatility over 2018 ( 16.7) has been below the historical average ( 19.5), bouts of elevated volatility early in the year (Feb. avg. 22) and since September (avg. 21) have made this year feel exceptionally chaotic. While the VIX has gone over 35 several times this year, this still is muted in comparison to the highs of 80 seen during 08 . • Realized v olatility has increased dramatically with the 2018 average of 17.l nearly 3 x the average of 2017 (6). With realized volatility within the last month (30) ex ceeding implied volatility (25), investors with insurance have been compensated . Although policy uncertainty seems to be driv ing much of the volatility, reports have indicated that large daily movements have been e xacerbated b y a changing market structure where high frequency trading provides much of the markets ' liquidity. •Correlations between companies in the S&P 500 have risen to 0 .65 w ith the pick up in volatility (L.T. avg. 0 .63), which has created a more difficult environment for active managers. The current level is elevated after touching below 0 .2 in late September, but below the high of 0 .87 of early March. • Market sentiment has soured as 31 % of market participants are bulli sh and 50% of investors feel bearish toward the stock market over the nex t 6 months. This is almost a complete reversal from the beginning of the year where 20% of investors reported bearish sentiment and 50% were bull ish on stocks . • In spite of lackluster returns for much of the year, fund Aows remained positive into global equities, although taxable bonds saw the largest amount of fund flows this year. APCM 's Cycl i cal View We have transitioned out of the post crisis low volatility regime and expect higher levels of volatility going forward -closer to those in our capital market assumption s utilized for portfolio construction and planning purposes. This i s supported by the tendency for v olatility regimes to cluster or persist4· 5 and ex pectations for higher volatility in economic data as late cycle dynamics come to fruition . An unforeseen shock would lead to more turbulent markets but conditions are broadly different than those prior to the Global Financial Crisis. Valuations are currently less demanding after the December sell off (ACWI forward P /E ratios have fallen 0 .8 since the end of November to 13 times forward earnings), the financial system is substantially more resilient, and the current ex pansion seem s largely devoid of the kinds of excesses that derailed the last two ex pansions. A PCM 's Secu la r V iew APCM 's portfolio c onstruction process recognizes that investors must accept some level of risk to generate a return above the risk-free rate. The challenge is that risk measures are unstable through time and estimation errors are a fundamental cause of falling short of financial goals. APCM 's prudent approach to portfolio construction utilizes tools that adequately address these sho r tfall s and allow our clients to evaluate the probability of meeting financial goals in spite of this uncerta inty. 4 Philippe Jorion, Financial Risk Manager Handbook: FRM Part I / Part 2. 5 Rama Cont, "Vola t ili t y Cl ustering in Financial Markets: Emp iri cal Facts and Agent-Based M odels," Long memory in economics, Springer (2005), accessed January 08, 2019. TRUSTED ADVISORS • MORE EXPERTS • BEDER ACCESS T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S ASSET ALLOCATION REVIEW City of Kenai Permanent Funds Account Summary as of December 31, 2018 City of Kenai Permanent Funds T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S1 Account Inception September 2008 Total Deposits $20,329,733 Cumulative Withdrawals Includes Annual Distributions and Custodian Fees $10,969,616 Current Market Value December 31, 2018 $26,497,437 Annualized Account Return September 30, 2008 –December 31, 2018 +7.40% Gross, +7.15% Net Current Allocation 55% Equity / 45% Bonds Fee Schedule 0.19%Annual Effective Rate Agenda T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S2 Historical Portfolio Review Next 10 Years What Can Kenai Do? 1 2 3 Historical Portfolio Review T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S3 Asset Allocation Expected Return and Risk City of Kenai Permanent Funds T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S4 Risk and return data from Windham Portfolio Advisor. *Range denotes the possible return range at the 95% confidence level. Asset Class 55% Equity / Current 20.0% 10.0% 5.0% 10.0% 5.0% 5.0% 45.0% Return 7.9% Risk 11.1% Range*-14.3 - 30.1% Emerging Markets Equity APCM's Forward Looking Assumptions REITs U.S. Fixed Income Kenai Initial Strategic Asset Allocation Large Cap Equity Mid Cap Equity Small Cap Equity International Equity Summary of historical allocation established in 2008. Municipal Code 7.30 established the City of Kenai Permanent Funds with the primary objective of supporting up to a 5% annual distribution. In 2008, APCM began managing the portfolio with the existing allocation of 55% equity and 45% fixed income. An explicit inflation protection goal is not detailed in code, but the initial strategic allocation was projected to support the 5% spending goal plus 3% inflation given the long term (5 year) projected return of 8%. The existing portfolio was designed to recognize that selecting an appropriate strategic asset allocation and controlling expenses are two key pillars of investment success. HISTORICAL REVIEW 7.9% 7.4% 0% 2% 4% 6% 8% 10% APCM's 2008 Capital Market Assumption Kenai's Annualized Return Historical Return Analysis as of December 31, 2018 City of Kenai Permanent Funds T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S5 HISTORICAL REVIEW The long term projected return is based upon APCM’s 2008 capital market assumptions. Performance is gross of fees, annualized, and begins on September 30, 2008. Strategic allocation has met established return objectives. The investment policy implies an absolute return goal of supporting a 5% distribution. Since inception, the portfolio has returned an average of 7.4% annually. The portfolio’s return since inception has been sufficient to support the required distribution level and preserve purchasing power from inflation induced erosion. -4.50 4.77 4.02 7.28 7.40 -4.04 4.95 4.19 7.39 7.51 -8% -4% 0% 4% 8% 12% 1 Year 3 Year 5 Year 10 Year Since InceptionT o t a l R e t u r n Kenai PF Strategic Benchmark Account Performance as of December 31, 2018 City of Kenai Permanent Funds T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S6 HISTORICAL REVIEW Performance is gross of fees and annualized for periods greater than one year. Inception performance begins on September 30, 2008. Strategic benchmark is a blended return of the account’s target allocation. Average annual inflation from September 2008 to November 2018 was 1.43%. Next 10 Years T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S7 A Look Back At Inflation + 5% Over the 1900 –2015 period, meeting an inflation + 5% goal has been challenging ▪The 5% payout rule for private foundations was established in the 1960’s to ensure that charitable entities were being utilized as intended and not as tax havens. During this decade the average 10 year Treasury yield was 4.7% vs. today’s rate of 2.7%. ▪A review of historical data shows how challenging the inflation + 5% return goal has been by laying out what percent of the time portfolios at different levels of equity exposure (risk) were able to meet the return goal of inflation + 5%. ▪Over the historical time period reviewed (1900 –2015),a 60% equity portfolio only met the return goal 50% of the time over rolling 10-year time frames. T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S8 NEXT 10 YEARS Source: Russell Investments. Each portfolio was calculated including the equity and bond asset classes only. