INVESTMENT OUTLOOK Q3 2021

Keeping an Eye on Inflation as Economies Reopen TAB LE OF CONTENTS

3 22 INTRODUCTION GLOBAL FIXED VICTOR ZHANG INCOME Chief Investment Officer JOHN LOVITO American Century Investments Co-Chief Investment Officer Global Fixed Income

5 CHARLES TAN KEY TAKEAWAYS Co-Chief Investment Officer Global Fixed Income

7 25 GLOBAL MACROECONOMIC MULTI-ASSET OUTLOOK STRATEGIES RICH WEISS Chief Investment Officer 12 Multi-Asset Strategies U.S. EQUITY PERUVEMBA SATISH, CFA 30 Chief Investment Officer ESG TRENDS Disciplined Equity

KEVIN TONEY, CFA Chief Investment Officer Global Value Equity GREG WOODHAMS, CFA Co-Chief Investment Officer Global Growth Equity

18 GLOBAL EQUITY KEITH CREVELING, CFA Co-Chief Investment Officer Global Growth Equity

2 INTRODUCTION Staying Mindful of Complacency

When we think the wind is at our backs, it’s easy to overlook the risks around us. This tendency is attributable to recency bias, a well-researched behavioral inclination to place greater importance on our most recent experiences. VICTOR ZHANG Chief Investment Officer From an investment perspective, recency bias can cause underconfidence or American Century Investments overconfidence in response to the most recent market events. Think about how far we’ve come since the market hit its pandemic lows. Economies are reopening as vaccine distribution gains momentum.

Global economic and earnings growth are picking up steam thanks to aggressive fiscal stimulus, accommodative monetary policy and pent-up demand. It’s easy to see why the Conference Board’s most recent survey of multinational CEOs indicated the highest level of CEO confidence in the survey’s 44-year history.1

Are We Underestimating the Risks Demand-driven inflation is possible given the high level We’re Taking? of federal spending while the Fed is holding rates near zero. We’re also seeing rising housing prices due to high We think there’s a lot to be optimistic about, but it’s demand coupled with a tight supply of existing homes sensible to ask whether this confidence has led us to and rising costs for new construction. And, with labor underappreciate emerging risks in the market. As we’ve shortages in some sectors of the economy, wage inflation learned yet again over the last 18 months, markets are could be a threat if employers hike pay to attract workers. dynamic and economic conditions can change quickly.

That’s why we think it’s vital to challenge assumptions. We’re Monitoring Possible Blind Spots As you’ll read in this issue of Investment Outlook, our About Inflation Assumptions chief investment officers generally agree with the Federal Reserve’s view that the current uptick in inflation is We’ve also considered the possibility the Fed is transitory. Even so, however, our entire investment team underestimating the recovery in the “informal” job market. recently met to discuss the downside of being wrong. The Bureau of Labor Statistics estimates this segment of

1“Measure of CEO Confidence™,” The Conference Board, May 19, 2021.

3 INTRODUCTION

the market, which operates on a cash basis, accounts for later this year or in early 2022. Still, we see the risk of 17% of the U.S. population. These jobs produce income higher inflation and interest rates as potential sources that puts upward pressure on inflation, but payroll data of volatility. And, after a year of stock prices rising in doesn’t reflect them. anticipation of a profit recovery, investor expectations are high, leaving companies with little room to disappoint. While this potential blind spot doesn’t change our view, it does remind us of the risk surrounding inflation Committing to a long-term strategy to meet your financial assumptions. Investors could be set up for an unpleasant goals helps overcome recency bias. Has your portfolio been rebalanced after the terrific rise in equities? policy surprise if these assumptions are wrong and Should you consider deploying inflation-protected fixed the Fed must move faster and more aggressively than income strategies or short duration multi-sector fixed expected to cool down an overheated economy. income strategies?

We’re Optimistic About Economic The best time to adjust portfolios is when markets are calm. We think it’s a good time to reevaluate portfolios Recovery but Expect Volatility before volatility returns.

Overall, the global economy is healthy and corporate earnings are on a trajectory to reach pre-pandemic levels Thank you for investing with us.

4 KEY TAKEAWAYS

The global economy is healthy, and profits are rebounding, but we caution against underestimating market risk. Volatility could spike if investors’ assumptions about inflation, interest rates and corporate earnings are wrong.

Las Vegas reopened at 100% capacity on June 1, 2021, another indicator of the rebound that’s creating opportunities in leisure travel and other industries the pandemic hit hardest.

5 KEY TAKEAWAYS

The U.S. is leading the recovery in developed markets as easing coronavirus restrictions unleash pent-up consumer demand. The outlook for emerging markets is improving as vaccination rates climb.

We agree with the U.S. Federal Reserve’s (Fed’s) view that much of the upward pressure on inflation is transitory due to higher demand and disrupted supply chains. But we believe services inflation will continue upward and keep inflation elevated.

Our outlook for emerging markets sovereign debt, U.S. securitized and municipal bonds is positive. We’re more selective around U.S. credit, U.S. government and European debt.

Following the broad cyclical upswing, we expect the market to become more discerning, making company- specific data a more important performance driver.

We view the global shortage of semiconductors that’s disrupting numerous industries as temporary. Longer- term, we believe governmental support for expanding production capacity is beneficial for companies that make chip manufacturing equipment.

