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Real Assets The New Essential

A Global Alternative Asset Manager

Real Assets The New Essential

EXECUTIVE SUMMARY

The current market environment is leading investors across the globe to seek an alternative to traditional equity and xed income investments. Following a multi-year decline in interest rates and recent global nancial upheaval, the ability to invest for yield has diminished and the outlook for growth has been generally subdued. With interest rates beginning to rise and the potential for ination looming, investors are seeking a New Essential portfolio investment to help navigate the market cycles that lie ahead.
Brookeld believes this pursuit of a new alternative is creating a secular shift toward increased investment in Real Assets. Importantly, we believe that Real Assets offer a relatively unique combination of yield, stability and growth that can provide downside protection as well as upside value creation. Over the course of Brookelds experience as an owner and operator of these assets and based upon an analysis of their historical performance, Real Assets have demonstrated a proven ability to enhance overall risk-adjusted returns across market cycles. Looking ahead, as investors recognize the benets of Real Assets, we expect a meaningful shift in asset allocations to occur, which may rival the historic transformation of institutional investment from xed income to equity securities. We expect this trend to accelerate materially over the course of the next decade, with allocations to Real Assets reaching 20% to 30% of portfolios by 2030, with some institutional investors allocating upwards of 50% to the asset class. Based upon recent investment trends and fundraising activity, we believe this transformation is underway and expect that it will continue to grow as investors recognize and appreciate the attractive, long-term benets of Real Asset investment. Within the constraints of the current market environment and across future challenges, we believe Real Assets can generate compelling risk-adjusted returns, provide attractive capital appreciation and deliver important diversication benets. Accordingly, as investors move beyond the New Normal, we expect Real Assets to emerge as the New Essential. In this piece, we provide an assessment of recent investment trends as well as an overview of the attractive characteristics of Real Assets. Following this discussion, we offer a detailed introduction to the asset class.

Potential Benets of Investment in Real Assets Stability Income Upside Potential Visible Growth Drivers Attractive Performance Low Volatility Ination Protection Investment Diversication Portfolio Diversication Steady cash ow streams supported by regulated or contractual revenues and attractive operating margins Reliable current income with long-term capital appreciation potential Meaningful leverage to economic growth Positive growth momentum led by signicant fundamental trends Compelling absolute and relative returns Attractive risk-adjusted returns Cash ows tend to increase in an inationary environment Diversity of geography, currency and asset type Low correlation to traditional equity and xed income investments

Note: An investment in Real Assets involves signicant risks, including loss of the full amount invested.

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Real Assets The New Essential

PART I THE CASE FOR REAL ASSETS AS THE NEW ESSENTIAL


In our view, the current market environment is presenting numerous challenges to navigate, leading investors across the globe to seek new alternatives to enhance overall returns while mitigating volatility and risk. LOW BOND YIELDS In the years since the global nancial crisis of 2008 and 2009, central banks across the globe have ooded capital markets with liquidity, driving government and corporate bond yields to historic lows. Accordingly, these instruments no longer provide sufficient current income to keep pace with growing liquidity needs or liability requirements, particularly when considering the potential for rising ination. Exhibit 1: Falling Bond Yields

Exhibit 2: U.S. Federal Reserve Assets on Balance Sheet

Source: U.S. Federal Reserve; data as of June 30, 2013

INFLATION CONCERNS ON THE RISE The prospect of rising interest rates is leading to a corresponding increase in concern over ination. While current levels of ination remain modest and do not appear to represent a near-term threat, the potential for rising costs over the medium-term is expected to lead investors to seek alternatives that offer a greater degree of ination protection. LOW GROWTH ECONOMIC ENVIRONMENT Although the global economy has recovered from the recent nancial crisis and pockets of growth have begun to re-emerge, overall growth remains subdued, with few visible catalysts to ignite a meaningful change in trend. Despite this low growth environment, interest rates are on the rise. In such an environment, we believe that investors will likely need to look beyond traditional equity and xed income investments to generate attractive returns. Exhibit 3: Subdued Global Growth