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 100% Bonds10% Equities20% Equities30% Equities40% Equities50% Equities60% Equities70% Equities80% Equities90% Equities100% Equities Probability of Meeting Inflation + 5% Return Goal Return Expectations Have Declined Over Time T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S9 NEXT 10 YEARS 0% 2% 4% 6% 8% 10% 12% 14% 16% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Large Cap Mid Cap Small Cap Int'l Equity EM Equity REITs Commodities U.S. Fixed TIPS Int'l Bonds Cash Forward return expectations have been declining, with more material downward revisions post 2008 recession. APCM’s projections are in line with industry peers. APCM’s Capital Market Assumptions 2008-2018 Callan’s Capital Market Assumptions 1989-2018 Source: Callan $17.3 $29.3 $50.6 $15 $25 $35 $45 $55 55% Equity / CurrentM i l l i o n s Monte Carlo Simulation Worst Case (95%)Expected (50%)Best Case (5%) Wealth Simulation, 10 Year Horizon City of Kenai Permanent Funds T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S10 NEXT 10 YEARS Data from Windham Portfolio Advisor. The simulation indicates the current allocation is expected to sustain a 5% distribution, but may not provide inflation protection (2%). Monte Carlo simulations are valuable for planning purposes because they integrate the potential volatility associated with Kenai's portfolio. Returns above and below the average are incorporated, which allows Kenai to assess the ability to meet its goals in spite of market uncertainty. The wealth simulation displays 90% of the potential outcomes, which capture the return paths with the highest frequency of occurring. The simulation assumes a portfolio starting value of $27.3M and includes a 5% annual smoothed distribution and no deposits. Cumulative distributions are expected to be $14.1M, with annual distributions ranging from $1.37M to $1.45M. Out of the 5000 simulations, half of the results had an ending portfolio value of $29.3M or greater. 95% of the simulations had an ending portfolio value of $17.3M or greater while still providing cumulative distributions of $11.7M. Although this allocation is expected to support Kenai’s distribution goal, it has a 35% probability of maintaining inflation adjusted principal. Inflation adjusted principal: $33.4M A Look Forward at Inflation + 5% Spending requirements will continue to be a challenge ▪The chart displays the probability of a portfolio meeting the inflation + 5% return goal over the next 10 years and the lower limit of the 95% confidence interval (this indicates that 2.5% of the time there will be a loss of this size or more). ▪Over the next 10 years, APCM expects returns for equities and bonds to be muted compared with history given the current market environment and secular headwinds (poor demographics and elevated debt levels). ▪As exposure to equities increases, the probability of portfolio loss increases. ▪Even at the highest equity exposure (85%), there is less than a 50% probability of meeting the inflation + 5% return goal, and a 2.5% probability of a loss of at least 22% in any given year. ▪Given declining return expectations, the incremental amount of return earned per unit of risk declines as more equity exposure is added T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S11 NEXT 10 YEARS Data: Windham Portfolio Advisor. See appendix for model portfolio allocations, distributions modeled as 5% of the average of last 12 months market value. Probability of meeting inflation + 5% return goal vs. lower limit of 95% confidence interval 25% Equity 40% Equity 55% Equity 70% Equity 85% Equity 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% -25%-20%-15%-10%-5%0%Probability of Meeting Inflation + 5% Return Goal (10-Year)Lower Limit of 95% Confidence Interval (1-Year) What Can Kenai Do? Airport Land Sale Permanent Fund T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S12 Maintain the current 5% Spending Rate and Accept Partial Asset Preservation ✓Optimize allocation. ✓Maintain spending policy. Establish Sustainable, Flexible Spending Rate to Preserve Existing Asset Base ✓Optimize allocation. ✓Adapt spending policy. Evaluating Goals and Spending Airport Land Sale Permanent Fund KENAI’S OPTIONS T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S13 Evaluating Asset Class Exposure Airport Land Sale Permanent Fund T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S14 KENAI’S OPTIONS Asset Class 55% Equity / Current 55% Equity / Diversified Large Cap Equity 20.0%20.0% Mid Cap Equity 10.0%10.0% Small Cap Equity 5.0%5.0% International Equity 10.0%10.0% Emerging Markets Equity 5.0%5.0% REITs 5.0%2.0% Infrastructure 0.0%3.0% U.S. Aggregate Bonds 0.0%40.0% Intermediate Gov/Credit 40.0%0.0% Cash 5.0%5.0% Optimized allocation aligns bonds with the perpetual time horizon and expands real assets for inflation protection. Expected Risk and Return Comparison Airport Land Sale Permanent Fund T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S15 KENAI’S OPTIONS -30%-20%-10%0%10%20%30%40% Annual Expected Return & Ranges 55% Equity / Current 55% Equity / Diversified Risk and return data from Windham Portfolio Advisor. *Range denotes the possible return range at the 95% confidence level. 55% Equity / Current 55% Equity / Diversifed Arithmetic Return 6.2%6.4% Goemetric Return 5.8%6.0% Risk 9.8%10.0% Range*-13.4 - 25.8%-13.6 - 26.4 Return 6.6%6.7% Risk 8.6%8.7% Best 12 Months 34.6%35.3% Worst 12 Months -24.8%-25.2% APCM's Forward Looking Assumptions Annualized Historical Returns 1/1999 - 12/2017 Comparison of Policies and Outcomes Airport Land Sale Permanent Fund 16 KENAI’S OPTIONS Maintain 5% Spending Rate, Partial Asset Preservation Establish Sustainable, Flexible Spending Rate to Preserve Existing Asset Base Investment Policy Diversify asset class exposure Diversify asset class exposure Spending Policy - Flexible structure based on 4% sustainable rate to recognize dispersion of anticipated returns ▪4.2% annual distribution if 5 year average market value is greater than inflation adjusted principal ▪3.8% Annual distribution if 5 year average market value is less than inflation adjusted principal Ordinance Changes ▪Add new asset classes to authorized investments in 7.30.020 (b) ▪Amend spending policy in 7.30.020 (a) (4) (A) ▪Add new asset classes to authorized investments in 7.30.020 (b) ▪Add explicit inflation protection to 7.30.020 (a) Expected Market Value Less Inflation Adjusted Principal -$3.2M ($25.6M -$28.8M) $0M ($28.8M -$28.8M) Average annual Distributions Worst Base Best Worst Base Best $1.00M $1.22M $1.53M $793K $988K $1.31M T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S Risk and return data from Windham Portfolio Advisor, 10 year horizon. *Figures based on worst, base, and best case at the 95%, 50%, and 5% confidence level, respectively. What Can Kenai Do? General Fund Land Sale Permanent Fund T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S17 $2.9 $4.0 $6.0 $2 $3 $4 $5 $6 $7 55% Equity / CurrentM i l l i o n s Monte Carlo Simulation Worst Case (95%)Expected (50%)Best Case (5%) Wealth Simulation, 10 Year Horizon General Fund Land Sale Permanent Fund T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S18 KENAI’S OPTIONS Data from Windham Portfolio Advisor. The simulation indicates Kenai’s allocation is expected to sustain the current distribution policy, but may not provide regular distributions. The wealth simulation displays 90% of the potential outcomes, which capture the return paths with the highest frequency of occurring. The simulation assumes a portfolio starting value of $2.9M and includes a 5% annual distribution when returns are positive and the portfolio market value exceeds inflation-adjusted principal and no deposits. Out of the 5000 simulations, half of the results had an ending portfolio value of $4.0M or greater. 