6 GLOBAL MACROECONOMIC OUTLOOK GLOBAL MACROECONOMIC OUTLOOK

GLOBAL ECONOMY Growth remains on the mend

U.S. Recovery Gathers Strength We expect U.S. economic growth to gain momentum in 2021, as the easing of coronavirus restrictions unleashes pent-up consumer demand. However, the resumption of normal economic activity may face a bumpy road. Supply chain disruptions are driving prices “ higher, while the federal government’s enhanced unemployment benefits are contributing to labor market shortages. The resumption of normal economy Europe Slower to Rebound activity may face The European economy is slowly recovering from the effects of COVID-19. Improving vaccine availability and the lifting of a bumpy road due lockdowns—along with significant fiscal and monetary support— to the tight labor should help restore economic growth to the region. In the U.K., market and supply where vaccination rates have exceeded those in Continental Europe, we expect growth to return to pre-pandemic levels by chain disruptions. year-end. It struggled with an early 2021 surge in virus cases and subsequent lockdowns but is now reopening its economy.

U.S. Demand Boosts China’s Prospects The recovering U.S. economy continues to drive demand for goods made in China. Factory shutdowns in other export-driven emerging markets countries plagued with COVID-19 outbreaks have also aided China’s manufacturing sector. While rising raw materials costs and supply bottlenecks are creating headwinds for China, we expect the nation’s export-heavy economy to exhibit strong growth this year. Accommodative fiscal policy should also help.

8 GLOBAL MACROECONOMIC OUTLOOK

INFLATION Inflation rising in developed markets

U.S. Shelter Costs Pressure Inflation Rate Supply chain shortages recently drove the inflation rate to multiyear highs. The Fed believes most price increases are transitory, and we generally agree. However, we believe services inflation, particularly rents, will continue to climb and keep the inflation rate elevated. Massive government debt, a weaker U.S. dollar and onshoring trends among U.S. businesses, along with the Fed’s average inflation targeting, will also likely keep inflation elevated.

Prices Edging Higher in Europe Outside the U.S., inflation remains weaker but is also trending upward. Expanding vaccine availability and the corresponding return of economic activity is gradually forcing eurozone and U.K. inflation higher. Base effects from last year’s shutdowns along with temporary factors, including supply bottlenecks and rising raw materials prices, are also to blame. Similar to the Fed’s strategy, eurozone and U.K. central bankers remain content to let inflation rise for the time being.

Inflation Easing in Emerging Markets Although consumer prices have risen in emerging markets, inflation momentum is subsiding in most countries. In general, emerging markets inflation remains below average and sharply lower than the peaks recorded in recent years. We expect inflation to remain below central bank targets in several countries, including China, Malaysia, India, Colombia and South Africa.

9 GLOBAL MACROECONOMIC OUTLOOK

MONETARY POLICY Central banks still supportive

Fed Reluctant to Alter Policy Despite improving economic growth and rising inflation, we expect the Fed to remain accommodative. Policymakers warn the economic recovery is far from complete, reinforcing the central bank’s commitment to low rates and a steady level of bond buying. Labor market challenges remain a concern. This factor, coupled with the Fed’s desire to raise inflation expectations, should ensure monetary policy remains supportive well into 2022.

European, U.K. Programs Continue European Central Bank (ECB) officials recently committed to maintaining their bond purchase program—and the resulting favorable financing terms—at least through March 2022. Despite rising interest rates and inflation, economic growth remains slow, underscoring the need for continued ECB support. Conversely, the Bank of England is tapering its bond purchases and remains on track to end its emergency support program later this year. But the central bank has no plans to lift interest rates until inflation is sustainable at 2%.

China Maintains Rate Cuts People’s Bank of China officials remain committed to the monetary stimulus they launched in early 2020, including two interest rate cuts. Risks to China’s growth, including onshoring trends, supply chain disruptions and weak domestic demand, should keep China’s corporate and household interest rates unchanged in the near term.

10 GLOBAL MACROECONOMIC OUTLOOK

INTEREST RATES Most rates slowly rising

U.S. Rates to Settle in a Range We believe economic gains combined with aggressive fiscal and monetary support will continue to push Treasury yields higher and steepen the yield curve. Expectations for higher inflation also should lift longer-maturity rates. We expect the 10-year “ Treasury yield to settle in a range of approximately 1.75% to 2.00% over the next several months. Meanwhile, the Fed’s We expect rates in near-zero monetary policy should keep shorter-maturity yields developed anchored at ultralow levels. markets to inch Most European Yields Turn Positive higher but remain Economic gains and improving outlooks are driving yields higher in relatively stable. Europe. Government bond yields in all European countries except Germany have returned to positive territory. U.K. rates are also rising, while rates in Japan are hovering slightly above the central bank’s 0% target. We expect rates in developed markets to inch modestly higher but remain relatively stable through 2021.

Rates Higher in Emerging Markets Government bond yields in most EM countries are notably higher than in developed markets. In our view, countries with low yields remain the most vulnerable to rising U.S. Treasury yields. Accordingly, we prefer countries where real rates (rates adjusted for inflation) are high or expected to increase. We favor government bonds in China, which offer additional yield versus U.S. Treasuries but are closely correlated with yield movements in the U.S.

