Real Assets and Pricing Opportunities

Real assets offer investors several potential benefits for their portfolios— Strategy Benefits • One-Stop Real Asset diversification, income, capital Solution: The strategy offers appreciation, and inflation protection. exposure to different types of real assets in a single, liquid These benefits vary by real asset type, vehicle • Dynamic Management: and we believe the full potential of seeks to maximize the asset class’s the asset class can be best exploited potential benefits, regardless for clients by a skilled, well-resourced of the market cycle • Be Potentially Paid while You manager. Wait: Along with traditional real assets, the strategy offers Real assets generate “real” returns—or returns that account for inflation. exposure to equities with Real assets encompass a broad range of categories, such as real estate, pricing power infrastructure, industrial and precious metals, agricultural goods, and other natural resources. While many definitions of real assets focus on their hard, physical attributes, we give equal consideration to their potential performance during inflationary periods. As a result, our approach to real asset investing includes commodities, REITs, listed infrastructure, equities of companies with pricing power, and inflation-linked bonds.

For investors, such an allocation to real assets can provide traditional port- folios with:

• Diversification: Because their performance drivers are typically distinct, real assets generate low or negative correlations both to tradi- tional assets and to each other.

• Income: Many types of real assets offer stable and significant cash flows.

• Capital appreciation: Real assets offer absolute returns, partially because their capital appreciation potential is subject to the forces of supply and demand.

• Inflation protection: Real assets have historically offered a hedge against inflation for several reasons. Some real assets, such as infra- structure, are positively correlated with inflation while others—such as commodities—are sources of inflation.

SP28754 2

Real Assets: Real Diversification Exhibit 2 Given market valuations and the prospect of rising interest rates, Dynamic Management Can Exploit a Range of Potential investors have turned increasingly to real assets for their potential Benefits in Real Assets diversification qualities. Real assets offer low or negative correlations Inflation Current Capital to traditional due to their distinct performance drivers, Protection Income Appreciation Diversification which, unlike stocks and bonds, are generally based on near-term Commodities supply and demand dynamics. Real assets also offer diversification properties among themselves. For example, within commodities, agri- Infrastructure culture and livestock have a correlation of 0.14 (Exhibit 1). Thus, an Real Estate allocation to a broad mix of real assets within a portfolio may improve an investor’s risk-adjusted returns and help protect capital over time. Pricing Power We believe that investors who allocate to a single type of real asset Real Yield in their portfolio are missing out on the asset class’s potential. Real assets are heterogeneous, and even holdings within a real asset category Legend: Exposure to Potential Benefit can be quite differentiated. As a result, a single real asset type cannot Total High Some Low None provide the asset class’s potential benefits to a portfolio. Moreover, we believe a dynamic approach that adjusts the weightings within a real For illustrative purposes only. assets allocation in response to market conditions is critical to success- Source: Lazard, Bloomberg fully navigating the world of real assets (Exhibit 2).

Exhibit 1 Real Assets Offer Strong Diversification Characteristics Correlation Coefficient

Commod- Agri- Industrial Precious Energy Infra- Natural Stocks Bonds ities culture Energy Metals Livestock Metals Stocks REITs structure Linkers MLPs Resources

Stocks

Bonds -0.16

Commod- ities 0.49 -0.16

Agriculture 0.32 -0.08 0.54

Energy 0.45 -0.16 0.98 0.38

Industrial Metals 0.50 -0.21 0.63 0.40 0.54

Livestock 0.21 -0.02 0.22 0.14 0.18 0.13

Precious Metals 0.15 0.13 0.38 0.28 0.30 0.38 0.10 Energy Stocks 0.80 -0.16 0.71 0.41 0.68 0.53 0.20 0.30

REITs 0.79 0.03 0.34 0.24 0.30 0.37 0.17 0.18 0.56

Infra- structure 0.84 -0.05 0.54 0.34 0.50 0.49 0.25 0.25 0.75 0.68

Linkers 0.18 0.49 0.30 0.22 0.27 0.22 0.02 0.41 0.21 0.22 0.40

MLPs 0.59 -0.08 0.48 0.22 0.49 0.37 0.19 0.09 0.62 0.45 0.69 0.14

Natural Resources 0.81 -0.13 0.74 0.44 0.70 0.59 0.22 0.39 0.97 0.60 0.78 0.27 0.65

From 30 September 2007 to 30 September 2017 Daily data in US dollars. Equities = S&P 500 Total Return Index; Bonds = BB Barclays US Agg Total Return Value Unhedged USD; Commodities = S&P GSCI Total Return Index; Agriculture = S&P GSCI Agriculture Total Return Index; Livestock = S&P GSCI Livestock Total Return Index; Precious Metals = S&P GSCI Precious Metals Total Return Index; Industrial Metals = S&P GSCI Industrials Metals Total Return Index; Energy = S&P GSCI Energy Total Return Index; Energy Stocks = S&P Energy Sector Total Return Index; REITs = FTSE NAREIT All Equity Total Return Index; Infrastructure = DJ Brookfield Global Infrastructure Index Total Return; Linkers = BB Barclays Global Inflation-Linked Total Return Index Value Unhedged USD; MLPs = Alerian MLP Index; Natural Resources = S&P North America Natural Resources Sector Total Return Index Source: Lazard, Bloomberg 3