95% of the simulations had an ending portfolio value of $2.9M or greater. Cumulative distributions are expected to be $974K, with 6 distributions over the 10 year horizon, leaving 4 years with no distribution. Although this allocation is expected to support Kenai’s current distribution policy, it has a 40% probability of allowing 5 distributions or less. Inflation adjusted principal: $3.5M What is the Distribution Priority? General Fund Land Sale Permanent Fund T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S19 KENAI’S OPTIONS ▪An optimal spending policy is determined by Kenai’s primary objective, which can prioritize either a higher dollar amount or stability in the frequency of distributions. ▪The current distribution policy implies that Kenai prioritizes higher individual distributions over the frequency of distributions , given that only the prior calendar year’s earnings may be distributed [07.30.020 (a) (3)]. ▪If more stability in the frequency of distributions is desired, the distribution policy can be reduced to a sustainable rate (4%) or the portfolio can be moved to a more conservative allocation. ▪Reducing the distribution amount will allow Kenai to create an “earnings reserve” with residual earnings from years of higher than average returns. This reserve could be utilized to supplement the annual distribution during years of below average returns. Comparison of Policies and Outcomes General Fund Land Sale Permanent Fund 20 KENAI’S OPTIONS Maintain Current Spending Rate and Current Allocation Establish Reserve and Sustainable Spending Rate Investment Policy -Diversify asset class exposure Spending Policy - Structured based on 4% sustainable rate to recognize dispersion of anticipated returns and utilize good years to stabilize distributions in down years Ordinance Changes - ▪Amend policy in 7.30.020 (a) (3) ▪Amend spending policy in 7.30.020 (a) (5) ▪Add new asset classes to authorized investments in 7.30.020 (b) ▪Add explicit inflation protection to 7.30.020 (a) Expected Reserve Value $510K (2.6 Years of Distributions) $478K (2.8 Years of Distributions) Number of Distributions No Reserve Base Best No Reserve Base Best 4 6 8 5 8 10 Expected Cumulative Distributions $974K $1.04M T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S Risk and return data from Windham Portfolio Advisor, 10 year horizon. * No reserve denotes the confidence level at which the Reserve value is closest to zero. Figures based on base, and best case at the 50%, and 5% confidence level, respectively. Appendix T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S21 Next 10 Years (pg 22-23)Secular Outlook, Capital Market Assumptions Kenai’s Options (pg 24-28)80% Equity Portfolio Characteristics, Monte Carlo Simulations, Introduction to Infrastructure, Fixed Income Index Fact Sheets Modest Returns Relative to History T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S22 Bonds G4 yields should slowly reach an equilibrium rate equal to, or just below, nominal national GDP. Alternatives Industry advancements are increasing access to alternative sources of return. Timely, given low rates and modest expected returns. Stocks Valuations indicate modest long-term returns. However, the global equity risk premium still supports the asset class. Global Growth OECD forecasted GDP growth is projected to be 2.4%per year for the next 10 years versus a long-term, pre-crisis realized average of 3.5%. Inflation Developed market inflation is expected to be below 2.2% versus a pre-crisis average since 1980 of 4.0%. Valuations A forward P/E ratio of 18 to start 2018 (25-year average of 16) indicates headwinds for long-term returns. Debt Levels Aggregate G20 Debt-to-GDP (235%) ratios have risen since the Global Financial Crisis. Productivity Potential productivity growth expectations in the U.S. are 1.1% per year versus a long-term average of 2.1%. Demographics The working age population in developed markets is expected to drop by 5%through 2030, the largest drop in over 50 years. NEXT 10 YEARS Current Assumptions and Efficient Frontier T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S23 APCM Annualized Return and Risk Assumptions 10 Year Horizon Return Risk U.S.Large Cap Equities 8.2%17.4% U.S.Mid Cap Equities 8.9%20.0% U.S.Small Cap Equities 9.4%23.2% Int’l Developed Equities 9.2%18.6% Emerging Market Equities 11.5%26.4% REITs 8.0%23.6% Infrastructure 7.0%15.7% U.S. Fixed Income 3.6%4.2% U.S. TIPS 3.3%4.0% International Bonds 1.6%3.2% Commodities 5.5%18.3% Cash 2.5%0.6% Shaded color in the table above represents the direction of change from APCM’s 2017 assumptions. Red = Lower, Green = Higher, Gray = Unchanged Large Cap Mid Cap Small Cap Int'l Dev EM REITs U.S. Bonds TIPS Int'l Bonds Commodities Infrastructure Cash 25% Equity 40% Equity 55% Equity 70% Equity 85% Equity 0% 2% 4% 6% 8% 10% 12% 14% 0%10%20%30%ReturnRisk Efficient Frontier NEXT 10 YEARS Portfolio Options and Characteristics T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S24 KENAI’S OPTIONS Asset Class 55% Equity / Current 80% Equity Large Cap Equity 20.0%25.0% Mid Cap Equity 10.0%12.0% Small Cap Equity 5.0%8.0% International Equity 10.0%15.0% Emerging Markets Equity 5.0%10.0% REITs 5.0%5.0% Infrastructure 0.0%5.0% U.S. Aggregate Bonds 0.0%15.0% Intermediate Gov/Credit 40.0%0.0% Cash 5.0%5.0% Expected Risk and Return T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S25 KENAI’S OPTIONS -30%-20%-10%0%10%20%30%40% Annual Expected Return & Ranges 55% Equity / Current 80% Equity Risk and return data from Windham Portfolio Advisor. *Range denotes the possible pretax return range at the 95% confidence level. 55% Equity / Current 80% Equity Return 6.2%7.8% Risk 9.8%14.5% Range*-13.4 - 25.8%-21.2 - 36.8% Return 6.6%7.4% Risk 8.6%13.0% Best 12 Months 34.6%50.4% Worst 12 Months -24.8%-37.7% APCM's Forward Looking Assumptions Annualized Historical Returns 1/1999 - 12/2017 $14.8 $12.8 $25.1 $28.1 $43.4 $61.3 $5 $20 $35 $50 $65 $80 55% Equity / Current 80% EquityM i l l i o n s Monte Carlo Simulation Worst Case (95%)Expected (50%)Best Case (5%) Asset Base and Distribution Analysis Wealth simulation, 10 year horizon T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S26 KENAI’S OPTIONS Data from Windham Portfolio Advisor. Inflation adjusted principal: $28.8M Additional equity exposure modestly increases probability of maintaining purchasing power, but has greater downside risk. The simulation assumes a portfolio starting value of $23.6M and includes a 5% annual smoothed distribution and no deposits. Out of the 5000 simulations, half of the results had an ending portfolio value of $25.1M for the 55% Equity portfolio and $28.1M for the 80% Equity portfolio. 