11 U.S. EQUITY U.S. EQUITY

OUR TECHNOLOGY GREG WOODHAMS, CFA Co-Chief Investment Officer, OUTLOOK Global Growth Equity REMAINS POSITIVE

Semiconductor Supply Disruptions Are Temporary We believe higher inflationary trends will remain a risk for the next several months. In our view, however, upward pressure on inflation is transitory and related to supply chain bottlenecks that we think will resolve. For example, we see the disruption in semiconductor manufacturing as a short-term issue that caused automobile prices to spike earlier this year. We are already seeing a rebound in chip manufacturing and distribution that should allow automobile production rates to return to normal levels.

Government Support Reflects Strategic Importance of Chip Manufacturing The U.S. and China consider expanded chip-making capacity an economic and military strategic priority. But both nations lag Taiwan and South Korea in the ability to develop the most advanced semiconductor chips. President Joe Biden’s infrastructure plan and Beijing’s Made in China 2025 initiative call for bolstering semiconductor manufacturing through significant investments in engineering and production capacity. We believe companies that supply chip manufacturing equipment should be long-term beneficiaries given market demand for semiconductors and sovereign support for their production.

Long-Term Trends Remain Intact After outperforming for several years, tech stocks have lagged the broader stock market since the November 2020 vaccine announcements. This development heralded the opening of the global economy and set the stage for a broader swath of companies to experience earnings growth. Despite recent relative underperformance, we believe the earnings profile of most tech stocks remains robust thanks to long-lived investment themes such as cloud computing, advances in semiconductor manufacturing and 5G networks.

The easiest year-over-year “reopening” comparisons for individual companies’ key financial metrics will soon be behind us. As a result, we believe the market will return its focus to stock-specific dynamics.

13 U.S. EQUITY

ECONOMIC REOPENING TRENDS PROVIDE TAI LWI N DS KEVIN TONEY, CFA Chief Investment Officer, FOR UNDERAPPRECIATED Global Value Equity STOCKS

Leisure Travel Takes Off Shares of cruise companies, airlines, hotels and casinos plummeted in 2020 as many feared worst- case scenarios for the travel industry. Even Warren Buffett—who espouses greediness when others are fearful—exited his positions in airlines. Though business travel continues to lag, leisure travel trends are turning positive as vaccine rollouts have encouraged people to book long-delayed vacations.

Despite the upturn, leisure-related businesses may take a couple of years to fully recover. Meanwhile, we expect travel volumes and the stocks of related companies to be volatile. We think low-cost airlines that primarily fly domestic routes could recover more quickly than their global counterparts. Coupled with a strong balance sheet, Southwest Airlines, for example, could benefit from focusing on leisure travel and U.S. routes.

FIGURE 1: Sharp Uptick in Airline Passengers May Bode Well for Travel Businesses

Vaccine Rollouts Have Spurred Travel

2019 TSA Checkpoint Traffic 2019 TSA Checkpoint Traffic 2019 TSA Checkpoint Traffic

3,500,000

3,000,000

2,500,000

2,000,000

1,500,000

1,000,000

500,000

0

June July August September

October November December January February March April May June

Data as of 5/31/2021. Source:TSA. References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and are subject to change without notice.

14 U.S. EQUITY

Automakers Strive for Inventory Discipline Low auto inventories, caused by pandemic-related factory closures, semiconductor shortages and high buyer demand, have elevated profits for car companies and their dealerships. Automakers are taking steps to preserve those positive margin and profits trends. GM, Ford Toyota and other manufacturers are considering business models that lower inventory levels at dealers to maintain margins and profitability.

Inventory discipline is the key. For example, GM, borrowing an ecommerce strategy, intends to set up regional distribution facilities for its Bolt electric vehicle.1 These “inventory pools” keep dealers from overstocking and paying for additional floor space while automakers reduce customer wait times for desired configurations.

Millennials Are Forming Households at a Steady Pace There are conflicting views about whether housing is a bubble about to burst. Home prices have spiked, mortgage rates have risen from historic lows and the supply of homes is anemic. On the other hand, demographic trends indicate that because their incomes are rising, millennials will provide a steady demand for housing for several years.

Builders are doing their best to add new supply, and our analysis indicates more existing homes will come to market as the year unfolds. We think the stocks of many companies in housing-related industries are fully valued now but could become underappreciated again. If that happens, we think select homebuilders, home improvement retailers and building products companies could be attractive.2 3

1Kyle Hyatt, “GM considering regional Bolt EV stock, taking inspiration from e-commerce,” Road Show, March 22, 2021. 2Ana Hernandez Kent and Lowell R. Ricketts, “Millennials Are Catching Up in Terms of Generational Wealth,” St. Louis Fed on the Economy Blog, March 30, 2021. 3Ayelet Sheffey, “3 reasons why the housing shortage will last for years, Goldman Sachs says,” Business Insider, May 19, 2021.

15 U.S. EQUITY

EXPECT THE MARKET TO BE MORE DISCRIMINATING AS THE PERUVEMBA SATISH, CFA Chief Investment Officer, GROWTH RATE MODERATES Disciplined Equity

Business Fundamentals to Take Prominence After a year or more in which style rotations dominated market returns from growth to value, we anticipate a renewed market focus on fundamental business strength for the remainder of 2021 and into 2022. We think this focus on individual business characteristics should provide a tailwind to moderately valued businesses that show stable fundamentals and some moderately expensive firms that demonstrate tangible near-term growth.

FIGURE 2: Profit Expectations Are Approaching Pre-Pandemic Levels. Can Businesses Deliver?

