U.S. Liquidity Relative Value (S&P 500 Overlay)

Investment Objective

The U.S. Liquidity Relative Value (S&P 500 Overlay) Strategy is an institutional investment strategy that seeks to outperform the broad U.S. equity market over the long term, using a U.S. fixed income long/short relative value strategy.¹

Investment Philosophy

The U.S. Liquidity Relative Value (S&P 500 Overlay) Strategy typically invests 80% of assets in the U.S. Liquidity Relative Value Strategy (20% of assets are held in cash for margin calls), with a 100% beta overlay of S&P 500 futures. This achieves a beta of 1.0 to the S&P 500 Index. We expect this approach to achieve significant return enhancement over the S&P 500 Total Return Index, with higher information ratio and excess returns than top ranked active equity managers.

In times of very low market volatility, the propensity for relative value distortions to arise could tend to be lower, and therefore the resulting alpha could be lower. Conversely, in times of extreme market volatility, particularly when accompanied by overall illiquidity and deleveraging, this Relative Value strategy could underperform cash.

PGIM expects the Strategy to outperform during periods in which there is reasonable volatility in the markets, and generally decent liquidity to be able to implement relative value positions. A reasonable level of market volatility has tended to result in frequent relative value anomalies and other market inefficiencies on which PGIM Fixed Income's investment approach seeks to capitalize on.

Investment Process

The U.S. Liquidity Relative Value (S&P 500 Overlay) Strategy implements six different trading sub-strategies, which the Senior Portfolio Manager dynamically allocates to based on their assessment of the opportunities available at any one time:

The Strategy seeks alpha through six primary trading strategies:

• Treasury Optimal - Seeks to maximize fundamental value in U.S. Treasuries using proprietary quantitative models
• Treasury Relative Value - Seeks relative value along the U.S. Treasury curve using proprietary quantitative models, along with portfolio manager input
• MBS Relative Value - Seeks relative value in U.S. mortgages using proprietary quantitative models, along with portfolio manager input
• Swaps Relative Value - Seeks relative value in the swaps and Eurodollar markets using our proprietary quantitative curve model
• Futures Relative Value - Seeks arbitrage opportunities between futures and Treasury markets
• Spread Trading - Seeks relative value spread opportunities between Treasuries, agencies, and mortgage-backed securities

In the future, additional relative value strategies may be employed and one or more of these strategies may be discontinued.

With these allocations as a guide, PGIM Fixed Income's portfolio managers continually seek to construct a diversified mix of these strategies to maximize the ex-ante information ratio of the overall Strategy. They continually evaluate the opportunity set within each sub-strategy and adjust weights accordingly.

The S&P 500 overlay is monitored closely on a daily basis and managed to a tight range to fully capture the beta exposure. The Relative Value portfolio management team adjusts the S&P 500 futures position as necessary to reflect NAV changes due to the alpha generation. The Alternative Products Portfolio Administration team rebalances the portfolio to the 80/20% split on each weekly valuation date by subscribing to or redeeming from the U.S. Liquidity Relative Value Strategy. As noted earlier, 20% of assets are held for initial margin and potential drawdown for the beta overlay.