95% of the simulations had an ending portfolio value of $14.8M or greater for the 55% Equity portfolio and $12.8M for the 80% Equity portfolio. Annual expected cash flow ranges are as follows: ▪$1.00M -$1.51M for 55% Equity ▪$947K -$1.75M for 80% Equity Cumulative expected cash flow distributions are as follows: ▪$10.1M –$14.9M for 55% Equity ▪$9.6M -$17.2M for 80% Equity Increasing equity exposure raises the probability of maintaining purchasing power from 38% to 45%, but risks losing principal in the worst case scenario. $15.0 $17.4 $25.6 $28.8 $44.0 $48.2 $5 $20 $35 $50 5% / Current 4% FlexibleM i l l i o n s Monte Carlo Simulation Worst Case (95%)Expected (50%)Best Case (5%) Asset Base and Distribution Analysis Wealth simulation, 10 year horizon T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S27 KENAI’S OPTIONS Data from Windham Portfolio Advisor. Inflation adjusted principal: $28.8M Diversified 55% Equity allocation is expected to support a 4% annual distribution and preserve purchasing power. The simulation assumes a portfolio starting value of $23.6M and includes a 5% annual smoothed distribution and a 4% flexible annual smoothed distribution and no deposits. Out of the 5000 simulations, half of the results had an ending portfolio value of $25.6M for the current 5% spend rate and $28.8M for the 4% flexible spend rate. 95% of the simulations had an ending portfolio value of $15.0M or greater for the current 5% spend rate and $17.4 for the 4% flexible spend rate. Annual expected cash flow ranges are as follows: ▪$1.00M -$1.53M for 5% Current Spend Rate ▪$793K -$1.31M for 4% Flexible Spend Rate Cumulative expected cash flow distributions are as follows: ▪$10.1M –$15.1M for 5% Current Spend Rate ▪$8.1M -$12.8M for 4% Flexible Spend Rate Optimizing the allocation is expected to increase ending wealth and distributions, with less downside risk. Airports Utilities & Pipelines Seaports Cell Phone Towers Introduction to Infrastructure T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S28 Adding infrastructure would incrementally reduce portfolio risk for the same expected return. Infrastructure refers to assets that are socially and economically necessary to deliver products required to enhance the safety and well being of the general population. Examples of traditional infrastructure projects are bridges, toll roads, airports, and electric, gas or water and sewage facilities. “New age” infrastructure incorporates assets such as wireless towers and data centers as these structures are critical to information processing and sharing. Infrastructure is often characterized by inflation hedging qualities, less sensitivity to economic downturns, and stable cash flows. APCM’s analysis indicates adding infrastructure would incrementally reduce portfolio risk for the same expected return. Consider adding a 3% allocation to infrastructure, funded from the current 5% REIT allocation. KENAI’S OPTIONS Disclosures T R U S T E D A D V I S O R S ▪M O R E E X P E R T S ▪B E T T E R A C C E S S29 Important Assumptions IMPORTANT:The projections or other information generated by Alaska Permanent Capital Management Company (APCM)regarding the likelihood of various outcomes are hypothetical in nature,do not reflect actual investment results,and are not guarantees of future results.There can be no assurance that the projected or simulated results will be achieved or sustained.The charts and data only present a range of possible outcomes.Actual results will vary over time,and such results may be better or worse than the simulated scenarios. Clients should be aware that the potential for loss (or gain)may be greater than that demonstrated in the simulations.Please note that the analysis does not take into consideration all asset classes,and other asset classes not considered may have characteristics similar or superior to those being analyzed. Important Legal Information These calculations are designed to be informational and educational only,and when used alone,do not constitute investment advice.APCM encourages investors to review their investment strategy periodically as financial circumstances do change. Model results are provided as a rough approximation of future financial performance.Actual results could produce different outcomes (either better or worse)than those illustrated by the model,since it is not possible to anticipate every possible combination of financial market returns.APCM is not responsible for the consequences of any decisions or actions taken in reliance upon or as a result of the information provided by the results of the model. Other Influences on Rates of Return Investment management fees:Returns are presented gross of management fees and include the reinvestment of all income.Actual returns will be reduced by investment advisory fees and other expenses that may be incurred in the management of the account.The collection of fees produces a compounding effect on the total rate of return net of management fees. As an example,the effect of investment management fees on the total value of a client’s portfolio assuming (a)quarterly fee assessment,(b)$1,000,000 investment,(c)portfolio return of 8%a year,and (d)1.00%annual investment advisory fee would be $10,416 in the first year,and cumulative effects of $59,816 over five years and $143,430 over ten years.Actual investment advisory fees incurred by clients may vary. Taxes:Unless noted otherwise,model results have not been adjusted for any state or federal taxes or penalties. Inflation:Unless noted otherwise,model results do not adjust any inputs or outcomes for inflation.Inflation is assumed to be constant over the investment horizon. Limitations Inherent in Model Results Limitations include but are not restricted to the following: Model results do not represent actual trading and may not reflect the impact that material economic and market factors might have had on APCM’s decision making if the actual client money were being managed. Extreme market movements may occur more frequently than represented in the model. Some asset classes have relatively limited histories.While future results for all asset classes in the model may materially differ from those assumed in APCM’s calculations,the future results for asset classes with limited histories may diverge to a greater extent than the future results of asset classes with longer track records. Market crises can cause asset classes to perform similarly over time;reducing the accuracy of the projected portfolio volatility and returns.The model is based on the long-term behavior of the asset classes and therefore is less reliable for short-term periods.This means that the model does not reflect the average periods of "bull"and "bear"markets,which can be longer than those modeled. The model represent APCM’s best view of the next 7-10 years,but is unlikely to reflect actual investment returns worldwide over this period. 53.3 53.4 52.5 52.2 52.9 52.4 16.4 15.0 14.7 13.9 11.9 11.5 30.2 31.5 32.8 33.9 35.2 36.3 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2012 2013 2014 2015 1H16 MV% Treasury Govt Related Corporate 63.3 61.7 60.5 59.6 59.6 58.6 7.5 7.0 6.7 6.3 6.2 6.2 15.7 15.9 16.1 16.9 15.2 16.0 13.5 15.5 16.8 17.2 19.0 19.3 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2012 2013 2014 2015 1H16 MV% Aaa Aa A Baa August 24, 2016 Monthly Returns in USO. ,nnt.