Stoxx 600 & S&P 500 Stoxx 600 (LHS) S&P 500 (RHS) EPS

32 255

30 235

215 28

195 26

175 24 155 22 135

20 115

18 95

16 75

14 55 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

3/31/2021; estimated from 2021 forward. Source: Bloomberg.

16 U.S. EQUITY

Business Quality as a Key Value Metric

We think of a company’s quality as two dimensional—the health of its balance sheet health and durability of its earnings growth. Earnings growth that reflects enduring competitive advantages is superior to growth financed through debt. During the pandemic, there was less focus on quality as a driver of stock returns. But the COVID vaccine, global economic reopening and stimulus were a tide that “lifted all boats,” arguably resetting the corporate earnings landscape. As a result, we expect the market to be more discriminating going forward, rewarding tangible fundamental growth.

The Question Isn’t Growth Versus Value, It’s Profitable Versus Unprofitable We expect rising interest rates and inflation to have greater impacts for many expensive growth stocks. As a result, we believe the market will begin to favor businesses that can demonstrate tangible short-term growth and penalize businesses that lack clear lines of sight to profitability.

Think of it like this slight rephrasing of the proverb, “A bird in the hand is worth (more) than two in the bush.” Cash flows are now worth more than cash flows in the future, and that’s especially true if inflation and interest rates rise. So, rather than focusing on style or sector dominating performance potential going forward, we believe a focus on near-term profitability is key to uncovering investment opportunities. And given concerns about inflation, we’ll look for margin sustainability and pricing power as key elements in our security selection process.

17 GLOBAL EQUITY GLOBAL EQUITY

EVOLVING GLOBAL MARKET CONDITIONS CREATE KEITH CREVELING, CFA Co-Chief Investment Officer, INVESTMENT OPPORTUNITIES Global Growth Equity

Higher Inflation Expectations May Weigh on Company Earnings Vaccination rates continue to accelerate across developed markets. As vaccination rates in the U.S., U.K. and Europe approach saturation, we expect markets to reopen more aggressively. The resulting uptick in economic activity, supply constraints along with government stimulus, and accommodative monetary policy should put additional upward pressure on inflation and yields. While we don’t make specific inflation or interest rate predictions, we note that, directionally, higher inflation and yield expectations will likely pressure corporate earnings.

Higher materials costs and wage pressures also increase general operating expenses, which we expect to have a material effect on corporate earnings growth in the near term. We expect companies with the ability to raise prices to be in a much better position to pass on additional costs to end clients and sustain earnings growth.

Market Rotation Should Continue as Pandemic Eases As economies reopen more fully, we anticipate the rotation to sectors hit hardest during the pandemic to continue. This has helped benefit cyclical companies with exposure to economic expansion and value-oriented companies. Recent strong performers, such as U.S.-based large-cap tech companies with little or no earnings, are already feeling the pinch as the value of future earnings streams weakens in a rising-rate environment.

Rather than concentrate on traditional definitions of growth or value, we look for companies exhibiting inflections in earnings growth rates. Consequently, we are finding opportunities in both traditional growth and value stocks. Our portfolios contain a balance of companies benefiting from the trends borne out of behavioral changes during the pandemic as well as beneficiaries of economic expansion.

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Existing Secular Trends Benefit Well-Positioned Companies The stay-at-home environment accelerated secular trends, such as digitalization, e-commerce and 5G network rollout. We expect the demand for digital services, cloud-based computing and more robust online platforms to continue even as mobility restrictions ease. Despite the noted pressure on large-cap technology company earnings, we are finding opportunities in firms positioned to benefit from these ongoing trends.

EM OUTLOOK IS IMPROVING

Reasons for Optimism Remain Despite Recent Hurdles We believe the emerging markets (EM) outlook is more positive despite the headwinds of higher inflation expectations and resurgence of COVID-19 cases in key markets, including India and Brazil. Vaccination rates across emerging markets, while still lagging developed markets, are accelerating. But many countries may not reach the milestone of majority vaccination until late 2021 or early 2022.

Conditions have improved in India after a new coronavirus variant caused a recent spike. Caseloads have moderated, however, and many states have now partially eased restrictions. Thus, we expect the slowdown in economic activity to be transitory. Brazil, one of the hardest-hit countries, has increased its vaccination program with new supply coming online and hopes to have its entire population vaccinated by year-end.

Continuing uncertainties around COVID-19 are weighing on emerging markets, but we believe they may delay, rather than reverse, economic recovery in this asset class.

Rising Yields and Inflation Expectations Weigh on Emerging Markets, but Dollar Weakness Helps Improvement in global economic activity and positive revisions to global growth prospects have shifted many investors’ focus from growth to inflation. Higher rates are largely a function of earlier- and stronger-than-expected economic recovery. But in times of elevated rate volatility, EM assets tend to struggle when the moves happen fast (as we’ve seen recently).

20 GLOBAL EQUITY

While investors may question the Fed’s commitment to keeping inflation in check, we expect the central bank to maintain its patient position. Staying on that course, combined with ongoing U.S. government stimulus and support, should keep pressure on the U.S. dollar. A weaker dollar has shown to support EM economies and equities.

Global Reopening Benefits Emerging Markets Despite the emergence of new waves of COVID-19 cases in some countries, the gradual improvement in the global health crisis has strengthened economic recovery. However, we don’t expect the pace of recovery to be uniform across all regions or countries. The strong rotation into companies with greater sensitivity to economic growth should continue as global economic activity approaches normalization.