Lazard Real Assets and Pricing Philosophy and Process Opportunities Real Assets and Pricing Opportunities is managed by Lazard’s Multi- We believe the Lazard Real Assets and Pricing Opportunities strategy Asset team, which employs an investment process utilized across its helps solve the historic challenges faced by investors in real assets, entire platform. The process is based on a three-step approach: namely that they are relatively inflexible and difficult to access. 1) Forecast; 2) Dynamic Response; and 3) Risk Calibration. Lazard’s real asset strategy is a liquid, daily priced vehicle that offers 1. Forecast dynamic exposure to this asset class. The strategy can be a turnkey solu- Asset allocation decisions are based on the Multi-Asset team’s tion for a real assets allocation or, for investors holding physical real market forecast, which assesses four areas of the markets: Economy, assets, it can serve as a liquidity sleeve to complement their less liquid Valuation, Liquidity, and Sentiment (Exhibit 3). holdings. Investors can maintain their budgeted exposure by reducing/ accumulating the strategy as physical assets are bought and sold. To analyze these four macro areas, the team considers a range of inputs, including macroeconomic indicators and financial market Lazard Real Assets and Pricing Opportunities invests in the traditional data. The team also incorporates on-the-ground observations and real asset categories of commodities, REITs, and listed infrastructure. research as well as Dragonfly (an internal, proprietary social media The strategy also holds global inflation-linked bonds, or “link- network that provides a range of internal opinions and macroeco- ers,” because of their inflation-hedging and low-risk diversification nomic insights). properties. In addition, the strategy invests in equities of companies that exhibit pricing power, —i.e., goods and services with few or no 2. Dynamic Response substitutes in the marketplace, strong patent protection, or brand rec- The team uses the market forecast to determine asset allocations, ognition. These equities also have exposure to economic growth and which are designed to manage volatility while optimizing returns. This can potentially generate returns even if inflation is dormant (in effect, top-down approach is combined with bottom-up investment analysis investors can be paid to wait). carried out in different real assets categories by individual teams, who research and select securities.

3. Risk Calibration Risk control is essential for the strategy’s success. To help anticipate the potential impact of market volatility, optimizations are performed over the long, medium, and short term. The team seeks to mitigate factor risk and lower correlations between asset classes while maintain- ing exposure to idiosyncratic, fundamentally selected securities.

Exhibit 3 The Team Considers Four Areas when Compiling Its Market Forecast

Economy Valuation Liquidity Sentiment

What stage of the business What is the outlook for How are credit markets How supportive will cycle are we likely to be in business costs, profit likely to be characterized politics and/or public over the next 6–12 months margins, and returns over over the next 6–12 opinion be for returns relative to trend? the next 6–12 months? months? over the next 6–12 months?

United States Commodities Credit Availability Risk Appetite Europe Labor Credit Demand Geopolitical Risk China Equities Policy and Regulation Japan

Multi-Asset Forecast

For illustrative purposes only. Lazard Real Assets and Pricing Opportunities

Important Information Published on 18 October 2017. Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. All opin- ions expressed herein are as of 16 October 2017 and are subject to change. The performance quoted represents past performance. Diversification does not guarantee profit or protect against loss in declining markets. Information and opinions presented have been obtained or derived from sources believed by Lazard to be reliable. Lazard makes no representation as to their accuracy or completeness. Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Small- and mid-capitalization stocks may be subject to higher degrees of risk, their earnings may be less predictable, their prices more volatile, and their liquidity less than that of large-capitalization or more established companies’ securities. An investment in bonds carries risk. If interest rates rise, prices usually decline. The longer a bond’s maturity, the greater the impact a change in interest rates can have on its price. If you do not hold a bond until maturity, you may experience a gain or loss when you sell. Bonds also carry the risk of default, which is the risk that the issuer is unable to make further income and principal payments. Other risks, including inflation risk, call risk, and pre-payment risk, also apply. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to govern- mental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Derivatives transactions, including those entered into for hedging purposes, may reduce returns or increase volatility, perhaps substantially. Forward currency contracts, and other derivatives investments are subject to the risk of default by the counterparty, can be illiquid and are subject to many of the risks of, and can be highly sensi- tive to changes in the value of, the related currency or other reference asset. As such, a small investment could have a potentially large impact on performance. Use of derivatives transactions, even if entered into for hedging purposes, may cause losses greater than if an account had not engaged in such transactions. Securities and instruments of infrastructure companies are more susceptible to adverse economic or regulatory occurrences affecting their industries. Infrastructure companies may be subject to a variety of factors that may adversely affect their business or operations, including additional costs, competition, regulatory implications, and certain other factors. The performance of investments in real estate and real estate related securities may be determined to a great extent by the current status of the real estate industry in general, or by other fac- tors (such as interest rates and the availability of loan capital) that may affect the real estate industry, even if other industries would not be so affected. The risks related to investments in realty companies include, but are not limited to: adverse changes in general economic and local market conditions; adverse developments in employment; changes in supply or demand for similar or competing properties; unfavorable changes in applicable taxes, governmental regulations, and interest rates; operating or development expenses; and lack of available financing. An investment in REITs may be affected or lost due in part to the fluctuation with the value of the underlying properties of the investment. An investment in REITs may be affected or lost if the REIT fails to com- ply with applicable laws and regulations, including tax regulations, specifically, the failure to qualify as a REIT under the Internal Revenue Code of 1986, as amended. This document is provided by Lazard Asset Management LLC or its affiliates (“Lazard”) for informational purposes only. 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