Source: U.S. Federal Reserve, Barclays; data as of June 30, 2013

TAPERING OF CENTRAL BANK SUPPORT ON THE HORIZON Given the historically low level of nominal yields as well as recent improvements in global economic growth, rates have begun to rise. Importantly, this move in rates has been exacerbated by central bank activity, as the U.S. Federal Reserve appears poised to begin tapering asset purchases in the near term, with a full end to quantitative easing possible in the next few years. While the Federal Reserves potential tapering of accommodative monetary policy does signal a return to more normalized growth in the U.S., the drawdown of this meaningful support will almost certainly lead to a further increase in Treasury rates and bond yields. As a point of reference, both instruments witnessed a signicant rise in rates following the mere announcement of the Federal Reserves intentions in just four months time, from the end of April until the beginning of September 2013, the 10-year U.S. Treasury rate increased by over 120 basis points or more than 70%, while the average yield on U.S. investment grade bonds increased by over 80 basis points, or more than 45%1.

Source: World Bank; data as of June 30, 2013

U.S. Federal Reserve; Barclays

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Real Assets The New Essential

INCREASING DEMAND FOR ASSETS OFFERING STABLE INCOME AND GROWTH POTENTIAL At the same time that yields have fallen and the outlook for growth has declined, demand for income-producing assets with upside potential has increased. Among both institutional and retail investors, liquidity needs are on the rise. For instance, the aging U.S. Baby Boomer population is nearing retirement and is seeking a stable source of income to weather the market cycles that lie ahead. Exhibit 4: Aging U.S. Population

THE PATH FORWARD


As institutional investors seek to fund liabilities and navigate the challenges of the current landscape, we believe Real Assets are emerging as a new alternative one that can provide attractive yield, stability and growth irrespective of market cycles and macroeconomic volatility. Accordingly, as investors move beyond the New Normal, we believe the stage has been set for a strategic shift in asset allocations, with Real Assets becoming the New Essential. Importantly, we believe this transformation of traditional portfolio allocation has only just begun. Over the next decade, we expect this trend to accelerate materially, as investors come to recognize Real Assets as a fundamental component of portfolio investment. Indeed, we expect that by 2030, allocations to Real Assets among institutional investors will reach 20% to 30% of total portfolio value, with some institutions allocating upwards of 50% to the asset class.
Dening the Real Asset Investible Universe Real Assets are often dened as physical or tangible assets that tend to provide a real return, often linked to ination. This denition encompasses a wide range of potential investments, including real estate, infrastructure, timberlands, agrilands, commodities, precious metals and natural resources. Additionally, real-return nancial instruments, such as ination-protected bonds, are often included in the Real Asset conversation as well. Based upon Brookelds experience as an owner and operator of Real Assets, we have sought to focus our denition of the asset class in order to capture several key characteristics a pure-play emphasis on longlived, hard assets that generate stable and growing cash ow streams, provide enhanced current yield, offer protection against ination and produce attractive risk-adjusted returns. Importantly, this denition generally does not include commodities or nancial assets, which tend to experience greater volatility and are more susceptible to global capital market trends. Within our narrower denition of the Real Asset investible universe, we classify assets in four major categories: Property, Infrastructure, Timberlands and Agrilands. For a detailed description of these categories, please refer to Part II of this piece, entitled An Introduction to Real Assets.