Banks and basic materials could see high earnings momentum. Additional potential beneficiaries include automakers, industrials and energy. We expect global economic expansion to support EM growth as stronger demand drives higher EM exports. Export demand often serves as a leading indicator of earnings growth, and economies linked to global supply chains should continue to outperform.

FIGURE 3 A Weaker U.S. Dollar Supports Emerging Markets Equities

U.S. Dollar Index MSCI Emerging Markets Index

25% 70%

60% 20% MSCI

50% 15% Emerging

Return 40% Yr -

1 10% 30%

5% 20% Markets Index

10% 0% Dollar 1

0% - Yr

U.S. -5% Return -10%

-10% -20%

-15% -30%

2013 2014 2015 2016 2017 2017 2019 2020

Data from 12/31/2013 to 3/31/2021. Returns in USD. Source: Bloomberg, FactSet.

21 GLOBAL FIXED INCOME GLOBAL FIXED INCOME

JOHN LOVITO CHARLES TAN Co-Chief Investment Officer Co-Chief Investment Officer Global Fixed Income Global Fixed Income

p POSITIVE ■ NEUTRAL q NEGATIVE ● SELECTIVE

U.S. CREDIT l We favor sectors and companies with stable cash flows, including securities issued by utilities, real estate investment trusts (REITs), finance companies and life insurance firms. We are also focusing on companies benefiting from the resumption of normal economic activity, including airlines and hotels, and remain active in the robust new- issues market. Investment-grade credit spreads remain tight, but we are finding value among lower-credit-quality securities, particularly those with BBB credit ratings. We’re also finding opportunities among “rising stars” in the BB segment. Improving economic growth, supportive Fed policy and yield advantages versus non- U.S. bonds remain positive influences on U.S. corporates. However, at this point in the credit cycle, event risk for issuers, including leveraged buyouts, is rising across many industrials sectors. Our research team is actively working on avoiding such situations.

U.S. p We continue to favor collateralized loan obligations (CLOs) and non-agency SECURITIZED collateralized mortgage obligations (CMOs). We believe these securities offer higher quality structures and yield advantages relative to agency mortgages, which appear richly valued. In addition, given positive trends in the U.S. housing market (low mortgage rates, favorable supply/demand backdrop), we believe securities backed by residential housing offer value.

U.S. l Improving economic growth, rising inflation and aggressive fiscal and monetary GOVERNMENT support should push Treasury yields higher and steepen the yield curve. We expect the benchmark 10-year Treasury yield to settle near 1.75% to 2.00% over the next few months. In this environment, we are underweighting nominal Treasuries in favor of Treasury Inflation-Protected Securities (TIPS). In addition to improving growth, we expect soaring U.S. debt, a weaker U.S. dollar, supply/demand imbalances and corporate onshoring trends to drive inflation higher, highlighting the value in TIPS.

23 GLOBAL FIXED INCOME

p POSITIVE ■ NEUTRAL q NEGATIVE ● SELECTIVE

U.S. MUNICIPAL p Biden administration proposals for higher taxes and spending should bode well for tax-advantaged municipal bonds (munis). Infrastructure spending should directly benefit municipalities across the country. We believe the higher corporate tax rates to pay for those projects likely would boost demand for munis from corporations looking to ease their tax burdens. Meanwhile, the massive fiscal spending already working its way through the economy, including direct federal aid to state and local governments, is providing support.

EUROPEAN l Improving growth prospects are pushing government bond yields higher, prompting DEBT us to maintain an underweight position in core European government bonds. We favor exposure to peripheral European sovereigns, which should benefit from sustained European Central Bank and European Union aid. Additionally, we are holding an overweight position in European inflation-linked securities amid mounting global pricing pressures. We continue to have a neutral position in European credit.

EMERGING p Within emerging markets, we favor currencies and local rates over credit. We believe MARKETS EM currencies can benefit from rising commodity prices, rising real rates and SOVEREIGN reasonable valuations. We also note that EM current accounts are close to record levels, while aggressive fiscal and monetary stimulus in the U.S. argues for dollar deprecation. In local rates, we believe some caution is warranted following the recent rally, but continue to see value in South Africa, China and Mexico.

EMERGING n We have a small position in EM corporates, where we can gain exposure to positive MARKETS sovereign fundamentals at more attractive valuations. Our largest exposures are in CORPORATE Mexico and Brazil, where sovereign spreads are tight.

24 MULTI-ASSET STRATEGIES MULTI-ASSET STRATEGIES

Inflation, Inflation, Inflation—The Three Most Important Words in Financial Markets Right Now RICH WEISS The speed of the U.S. economic recovery is creating its own challenges and Chief Investment Officer opportunities. Let’s start with inflation, the topic du jour. Our base case is that Multi-Asset Strategies the rapid increase in inflation is transitory, a product of the dramatic rebound in demand for materials, goods and services at a time when supply chains simply aren’t fully up and running.

Conversely, we also see the comparatively high unemployment rate and the continuation of long-term trends like an aging population, automation, digitization and the “Amazon.com effect” combining to limit inflation over time.