-~016 (%} Jan 2006 -0.18 2007 -0.08 2008 l 90 2009 -1.54 2010 l 49 2011 0.08 2012 l .07 2013 -0.80 2014 1.46 2015 2.64 2016 1.41 Index History June 1, 2014 April 1, 2013 January l, 2008 Julyl, 2005 Julyl, 2004 October 1, 2003 Julyl, 2000 July 1, 1999 January 1, 1998 January l, 1994 January l, 1990 August l, 1988 January l, 1979 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD 0.27 -1.10 -0.31 -0.06 0.23 1.30 l .58 0.98 0.63 1.17 -0.76 3 78 1.73 -0.17 0.59 -0.86 -0.21 l 00 l .28 0 70 0 91 l 98 019 7 23 0.63 -0.0l -0.59 -1.03 0.10 0.00 0.92 -2.53 -2.51 4.43 4 53 5 70 -0.83 l 0 019 0.80 0.86 l 79 l 18 l 14 0.24 l 35 -1.77 4 52 0.41 -0.35 l 22 08 l 80 l 13 l .86 0.27 0.01 -0.79 -1.40 6 59 0.23 -0.03 1.32 1.46 -0.47 1 95 1.68 1.03 012 -0.23 l 29 8 74 -0. l l -0.86 1.35 l 22 -0.02 l 64 0.02 0.07 0.35 0.30 -0.28 4 82 0.59 0.06 1.22 -1.92 -1.80 0.23 -0.61 0 75 0.87 -0.28 -0.62 -2.35 0.61 -0.11 0 82 l 13 -0.04 -0. l l 1.20 -0.90 0.99 0 74 0 08 6.01 -1.27 0.50 -0.53 -0.34 -1.23 0.73 -0.23 0.70 0.00 -0.32 -0.43 0. 5 0.85 1.17 0.48 -0.02 2 20 6.23 Global cla ss ification scheme modified to incorporate new sectors, sector name changes and sector retirements . Loan Participation notes (LPNs) eligible for the index. Fixed-to-floating rate perpetual securities without a coupon step-up on their first call date eligible for inclusion. Fitch ratings added to Moody's and S&P to determine index eligibility and classification. Liquidity constraint raised to USD250mn. Liquidity constraint raised to USD 200mn from USD l 50mn. Started using the most conservative rating of Moody's and S&P to determine index eligibility instead of Moody's only for split-rated securities. Absorbed all Yankee corporate into their respective industry and sector class ifications. Liquidity constraint raised to USDl 50mn from USDl OOmn. Removed US TIPS from US Government/Credit Index. Liquidity constraint raised to USDl OOmn from USD50mn for non-government securities. Liquidity constraint raised to USDl OOmn from USD25mn. Liquidity constraint raised to USD25mn from USDl mn . US Governm e nt/Credit Ind e x introduced, with historical data backfilled to January 1973. lJS Goverrmert/C edit re 4 ● ● ● ● ● ● ● ● August 24, 2016 New York +l-212-617-5020 London +44-20-3525-9976 Singapore +65-6311-1449 Hong Kong +852-2293-1346 Tokyo +81-3-3201-7024 Sydney +61-2-9777-7208 info@bloombergindices.com Bloomberg Disclaimer BLOOMBERG is a trademark and service mark of Bloomberg Finance L.P. BARCLAYS is a trademark and service mark of Barclays Bank Pie, used under license. Bloomberg Finance L.P. and its affiliates (collectively, "Bloomberg") or Bloomberg's licensors own all proprietary rights in the BLOOMBERG BARCLAYS INDICES. 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While Bloomberg may for itself execute transactions with Barclays in or relating to the BLOOMBERG BARCLAYS INDICES, investors in the BLOOMBERG BARCLAYS INDICES do not enter into any relationship with Barclays and Barclays does not sponsor, endorse, sell or promote, and Barclays makes no representation regarding the advisab'ility or use of, the BLOOMBERG BARCLAYS INDICES or any data included therein. Customers should consider obtaining independent advice before making any financial decisions. ©2016 Bloomberg Finance L.P. All rights reserved. .BARCLAYS ~)..) lJ~ vc11 111t:1"tfl earr r E 7 Bloomberg Barclays Indices A Bloomberg Professional service offering US Aggregate Index 1 US Aggregate Index The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non- agency). Provided the necessary inclusion rules are met, US Aggregate-eligible securities also contribute to the multi- currency Global Aggregate Index and the US Universal Index, which includes high yield and emerging markets debt. The US Aggregate Index was created in 1986 with history backfilled to January 1, 1976. ___ ___ Historical Composition by Sector (MV%) – Trailing 5 Years* Historical Composition by Quality (MV%) – Trailing 5 Years* *Note: 2017 data are as of January 2017. Rules for Inclusion Eligible Currencies Principal and interest must be denominated in USD. Quality Securities must be rated investment grade (Baa3/BBB-/BBB- or higher) using the middle rating of Moody’s, S&P and Fitch; when a rating from only two agencies is available, the lower is used; when only one agency rates a bond, that rating is used. In cases where explicit bond level ratings may not be available, other sources may be used to classify securities by credit quality: · Local currency treasury and hard currency sovereign issues are classified using the middle issuer level rating from each agency for all outstanding bonds, even if bond level ratings are available. · Expected ratings at issuance may be used to ensure timely index inclusion or to properly classify split-rated issuers. · Unrated securities may use an issuer rating for index classification purposes if available. Unrated subordinated securities are included if a subordinated issuer rating is available. Coupon · Fixed-rate coupon. · Callable fixed-to-floating rate bonds are eligible during their fixed-rate term only. · Bonds with a step-up coupon that changes according to a predetermined schedule are eligible. · Hybrid ARMs are index-eligible during their fixed term, but exit one year prior to their conversion to adjustable rate. 35.7 35.8 36.2 36.2 36.1 10.0 9.5 9.6 7.7 7.9 22.3 23.3 24.2 25.8 25.8 32.0 31.4 31.0 30.4 30.3 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2013 2014 2015 2016 2017 MV%Treasury Government-Related Corporate Securitized 72.4 71.8 71.5 70.8 70.9 4.9 4.6 4.4 4.8 4.8 11.1 11.8 11.4 10.9 10.6 11.6 11.9 12.7 13.6 13.8 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2013 2014 2015 2016 2017 MV%Aaa Aa A Baa February 8, 2017 US Aggregate Index 2 Rules for Inclusion Amount Outstanding · For Treasury, government-related and corporate securities, USD250mn minimum par amount outstanding. · For MBS pass-throughs, pool aggregates must have USD1bn par amount outstanding. · For ABS, USD500mn minimum deal size and USD25mn minimum tranche size. · For CMBS, USD500mn minimum deal size with at least USD300mn amount outstanding remaining in the deal and USD25mn minimum tranche size. · US Treasuries held in the Federal Reserve SOMA account (both purchases at issuance and net secondary market transactions) are deducted from the total amount outstanding. New issuance bought at auction by the Federal Reserve does not enter the index. Net secondary market purchases/sales are adjusted at each month- end with a one-month lag. As previously announced, the minimum amount outstanding for US Aggregate Indices will be raised to USD300mn from USD250mn for Treasury, Government-Related and Corporate securities as of April 1, 2017. Hybrid ARMs will also be removed as of June 1, 2017. Maturity · At least one year until final maturity, regardless of optionality. · MBS must have a weighted average maturity of at least one year. CMBS and ABS must have a remaining average life of at least one year. · Bonds that convert from fixed to floating rate, including fixed-to-float perpetuals, will exit the index one year prior to conversion to floating-rate. Fixed-rate perpetuals are not included. · Sub-indices based on maturity are inclusive of lower bounds. Intermediate maturity bands include bonds with maturities of 1 to 9.999 years. Long maturity bands include maturities of 10 years or greater. Market of Issue · SEC-registered securities, bonds exempt from registration at the time of issuance and SEC Rule 144A securities with registration rights are eligible. A security with both SEC Regulation-S (Reg-S) and SEC Rule 144A tranches is treated as one security for index purposes. The 144A tranche is used to prevent double- counting and represents the combined amount