Source: U.S. Census Bureau; data as of December 2012

Additionally, many institutional investment plans that service longterm liabilities are signicantly underfunded, due in large part to the inability of investment returns from traditional asset allocations to keep pace with rising liability requirements. In particular, public and private pension plans have witnessed ballooning decits and widening shortfalls as investment yields have fallen while liabilities have increased. Importantly, the number of retirees serviced by these plans continues to grow, due to the overall aging of many developed market populations as well as increasing life expectancies across the globe. This combination of accelerating demand for benets and decelerating growth in pension assets is leading to signicant nancial strain. Of note, recent studies of the funding status among U.S. state and municipal pension plans have estimated the current aggregate shortfall at over $2 trillion1. Interestingly, while the methodology underlying these studies assumed investment returns on pension assets would range from approximately 4.0% to 6.0%, U.S. states are assuming much higher rates of return, in the range of 7.25 to 8.25%.1 In view of the current low yield environment, such returns are not likely to be achieved through investment in traditional asset classes, which may require these pension plan sponsors to look elsewhere for more compelling returns.

A historical precedent for such a meaningful transformation can be found in the equally signicant shift from xed income to equities that has occurred over the last 30 years. As recently as the early 1980s, nearly 60% of assets held by U.S. institutional investors were allocated to xed income securities (Exhibit 5). However, challenging investment trends and macroeconomic factors, including double digit ination, led investors to seek a higher growth alternative. Accordingly, over the subsequent 20 years a dramatic shift in asset allocations occurred, whereby xed income investments fell to only 30% of portfolio value by the year 2000.

Center for Retirement Research at Boston College and Moodys Investors Services: Adjusted Pension Liability Medians for US States, June 2013

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Real Assets The New Essential

Exhibit 5: Shifting Institutional Investor Asset Allocations

Investors appear to be recognizing these attractive characteristics, as demonstrated by recent trends in institutional allocations and fundraising activity. For instance, over the last 10 years, real estate allocations by public dened benet pension plans have increased from just over 3.0% of portfolio value to nearly 8.0% (Exhibit 5). More recently, fundraising activity has demonstrated a signicant acceleration in demand for Real Assets. During the rst half of 2013, 18% of the nearly $210 billion raised globally by private equity funds was targeted towards Real Asset investments (Exhibit 6). Exhibit 6: Recent Momentum in Real Asset Fundraising Activity

Source: Pensions and Investments; data represents average asset mix of top 1,000 U.S. public dened benet pension plans since 1991 and average asset mix of top 200 U.S. public dened benet pension plans from 1984-1991; data as of September 30 of each respective year. Alternatives includes private equity and hedge fund investments.

Today, investment trends and macroeconomic factors are converging once again to lead to another potential shift in asset allocations this time to Real Assets. At a time when investors are struggling to fund long-term liability requirements, protect current wealth, participate in a recovering economy and defend against the potential for rising ination, Real Assets can offer an attractive alternative. Through a unique combination of steady current income, leverage to an improving economy and protection against ination, Real Assets may provide the foundation for institutional investors to navigate current and future market environments.
Measuring Real Asset Performance

Source: Bloomberg; data as of June 30, 2013

We believe these indicators demonstrate the potential for a long-term trend, as awareness of and appreciation for Real Assets continues to accelerate. Over the next decade, we expect Real Assets to be embraced by the global investment community as a compelling alternative to traditional xed income and equities and emerge as the New Essential.

Throughout the analysis included in this piece, the following indexes have been utilized to measure and represent the performance of Real Assets, unless otherwise noted. Please refer to the disclosures at the end of this report for a detailed description of each index. Property Infrastructure Timberlands NCREIF Property Index (data availability begins in 1Q 1978) Dow Jones Brookeld Global Infrastructure Composite Index (4Q 2002) NCREIF Timberland Index (1Q 1987) Agrilands Stocks Bonds NCREIF Farmland Index (1Q 1991) MSCI World Index (1Q 1978) Barclays Global Aggregate Bond Index (1Q 1990)