But one of the biggest risks to financial markets is that inflation turns out to be “stickier” than we expect. Another few trillion dollars in federal spending when the Fed is holding interest rates near zero holds the possibility of demand-driven inflation. Or, consider the reports of labor shortages in certain sectors of the economy. If these became more widespread, then presumably employers would start to raise wages in earnest and heighten the threat of persistent wage inflation. Of course, as of this writing, unemployment is still well above pre-COVID levels and it’s hard to see signs of large-scale wage increases.

No Sign of Housing Shortage Easing Another potential complication is the housing shortage across the U.S. With interest rates still low by historical standards, millennials entering their prime home-buying years and the economy emerging from lockdown, there’s tremendous pent-up demand for housing. Very strong demand and limited supply mean we just saw the fastest year-over-year increase in home prices, reaching all-time highs in April.

How tight is supply? Freddie Mac estimates the U.S. needs 3.8 million additional new homes to meet demand. For some perspective, the last time there were 1 million new homes built in the U.S. was before the 2008- 2009 financial crisis. What’s more, reported construction labor shortages and record-high lumber prices mean it’s unlikely new home builders will come anywhere close to that number again this year. To be clear, this isn’t

26 MULTI-ASSET STRATEGIES

the 2007-2008 housing bubble—there are fundamental reasons for the increase, and the credit quality of homebuyers is much higher now than during the runup to the financial crisis.

Opportunities for Small Cap and Value Investors But the same economic fundamentals creating these risks also present significant opportunities. For example, we believe economically sensitive value stocks look very appealing relative to growth-oriented stocks. Consider a classic cyclical value industry like banks—more economic activity means more loans, more transactions and higher borrower credit quality, all else equal. Add the likelihood of higher interest rates and a steeper yield curve, all of which benefit banks’ net interest income. In short, we believe the economic recovery that’s driving the rotation from growth to value still has plenty of room to run.

Similarly, small-cap stocks look appealing relative to large-cap equities because small-company stocks tend to be more domestically focused and more economically sensitive. Consider that large companies may operate in many geographies, products and markets, making them typically more resilient during a downturn, but relatively less attractive at a time when the U.S. is recovering much faster than the rest of the world.

Finally, in fixed-income markets, we believe municipal bonds, which offer federal and state tax-free income, remain attractive. Munis have performed very well in recent months as investors look ahead to potentially higher taxes under the Biden administration. In addition, the economic rebound helps muni credit quality, while provisions in the proposed infrastructure plan also benefit state and local governments.

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ASSET CLASS

Reacting isn’t a good investment policy, and overreacting is even worse. Ideally, investors prepare for and build portfolios to withstand interest rate volatility over time. Similarly, investors who incorporate a diversified, strategic inflation hedge into their long-term asset allocation are likely better off than those reacting to U.S. Fixed U.S. Equity an inflation spike. Add it all up, and we see no reason to move off the core Income & Cash bond position that’s a key part of our long-term, strategic asset allocation.

EQUITY REGION

The speed and success of vaccine rollouts put the U.S. at the forefront of the economic and earnings recovery. As a result, we maintain our underweight to non-U.S. stocks relative to U.S. markets. This reflects our conviction that relative economic growth differentials, among other macroeconomic, valuation and Non-U.S. technical/momentum factors favor U.S. equities over non-U.S. equities in the U.S. Developed Markets near term.

The fundamental economic drivers favor the U.S., even if only in the short run. We believe in the long-term attractiveness and growth opportunities EM equities present, but the pandemic is still an unfolding crisis in many countries. Beyond this fundamental view, our forecast retains its negative outlook on EM U.S. Emerging equities in the short term as momentum in currencies, stocks and credits Markets remain strongly in favor of U.S. stocks.

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U.S. EQUITY SIZE & STYLE

Last quarter, we said we were carefully monitoring this position in anticipation of a potential move toward small versus large. Now, we believe that move is justified. We prefer small-cap stocks over large based on several factors. These include stronger U.S. growth relative to non-U.S. economies (small stocks have greater exposure to domestic growth); still relatively low interest rates (supports future Large Cap Small Cap growth); narrow/tight corporate bond spreads (along with interest rates reflect low funding costs); and attractive relative valuations.

Our multi-component forecast registered its highest reading for value stocks in the past 20 years. The continued economic recovery, rising consume sentiment and indications of higher interest rates all favor sectors like financials, materials and industrials over tech and health care in the near term. It bears repeating that we are not moving completely out of growth in favor of value, but overweighting and underweighting asset classes relative to our long- Growth Value term, strategic targets.

FIXED INCOME

The rapid economic rebound, higher interest rates and concerns about inflation weigh on bond markets across the developed world. Lower-yielding, more interest- rate sensitive government bonds are less attractive than higher-yielding corporate bonds, which should benefit from the upturn in growth. Even within corporates, however, the recovery’s benefits are uneven, so we argue for a very selective approach. The notable exception is the U.S. municipal bond market, which looks U.S. Non-U.S. attractive as federal taxes and spending rise.

ALTERNATIVES

We’ve been arguing for a year or more against the idea of a single, monolithic market for real estate investment trusts (REITs), advocating investors take a more nuanced view of the sector. That’s never been truer than now, as the economic rebound and return to work and retail after pandemic-induced lockdowns mean the demand picture for residential and commercial space is changing rapidly. So, for now we remain neutral, as the sector is less attractive in relative valuation terms REITs Core Assets after a big rebound, but we continue to watch this one closely.