outstanding of the 144A and Reg-S tranches. · Global bonds are included. · Bonds that were previously SEC-registered or 144A with registration rights but later deregistered by the issuer remain index eligible. Seniority of Debt Senior and subordinated issues are included. Taxability · Only fully taxable issues are eligible. · Build America Bonds (BAB) with the tax credit to the issuer are eligible; those with tax credits issued to investors are considered tax exempt. · Dividend Received Deduction (DRD) and Qualified Dividend Income (QDI) eligible securities are excluded. Security Types Included · Bullet, putable, sinkable/amortizing and callable bonds · Taxable municipal securities, including Build America · Bonds (BAB) · Original issue zero coupon and underwritten MTN · Enhanced equipment trust certificates (EETC) · Certificates of deposit · Fixed-rate and fixed-to-float (including fixed-to- variable) capital securities · Covered bonds (as of January 1, 2011) · US agency CMBS (as of July 1, 2014) Excluded · Contingent capital securities, including traditional CoCos and contingent write-down securities · Bonds with equity type features (eg, warrants, convertibles, preferreds, DRD/QDI-eligible issues) · Tax-exempt municipal securities · Inflation-linked bonds, floating-rate issues · Private placements, retail bonds · USD25/USD50 par bonds · Structured notes, pass-through certificates · Non-ERISA eligible CMBS issues · CMBS A1A tranches (as of January 1, 2011) · Illiquid securities with no available internal or third- party pricing source February 8, 2017 US Aggregate Index 3 Rebalancing Rules Frequency For each index, Bloomberg maintains two universes of securities: the Returns (Backward) and the Projected (Forward) Universes. The composition of the Returns Universe is rebalanced at each month-end and represents the fixed set of bonds on which index returns are calculated for the next month. The Projected Universe is a forward-looking projection that changes daily to reflect issues dropping out of and entering the index but is not used for return calculations. On the last business day of the month (the rebalancing date), the composition of the latest Projected Universe becomes the Returns Universe for the following month. Index Changes During the month, indicative changes to securities (credit rating change, sector reclassification, amount outstanding changes, corporate actions, and ticker changes) are reflected daily in the Projected and Returns Universe of the index. These changes may cause bonds to enter or fall out of the Projected Universe of the index on a daily basis, but will affect the composition of the Returns Universe at month-end only, when the index is next rebalanced. Reinvestment of Cash Flows Intra-month cash flows from interest and principal payments contribute to monthly index returns but are not reinvested at a short-term reinvestment rate between rebalance dates. At each rebalancing, cash is effectively reinvested into the Returns Universe for the following month so that index results over two or more months reflect monthly compounding. New Issues Qualifying securities issued, but not necessarily settled on or before the month-end rebalancing date, qualify for inclusion in the following month’s index if the required security reference information and pricing are readily available. Pricing and Related Issues Sources & Frequency · Most index-eligible bonds are priced on a daily basis by Bloomberg’s evaluated pricing service, BVAL. Certain segments of Eurodollar issues and LATAM USD-denominated bonds are priced by third party sources. · MBS generics are priced daily based on a weighted average price of underlying pools. The pools are priced by BVAL on a same-day settlement basis. Pricing Quotes Bonds can be quoted in a variety of ways, including nominal spreads over benchmark securities/treasuries, spreads over swap curves, or direct price quotes as a percentage of par. For securities quoted on a spread basis, daily security price changes will result from movements in the underlying curve (swap or treasury) and/or changes in the quoted spread. Prices from third-party sources are quoted as a percentage of par. Timing · 3pm (New York time) for all securities except taxable municipal bonds which use 4pm (New York time). · On early market closes, prices are taken as of 1pm (New York time), unless otherwise noted. · If the last business day of the month is a public holiday, prices from the previous business day are used. Bid or Offer Side Bonds in the index are priced on the bid side. The initial price for new corporate issues entering the index is the offer side; after the first month, the bid price is used. Settlement Assumptions T+1 calendar day settlement basis for all bonds except MBS, which use same-day settlement. At month-end, settlement is assumed to be the first calendar day of the following month, even if the last business day is not the last day of the month, to allow for one full month of accrued interest to be calculated. Verification Daily price moves for each security are analyzed by the index pricing team to identify outliers. Index users may also challenge price levels, which are then reviewed and updated as needed using input from various sources. Currency Hedging Returns hedged to various non-USD currencies are published for the US Aggregate Index. The indices’ FX hedging methodology takes rolling one-month forward contracts that are reset at the end of each month and hedges each non-reporting currency-denominated bond in the index into the reporting currency terms. No adjustment is made to the hedge during the month to account for price movements of constituent securities in the Returns Universe of the index. Calendar The US Aggregate Index follows the US bond market holiday schedule. February 8, 2017 US Aggregate Index 4 Monthly Returns in USD, 2007-2017 (%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec YTD 2007 -0.04 1.54 0.00 0.54 -0.76 -0.30 0.83 1.23 0.76 0.90 1.80 0.28 6.97 2008 1.68 0.14 0.34 -0.21 -0.73 -0.08 -0.08 0.95 -1.34 -2.36 3.25 3.73 5.24 2009 -0.88 -0.38 1.39 0.48 0.73 0.57 1.61 1.04 1.05 0.49 1.29 -1.56 5.93 2010 1.53 0.37 -0.12 1.04 0.84 1.57 1.07 1.29 0.11 0.36 -0.57 -1.08 6.54 2011 0.12 0.25 0.06 1.27 1.31 -0.29 1.59 1.46 0.73 0.11 -0.09 1.10 7.84 2012 0.88 -0.02 -0.55 1.11 0.90 0.04 1.38 0.07 0.14 0.20 0.16 -0.14 4.21 2013 -0.70 0.50 0.08 1.01 -1.78 -1.55 0.14 -0.51 0.95 0.81 -0.37 -0.57 -2.02 2014 1.48 0.53 -0.17 0.84 1.14 0.05 -0.25 1.10 -0.68 0.98 0.71 0.09 5.97 2015 2.10 -0.94 0.46 -0.36 -0.24 -1.09 0.70 -0.14 0.68 0.02 -0.26 -0.32 1.14 2016 1.38 0.71 0.92 0.38 0.03 1.80 0.63 -0.11 -0.06 -0.76 -2.37 0.14 2.65 2017 0.20 — — — — — — — — — — — 0.20 Index History June 1, 2017 Hybrid ARMs removed from the index. April 1, 2017 Liquidity constraint raised to USD300mn from USD250m for Treasury, Government-Related and Corporate securities. July 1, 2014 US agency CMBS added to the index. June 1, 2014 Global classification scheme modified to incorporate new sectors, sector name changes and sector retirements. April 1, 2014 Minimum liquidity for US MBS Index constituents raised from USD250mn to USD1bn. April 1, 2013 Loan participation notes (LPNs) eligible for the index. May 1, 2012 Issuer eligibility for fixed-rate ABS no longer based on a predefined list of “eligible” issuers. January 1, 2011 Covered bonds become eligible. A1A tranches are removed from the CMBS portion of the index. October 1, 2009 US ABS home equity sector removed from the