Of note, as private investment in infrastructure has only recently begun to accelerate, a private market infrastructure performance index with a meaningful track record does not currently exist. Accordingly, the Dow Jones Brookeld Global Infrastructure Composite Index was utilized as the chosen proxy for the asset class. Currently comprising more than 125 companies and with a market capitalization of over $1.0 trillion1, the Dow Jones Brookeld Global Infrastructure Composite Index includes publicly-listed infrastructure companies traded on developed market exchanges with historical data dating back to December31,2002. A key measure for inclusion in the index is that 70% of cash ows must be derived from the ownership or operation of infrastructure assets. This is a signicant differentiator from other indexes, which have a broader denition of infrastructure and are often dominated by infrastructure service companies, such as energy utilities, construction companies and mining companies. In contrast, the Dow Jones Brookeld Global Infrastructure Indexes focus on companies that are more likely to generate stable and predictable cash ow growth and are typically less cyclical in nature. Additionally, to be eligible for inclusion in the Dow Jones Brookeld Infrastructure Indexes, a company must have a minimum oat-adjusted market capitalization of $500 million as well as a minimum three-month average daily trading volume of $1 million. Securities also must be domiciled in a country with a liquid market listing. For more information on the Dow Jones Brookeld Global Infrastructure Indexes, please visit www.djindexes.com/infrastructure.
1

As of June 30, 2013

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Real Assets The New Essential

OPTIMIZING AN ALLOCATION TO REAL ASSETS


In considering the optimal allocation to Real Assets, modern portfolio theory can serve as a guide. Using tools such as the Efficient Frontier, it is possible to create hypothetical portfolios which contain the optimal allocation to selected asset classes. The optimal allocation is dened as that which maximizes the expected return for any given level of risk based upon historical performance results. Combining each of these optimal portfolios across the spectrum of risk and return creates the Efficient Frontier. It is also possible to compare Efficient Frontiers, to determine if the addition of a certain asset class provides higher or lower potential returns for each level of risk. In doing so, the portfolio benets of including a certain asset class, and the optimal allocation to that asset class, become increasingly clear. Exhibit 7 presents such an analysis, comparing the Efficient Frontier of a portfolio containing only bonds, equities and cash with that of a portfolio which also includes Real Assets. Exhibit 7: Efficient Frontier Analysis

While investor risk preferences and return needs may vary and asset allocations may include a more diverse set of opportunities than those included above, the Efficient Frontier conrms our belief in the attractiveness of Real Assets and the potential for meaningful growth from current allocation levels.
The Growth Potential of Real Assets While we expect investor allocations to Real Assets to accelerate in coming years, the global investible asset base is expected to grow exponentially as well. Current estimates of total global assets managed by institutional investors stands at $71 trillion, of which $45 trillion is invested to meet long-term nancial obligations1. We expect this long-term invested asset base to increase in size to over $70 trillion within the 2020s, producing $25 trillion in new capital ows2. Should investor allocations progress as we expect over the same time horizon, 20% to 30% of these new capital ows may be targeted towards Real Assets, leading to nearly $10 trillion of capital seeking Real Asset investment opportunities over the next 15 years. Importantly, as demand for Real Assets continues to rise, the supply of Real Asset investment opportunities is expected to expand as well. Global population growth and increasing urbanization around the world are leading to rising demand for new development. When combined with the overdue refurbishment or modernization of existing assets in many mature markets, a signicant need for capital has become apparent. Recent estimates indicate that this need may total as much as $55 trillion through 2030 in the infrastructure asset class alone3. Over the same time period, an analysis of global property markets reveals that over $15 trillion will need to be spent in order to simply maintain existing ratios of property investment relative to Gross Domestic Product (GDP)4. Given the current strain on government balance sheets around the world, public nancing will not be able to subsidize this $70 trillion price tag alone, creating a signicant opportunity for the investment of private capital. Furthermore, the ability to invest in existing Real Assets is expected to increase as well. In recent years, privatization of state-owned assets including toll roads, airports and seaports has accelerated, as governments across the globe seek to increase liquidity. Additionally, diversied owners of Real Assets are increasingly selling their holdings in order to become more capital and cost efficient, such as mining companies divesting their captive railroad systems. We expect these trends to continue to expand in the coming years, leading to a growing opportunity to invest in existing Real Assets. This combination of population growth, strained public nances and increasing monetization of in-service assets provides many options for investment. Whether investors seek opportunities for new development or existing assets in mature markets or emerging growth economies, the Real Asset investible universe appears poised for meaningful growth.
1