29 ESG TRENDS ESG TRENDS

Digital Acceleration: Fasten Your Cybersecurity Seat Belt As the situation with the pandemic continues to improve, businesses exposed to the stay-at-home digital economy remain attractive. We expect software, data centers, cloud-based and 5G networking companies to continue to thrive despite a pickup in demand in previously hard-hit sectors, notably consumer and cyclicals. However, pandemic-led “digitized” companies will likely face heightened data privacy and security risks. This would accelerate the shift in focus from “know your customer” (data collection and mining) to “protect your customer” (data security) that we identified last year.1

Cybersecurity and associated privacy issues should continue growing in importance for investors, from both consumers’ and regulators’ perspectives, as they grow wary of “Big Tech Watching.”

Resource Intensity of the Clean Transition: Balancing Clean Energy and ESG Risks We believe global asset owners should strike a balance between accelerating the clean energy transition and managing increasing risks. Risks include human rights/labor violations and negative environmental consequences of using lower carbon enabling metals (e.g., copper, lithium, cobalt and nickel).

Economic decarbonization is spurring growth in electric vehicles (EVs) and renewable energy. The production of minerals such as graphite, lithium and cobalt could increase by nearly 500% by 2050.2 Yet, concerns have surfaced about the negative impact of acquiring these materials that enable the low- carbon technologies we need to decarbonize. The authors of a World Bank report said, “Simply put, a green technology future is materially intensive and, if not properly managed, could bely the efforts and policies of supplying countries to meet their objectives of meeting climate and related Sustainable Development Goals.”3

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Lithium, a key component in the lithium-ion battery, is water intensive. Cobalt has been associated with child labor and human rights issues in the Democratic Republic of Congo. Efforts to use less cobalt have led to using more nickel, which has been associated with negative environmental issues, including toxic byproducts. In this context, we believe investors will focus on alternative supply sources for the minerals critical to building renewable infrastructure without dialing back ESG risks.

New research shows polymetallic rocks found on the deep-ocean floor can supply the clean energy value chain for EVs and power storage with far less impact on the climate than mining the same metals from the land.4

1“ESG Outlook: Five Key Trends Are Driving Momentum in 2020,” American Century Investments, March 2020. https://institutional.americancentury.com/content/institutional/en/insights/topic/esg-sustainable/esg-outlook.html.

2 Kirsten Hund, et al., “Minerals for Climate Action: The Mineral Intensity of the Clean Energy Transition,” World Bank, 2020. http://pubdocs.worldbank.org/en/961711588875536384/Minerals-for-Climate-Action-The-Mineral-Intensity-of-the-Clean-Energy-Transition.pdf.

3 Daniele La Porta Arrobas, et al., “The Growing Role of Minerals and Metals for a Low Carbon Future,” World Bank, June 30, 2017. https://documents.worldbank.org/en/publication/documents-reports/documentdetail/207371500386458722/the-growing-role-of-minerals-and- metals-for-a-low-carbon-future.

4 Daina Paulikas, et al., “Life cycle climate change impacts of producing battery metals from land ores versus deep-sea polymetallic nodules,” Journal of Cleaner Production 275 (December 2020): 123822. https://doi.org/10.1016/j.jclepro.2020.123822

32 GLOSSARY

BBB credit rating. Securities and issuers rated AAA to BBB are considered/perceived “investment-grade”; those rated below BBB are considered/perceived non-investment-grade or more speculative. Breakeven inflation rate. The breakeven inflation rate is the difference between the nominal yield (usually the market yield, which includes an inflation premium) on a fixed- income investment and the real yield (with no inflation premium) on an inflation-linked investment of similar maturity and credit quality. Central bank. The entity responsible for oversight of a nation’s monetary system, including policies and interest rates. Collateralized loan obligations (CLOs). A form of securitized debt (defined below), typically backed by pools of corporate loans and their payments. Collateralized mortgage obligations (CMOs). A form of securitized debt derived from mortgage-backed securities. Commercial mortgage-backed securities (CMBS). Mortgage-backed securities (defined below) that represent ownership in pools of commercial real estate loans used to finance the construction and improvement of income-producing properties. Consumer Price Index (CPI). CPI is the most commonly used statistic to measure inflation in the U.S. economy. Sometimes referred to as headline CPI, it reflects price changes from the consumer’s perspective. It’s a U.S. government index derived from detailed consumer spending information. Corporate securities. Debt instruments issued by corporations, as distinct from those issued by governments, government agencies or municipalities. Credit quality. The letter ratings indicate the creditworthiness of the underlying bonds in the portfolio and generally range from AAA (highest) to D (lowest). Credit ratings. Credit ratings are measurements of quality assigned by a Credit Rating Agency (CRA) to issuers of certain types of debt obligations as well as the debt instruments themselves. Debt security. A debt instrument, including bonds, certificates of deposit or preferred stocks. Default. Failure of a debtor to make timely payments of interest and principal as they become due, or to meet some other provision of a bond indenture. Default rate. A credit quality measurement used in bond or other debt analysis, a default rate measures how often a bond (categorized by issuer, sector, credit rating, etc.) or other borrower has defaulted (missed or delayed scheduled payments) over a given period. Deflation. The opposite of inflation (see below); considered a highly undesirable economic outcome by economists and policymakers, it describes a decline in prices for goods, assets and services. Downside risk. An estimation of what an investor may stand to lose from a particular investment if market prices decline. Duration. A measure of the price sensitivity of a fixed-income investment to changes in interest rates. The longer the duration, the more a fixed-income investment’s price will change when interest rates change.