index. January 1, 2008 Fixed-to-floating rate perpetual securities without a coupon step-up on their first call date eligible for inclusion. US MBS fixed-rate balloons and US ABS manufactured housing removed. April 1, 2007 Agency Hybrid Adjustable Rate Mortgage (ARM) securities added to the index, but not eligible for the Global Aggregate. July 1, 2005 Fitch ratings added to Moody’s and S&P to determine index eligibility based on the middle rating from each agency. July 1, 2004 Liquidity constraint raised to USD250mn/USD25mn CMBS tranche size from USD200mn. October 1, 2003 Liquidity constraint raised to USD200mn from USD150mn. Capital and senior unsecured securities with fixed-to-variable coupons added to the index. Lower of Moody’s and S&P rating used to determine index eligibility; previously, Moody’s was used as the primary rating with S&P rating used in cases where a Moody’s rating was unavailable. July 1, 2000 ABS liquidity constraint raised to USD500mn for deal size and USD25mn for tranche size. Absorbed all Yankee corporates into their respective industry and sector classification. February 8, 2017 US Aggregate Index 5 July 1, 1999 Liquidity constraint raised to USD150mn from USD100mn. ERISA-eligible CMBS issues added to the index. January 1, 1998 Removed US TIPS from US Aggregate Index. January 1, 1994 Liquidity constraint raised to USD100mn from USD50mn for non-government securities. January 1, 1992 ABS and MBS balloon issues added to the index. Liquidity constraint increased to USD50mn from USD25mn for non- government securities. January 1, 1990 Liquidity constraint raised to USD100mn from USD25mn for government issues. August 1, 1988 Liquidity constraint raised to USD25mn from USD1mn for corporate issues. January 1, 1986 US Aggregate Index introduced, with historical data backfilled to January 1976. Sub-indices and Index Customizations Bloomberg publishes numerous sub-indices of flagship indices and bespoke benchmarks created for specific index users. Several types of bespoke indices are available to select or customize the most appropriate benchmark for specific portfolio needs: Sub-Index Type Description Examples Enhanced Constraint Applies a more or less stringent set of constraints to any existing index. · US Aggregate ex Baa · US Aggregate 1-3 Year Composites Investors assign their own weights to sectors or other index sub-components within an overall index. · 50% US Aggregate; 50% Euro Aggregate · 30% US Government-Related; 70% US MBS Issuer Constrained Indices that cap issuer exposure to a fixed percentage. Options available for applying issuer caps and redistributing excess MV to other issuers. · US Credit 2% Issuer Capped Float Adjusted Adjusts par amount outstanding of bonds for holdings of central governments that are publicly available. · US Aggregate Float Adjusted ESG Screened/Weighted Applies Environmental, Social and Governance filters and/or tilts to a standard index. · US Aggregate Socially Responsible Index · US Aggregate ESG Weighted Mirror Futures Index (MFI) An index consisting of 14 funded futures contracts weighted to match closely the beginning-of-month OAD of the index. · US Aggregate Mirror Futures Index Duration Hedged Indices constructed to reflect the underlying return of an index with its duration fully or partially hedged using its MFI. · US Aggregate Duration Hedged Index February 8, 2017 US Aggregate Index 6 Accessing Index Data Bloomberg Professional® service Bloomberg benchmarks are the global standard for capital markets investors. · INDEX<Go> - The Bloomberg Indices landing page is a dashboard for index-related information on the terminal. Find daily and monthly index returns for key indices from each index family as well as index publications including methodologies, factsheets, monthly reports, updates and alerts. · IN<Go> - The Bloomberg Index Browser displays the latest performance results and statistics for the indices as well as history. IN presents the indices that make up Bloomberg's global, multi-asset class index families into a hierarchical view, facilitating navigation and comparisons. The "My Indices" tab allows a user to focus on a set of favorite indices. · PORT<Go> - Bloomberg’s Portfolio & Risk Analytics solution includes tools to analyze the risk, return, and current structure of indices. Analyze the performance of a portfolio versus a benchmark or use models for performance attribution, tracking error analysis, value-at-risk, scenario analysis, and optimization. · DES<Go> - The index description page provides transparency into an individual index including membership information, aggregated characteristics and returns, and historical performance. Bloomberg Indices Website (www.bloombergindices.com) The index website makes available limited index information including: · Index methodology and factsheets · Current performance numbers for select indices Data Distribution Index subscribers may choose to receive index data in files. Files may include: · Index level and/or constituent level returns and characteristics for any indices · Automatic delivery of files via email or SFTP following the completion of the index production process after market close · Clients may receive standard files or may customize file contents · Index data is also available via authorized redistributors Bloomberg Total Return Index Value Tickers: US Aggregate and Related Indices Ticker (USD Unhedged) Index Ticker (USD Unhedged) Index LBUSTRUU US Aggregate Index LU3ATRUU US Aggregate Aaa LC08TRUU US Intermediate Aggregate LU2ATRUU US Aggregate Aa LU13TRUU US Aggregate 1-3 Year LU1ATRUU US Aggregate A LU35TRUU US Aggregate 3-5 Year LUBATRUU US Aggregate Baa LU57TRUU US Aggregate 5-7 Year LUGCTRUU US Government/Credit LU71TRUU US Aggregate 7-10 Year LF97TRUU US Intermediate Government/Credit LU10TRUU US Aggregate 10+ Year LGC5TRUU US Long Government/Credit Total Return Index Values are available in other currencies and on a hedged basis. 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While Bloomberg may for itself execute transactions with Barclays in or relating to the BLOOMBERG BARCLAYS INDICES, investors in the BLOOMBERG BARCLAYS INDICES do not enter into any relationship with Barclays and Barclays does not sponsor, endorse, sell or promote, and Barclays makes no representation regarding the advisability or use of, the BLOOMBERG BARCLAYS INDICES or any data included therein. Customers should consider obtaining independent advice before making any financial decisions. ©2017 Bloomberg Finance L.P. All rights reserved. Portfolio AppraisalCITY OF KENAI PERMANENT FUNDSDecember 31, 2018YieldAverage Total Market Pct. Annual Accrued toQuantity Security Cost Average Cost Price Value Assets Income Interest MaturityFNMA & FHLMC22,124 FHLMC POOL G14203104.56 23,134 102.58 22,696 0.09 885 74 1.434.000% Due 040126Accrued Interest74 0.0023,134 22,770 0.09 74CASH AND EQUIVALENTSCASH RECEIVABLE2,873 2,873 0.01 NADIVIDEND ACCRUAL24,546 24,546 0.09WF ADV GOVT MM FDINSTL #17511,658,159 1,658,159 6.261,685,578 1,685,578 6.36CORPORATE BONDS200,000 TOYOTA MOTOR CREDIT CORP 100.48 200,958 99.95 199,906 0.75 4,200 1,913 2.942.100% Due 011719200,000 MICROSOFT CORP117.24 234,472 100.63 201,268 0.76 8,400 700 2.634.200% Due 060119200,000 TORONTODOMINION BANK 101.89 203,782 99.59 199,180 0.75 4,500 1,200 2.812.250% Due 092519200,000 HSBC USA INC99.61 199,216 99.36 198,726 0.75 4,750 633 3.112.375% Due 111319250,000 CAPITAL ONE99.94 249,850 98.73 246,830 0.93 5,875 2,464 3.552.350% Due 