2 GLOSSARY

Eurozone. The eurozone represents member states that participate in the economic and monetary union (EMU) with the European Union (EU). Federal Reserve (Fed). The Fed is the U.S. central bank responsible for monetary policies affecting the U.S. financial system and the economy. Fundamentals. In the context of investment analysis, fundamentals are typically those factors used to determine economic value (growth, interest rates, inflation, employment) and/or financial value (income, expenses, assets, credit quality), as opposed to “technical” based more on market price (into which fundamental factors are considered to have been “priced in”), trend and volume factors (such as supply and demand), and momentum. General obligation (GO) bonds. Typically, these bonds are secured by the full faith and credit pledge of the issuer. GO bonds can be issued by states, counties, cities, towns and regional districts to fund a variety of public projects. Gross domestic product (GDP). A measure of the total economic output in goods and services for an economy. High-yield bonds. High-yield bonds are fixed-income securities with lower credit quality and lower credit ratings. High- yield securities are those rated below BBB- by Standard & Poor’s. Inflation. Inflation reflects rising prices for consumer goods and services, or equivalently, a declining value of money. Investment-grade corporate bond or credit. A debt security with a relatively low risk of default issued and sold by a corporation to investors. Mortgage-backed securities (MBS). A form of securitized debt that represents ownership in pools of mortgage loans and their payments. Municipal securities and bonds. Debt securities typically issued by or on behalf of U.S. state and local governments, their agencies or authorities to raise money public purposes. Municipal bonds have maturities of 10 years or longer. Non-agency commercial mortgage-backed securities (CMBS). MBS that represent ownership in pools of commercial real estate loans used to finance the construction and improvement of income-producing properties. Non-agency CMBS are not guaranteed by the U.S. government or a government-sponsored enterprise. Quality. Nationally recognized statistical rating organizations assign quality ratings to reflect forward-looking opinions on the creditworthiness of loan issuers. Quantitative easing. A policy in which a central bank buys government securities or other market securities to lower interest rates and increase the money supply. REITs. Real estate investment trusts (REITs) are securities that trade like stocks and invest in real estate through properties or mortgages.

2 GLOSSARY

S&P 500 Index ®. The S&P 500 Index is composed of 500 selected common stocks most of which are listed on the New York Stock Exchange. It is not an investment product available for purchase. Securitized debt. Securitized debt results from aggregating debt instruments into a pool of similar debts, then issuing new securities backed by the pool. Sovereign debt. Debt issued by the national government in a foreign currency. Also referred to as government debt. Spreads, credit spreads. Measured differences between two interest rates or yields compared with each other. Spreads typically are measured between fixed-income securities of the same credit quality, but different maturities (“maturity spreads”), or of the same maturity, but different credit quality (“credit spreads”). Spread sectors. These are typically non-Treasury securities that usually trade in fixed-income markets at higher yields than same-maturity U.S. Treasury securities. The yield difference between Treasuries and non-Treasuries is the “spread,” hence the name “spread sectors” for non-Treasuries. Stoxx 600 Index. The Stoxx 600 Index includes 600 components, representing large, mid, and small-capitalization companies from 17 countries in Europe. Treasury inflation-protected securities (TIPS). TIPS are a special type of U.S. Treasury security designed to address a fundamental, long-standing fixed-income market issue—that the fixed interest payments and principal values at maturity of most fixed-income securities don’t adjust for inflation. TIPS interest payments and principal values do. The adjustments include upward or downward changes to both principal and coupon interest based on inflation. Treasury note. A treasury note is a debt security issued by the U.S. government with a fixed interest rate and maturity ranging from one to 10 years. Treasury yield. The yield of a Treasury security (most often refers to U.S. Treasury securities issued by the U.S. government). Yield. The rate of return on bonds and other fixed-income securities. Yield curve. A line graph showing the yields of fixed-income securities from a single sector from a range of different maturities at a single point in time.

2 The opinions expressed are those of the chief investment officers and are no guarantee of the future performance of any American Century Investments portfolio. Statements regarding specific holdings represent personal views and compensation has not been received in connection with such views. The information is not intended as a personalized recommendation or fiduciary advice and should not be relied upon for investment, accounting, legal or tax advice. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice. Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results. A strategy or emphasis on environmental, social and governance factors (ESG) may limit the investment opportunities available to a portfolio. Therefore, the portfolio may underperform or perform differently than other portfolios that do have an ESG investment focus. A portfolio’s ESG investment focus may also result in the portfolio investing in securities or industry sectors that perform differently or maintain a different risk profile than the market generally or compared to underlying holdings that are not screened for ESG standards. Sustainable Development Goals (SDGs) are a collection of 17 global goals set by the United Nations General Assembly. They were developed by a global team of industry and government leaders and adopted by all 193 member states. The SDGs include 17 goals and 169 attendant targets aimed at solving some of the world’s most pressing problems by 2030. The goals include eradicating poverty, providing environmental resources and achieving gender and income equality. International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks. Historically, small-and mid-cap stocks have been more volatile than the stocks of larger, more established companies. Diversification does not assure a profit, nor does it protect against loss of principal. Generally, as interest rates rise, bond values will decline. The opposite is true when interest rates decline.

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