013120200,000 ENTERPRISE PRODUCTS OPER 112.75 225,494 103.08 206,152 0.78 10,400 3,467 3.285.200% Due 090120250,000 PNC BANK NA99.72 249,300 98.77 246,935 0.93 6,125 953 3.132.450% Due 110520200,000 NBC UNIVERSAL MEDIA LLC109.20 218,408 102.50 204,996 0.77 8,750 2,187 3.214.375% Due 040121200,000 AMERICAN EXPRESS CREDIT99.92 199,850 97.86 195,714 0.74 4,500 700 3.202.250% Due 050521200,000 MORGAN STANLEY114.98 229,964 104.80 209,598 0.79 11,000 4,675 3.535.500% Due 072821200,000 GILEAD SCIENCES INC96.28 192,564 96.33 192,662 0.73 3,900 1,300 3.171.950% Due 030122200,000 BANK AMER CORP99.34 198,686 98.49 196,972 0.74 6,600 3,117 3.713.300% Due 011123200,000 AVALONBAY COMMUNITIES100.82 201,632 97.78 195,556 0.74 5,700 1,678 3.422.850% Due 0315231 Portfolio AppraisalCITY OF KENAI PERMANENT FUNDSDecember 31, 2018YieldAverage Total Market Pct. Annual Accrued toQuantity Security Cost Average Cost Price Value Assets Income Interest Maturity150,000 DISCOVERY COMMUNICATIONS 98.88 148,320 96.65 144,981 0.55 4,875 1,219 4.113.250% Due 040123150,000 NEWELL BRANDS INC106.01 159,022 98.53 147,802 0.56 5,775 1,444 4.233.850% Due 040123200,000 AFLAC INC104.97 209,950 100.33 200,664 0.76 7,250 322 3.543.625% Due 061523200,000 BANK OF NEW YORK MELLON 97.83 195,666 94.95 189,908 0.72 4,400 1,650 3.392.200% Due 081623200,000 JPMORGAN CHASE & CO105.18 210,362 100.26 200,512 0.76 7,750 3,229 3.823.875% Due 020124200,000 METLIFE INC105.46 210,930 100.69 201,378 0.76 7,200 1,620 3.453.600% Due 041024175,000 PRUDENTIAL FINANCIAL INC103.15 180,505 100.55 175,961 0.66 6,125 783 3.383.500% Due 051524200,000 WELLS FARGO & COMPANY99.88 199,764 96.73 193,468 0.73 6,600 2,053 3.943.300% Due 090924150,000 KIMCO REALTY CORP94.92 142,377 95.31 142,968 0.54 4,950 2,062 4.183.300% Due 020125150,000 REYNOLDS AMERICAN INC108.47 162,700 96.42 144,636 0.55 6,675 352 5.104.450% Due 061225200,000 APPLIED MATERIALS INC107.96 215,912 100.63 201,262 0.76 7,800 1,950 3.793.900% Due 100125150,000 CITIGROUP INC101.65 152,470 96.15 144,219 0.54 5,550 2,605 4.343.700% Due 011226150,000 ANHEUSERBUSCH INBEV FIN 103.01 154,519 94.26 141,394 0.53 5,475 2,281 4.613.650% Due 020126200,000 LOWE'S COS INC100.05 200,098 91.37 182,748 0.69 6,200 999 4.343.100% Due 050327Accrued Interest47,558 0.185,346,773 5,153,955 19.45 47,558DOMESTIC LARGE CAP EQUITY FUNDS/ETF18,425 FLEXSHARES QUAL DIV ETF40.76 750,937 39.81 733,499 2.77 NA17,100 SPDR S&P 500 ETF138.79 2,373,292 249.92 4,273,632 16.13 NA3,124,230 5,007,131 18.90DOMESTIC MID CAP EQUITY FUNDS/ETF14,550 ISHARES CORE S&P MIDCAP 400 ETF 70.94 1,032,204166.06 2,416,173 9.12 NA2 Portfolio AppraisalCITY OF KENAI PERMANENT FUNDSDecember 31, 2018YieldAverage Total Market Pct. Annual Accrued toQuantity Security Cost Average Cost Price Value Assets Income Interest MaturityDOMESTIC SMALL CAP EQUITY FUNDS/ETF16,525 ISHARES S&P SMALLCAP 600 INDEX ETF 32.40 535,335 69.32 1,145,513 4.32 NAINTERNATIONAL EQUITY FUNDS/ETF23,400 ISHARES ETF CORE MSCI EAFE 51.54 1,206,150 55.001,287,000 4.86 NA21,950 ISHARES MSCI EAFE INDEX FUND CLOSEDEND FU 61.68 1,353,874 58.78 1,290,221 4.87 NA2,560,024 2,577,221 9.73EMERGING MARKET FUNDS/ETF28,025 ISHARES ETF CORE MSCI EMERGING MKTS 42.08 1,179,249 47.15 1,321,379 4.99 NAREAL ESTATE18,275 JPMORGAN BETABUILDERS MSCI US REIT ETF 76.55 1,399,035 71.99 1,315,599 4.97 NAU.S. TREASURY 100,000 US TREASURY NOTES99.64 99,641 98.87 98,871 0.37 1,250 214 2.631.250% Due 103119110,000 US TREASURY NOTES99.53 109,480 98.81 108,690 0.41 1,512 71 2.641.375% Due 121519125,000 US TREASURY NOTES99.85 124,807 98.46 123,076 0.46 1,562 531 2.601.250% Due 022920170,000 US TREASURY NOTES100.04 170,060 100.12 170,206 0.64 4,462 1,867 2.552.625% Due 073120150,000 US TREASURY NOTES100.06 150,094 96.78 145,177 0.55 1,687 5 2.461.125% Due 063021375,000 US TREASURY NOTES99.34 372,510 99.17 371,895 1.40 7,969 22 2.472.125% Due 063021750,000 US TREASURY NOTES100.59 754,414 98.71 740,362 2.79 15,000 2,596 2.472.000% Due 103121525,000 US TREASURY NOTES101.31 531,879 98.63 517,823 1.95 10,500 58 2.482.000% Due 123121425,000 US TREASURY NOTES97.12 412,765 98.81 419,955 1.58 9,031 25 2.482.125% Due 063022350,000 US TREASURY NOTES99.72 349,016 100.51 351,778 1.33 9,187 3,122 2.502.625% Due 022823300,000 US TREASURY NOTES98.24 294,727 99.97 299,907 1.13 7,500 2,833 2.512.500% Due 081523500,000 US TREASURY NOTES100.23 501,133 99.08 495,410 1.87 11,875 4,485 2.552.375% Due 0815243 Portfolio AppraisalCITY OF KENAI PERMANENT FUNDSDecember 31, 2018YieldAverage Total Market Pct. Annual Accrued toQuantity Security Cost Average Cost Price Value Assets Income Interest Maturity150,000 US TREASURY NOTES99.71 149,561 101.01 151,512 0.57 4,125 11 2.582.750% Due 063025105,000 US TREASURY NOTES92.80 97,440 93.38 98,052 0.37 1,706 222 2.621.625% Due 051526250,000 US TREASURY NOTES95.26 238,145 95.46 238,642 0.90 5,000 649 2.642.000% Due 111526190,000 US TREASURY NOTES95.29 181,049 96.60 183,536 0.69 4,275 555 2.682.250% Due 111527220,000 US TREASURY NOTES98.74 217,225 100.52 221,135 0.83 6,050 2,285 2.692.750% Due 021528100,000 US TREASURY NOTES100.59 100,586 103.73 103,727 0.39 3,125 406 2.693.125% Due 111528Accrued Interest19,957 0.084,854,529 4,859,713 18.34 19,957AGENCIES250,000 FHLMC99.73 249,325 98.37 245,932 0.93 4,250 1,086 2.661.700% Due 092920250,000 FEDERAL HOME LOAN BANK STEP UP 99.85 249,62598.09 245,237 0.93 5,000 639 2.522.000% Due 111422300,000 FEDERAL FARM CREDIT BANK 100.00 300,000 98.62 295,863 1.12 8,550 1,591 3.092.850% Due 042425200,000 FHLB99.79 199,580 100.00 200,002 0.75 7,250 2,054 3.623.625% Due 031927Accrued Interest5,370 0.02998,530 992,405 3.75 5,370TOTAL PORTFOLIO22,738,620 26,497,437 100 303,079 72,9594 PERFORMANCE HISTORYGROSS OF FEESCITY OF KENAI PERMANENT FUNDS711522558Percent ReturnPer PeriodTime Period Total AccountBlend Fixed IncomeBB BARC INT G/C BENCHInt'l EquityMSCI EAFE IndexDomestic Mid Cap EquityS&P 400 MIDCAP BENCHDomestic Small Cap EquityS & P 600 SMALL CAPS BENCHEmerging Market EquityMSCI EMERGING MARKET BENCHReal EstateS&P US REIT BENCHDomestic Large Cap EquityS&P 500 LARGE CAPS BENCHCash and Cash EquivalentsFTSE 3MO TBILL INDEX123117 to 013118 2.05 1.91 0.75 0.88 5.17 5.02 2.87 2.87 2.64 2.53 7.43 8.33 4.25 4.37 5.30 5.73 0.00 0.11013118 to 022818 2.86 2.61 0.45 0.46 4.88 4.51 4.40 4.43 3.81 3.87 5.71 4.61 7.68 7.47 3.94 3.69 0.00 0.11022818 to 033118 0.02 0.25 0.26 0.36 0.39 1.80 0.970.93 1.99 2.04 0.81 1.86 3.86 3.80 2.44 2.54 0.00 0.13033118 to 043018 0.01 0.18 0.33 0.52 1.15 2.28 0.330.26 1.05 1.03 2.65 0.44 0.82 1.49 0.65 0.38 0.00 0.13043018 to 053118 1.36 1.28 0.57 0.60 1.37 2.25 4.33 4.13 6.77 6.46 2.32 3.54 3.68 4.31 2.64 2.41 0.00 0.15053118 to 063018 0.13 0.09 0.08 0.07 1.69 1.22 0.44 0.42 1.05 1.13 4.58 4.15 4.19 4.26 0.52 0.62 0.00 0.15063018 to 073118 1.55 1.49 0.09 0.03 2.45 2.46 1.70 1.763.24 3.16 3.03 2.20 0.60 0.67 3.59 3.72 0.00 0.16073118 to 083118 1.10 1.29 0.55 0.59 1.86 1.93 3.15 3.19 4.82 4.83 3.31 2.70 2.58 3.20 2.86 3.26 0.00 0.17083118 to 093018 0.38 0.38 0.29 0.40 0.57 0.87 1.08 1.10 3.07 3.17 1.21 0.53 1.93 2.72 0.52 0.57 0.00 0.17093018 to 103118 4.28 4.25 0.10 0.14 8.31 7.96 9.47 9.55 10.47 10.48 8.73 8.71 2.90 2.50 6.69 6.84 0.00 0.18103118 to 113018 1.40 1.42 0.40 0.45 0.42 0.13 3.15 3.12 1.60 1.50 4.68 4.12 4.64 4.85 1.66 2.04 0.00 0.18113018 to 123118 4.10 4.02 1.11 1.34 5.43 4.85 11.34 11.32 12.20 12.07 2.98 2.66 8.42 8.14 8.88 9.03 0.00 0.20Date to Date123117 to 123118 4.50 4.04 0.96 0.88 13.95 13.79 10.88 11.08 8.04 8.48 15.48 14.58 5.83 3.79 5.12 4.38 0.00 1.86