Source: U.S. Federal Reserve, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; the Real Asset category is comprised of performance results (over the duration of available data) generated by the previously dened indexes for Property, Infrastructure, Timberlands and Agrilands, weighted by the investible universe of each; the Stocks category is represented by the S&P 500 Total Return Index, the Bonds category consists of the Barclays U.S. Aggregate Bond Index and the Cash category is comprised of the 3-month U.S. Treasury bill.

As demonstrated above, the Efficient Frontier for the portfolio containing Real Assets is higher than that of the more traditional portfolio, indicating that returns are greater across the spectrum of risk. For example, assuming a standard deviation of 4.5%, the portfolio of traditional investment options generates a return of 7.5% while the portfolio including Real Assets produces a return of 9.5%. As such, the portfolio including Real Assets generated 200 basis points of incremental return for the same level of risk. While the value of this incremental return varies across the risk spectrum, it remains positive throughout, indicating that the addition of Real Assets to a mixedasset portfolio improved overall risk-adjusted returns throughout the time period of historical performance captured by this study. Additionally, the Efficient Frontier suggests that the optimal allocation to Real Assets can be found along the upward slope of the curve, highlighted in Exhibit 7. The target allocation to Real Assets reected in this portion of the curve ranges from 25% to 80%.

OECD; Climate Policy Initiative, March 2013 Brookeld Asset Management estimates 3 OECD: Strategic Transport Infrastructure Needs to 2030 4 EPRA, World Bank, PricewaterhouseCoopers, Brookeld Asset Management
2

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Real Assets The New Essential

REAL ASSETS AN ATTRACTIVE INVESTMENT OPPORTUNITY


Our belief that Real Assets will emerge as the New Essential portfolio investment is driven by the powerful combination of relative stability and growth offered by the asset class. Importantly, Real Assets can provide downside protection in a recessionary climate due to the duration and generally predictable nature of their cash ow streams, while also participating in the upside of a growth environment through meaningful exposure to a recovering economy. As such, we believe Real Assets are uniquely positioned to provide value and enhance overall risk-adjusted returns across the current market cycle and those that lie ahead. LARGE-SCALE, LONG-LIVED ASSETS PROVIDING ESSENTIAL SERVICES Real Assets tend to serve as the foundation for the delivery of goods and services that are necessary to support the global economy. As a result, drivers of end-user demand for these assets tend to be relatively predictable, sustainable and inelastic. STABLE, BOND-LIKE CASH FLOWS Real Assets offer investors relatively steady cash ow streams, often supported by regulated or contractual revenues and attractive operating margins. Many Real Assets are subject to long-term lease or concession agreements which frequently include pricing provisions that seek to ensure a predictable return over time. As a result, these assets tend to generate consistent, stable cash-ow streams with lower volatility than other traditional asset classes. Additionally, while macroeconomic trends can affect Real Asset operations, the impact tends to be relatively muted by the long-term, contractual nature of the underlying revenue streams. Therefore, we believe attractive cash ow growth can be achieved across market cycles. While asset-level nancial performance is not always readily observable, the cash ow streams produced by publicly listed companies that own and operate Real Assets are provided on a consistent basis through quarterly reporting and disclosures. Importantly, these nancial results demonstrate the relative stability of the underlying asset cash ows over time. Exhibit 8: Comparative Cash Flow Growth Rates of Listed Infrastructure and Global Equities

Exhibit 9: Stability of U.S. Listed Property Cash Flow Streams

Source: Brookeld Investment Management research and estimates; projected Same Store NOI Growth is based on proprietary Brookeld Investment Management research and nancial analysis and is subject to change without notice; data as of June 30, 2013 based upon rst quarter 2013 earnings announcements.

ATTRACTIVE YIELDS WITH LONG-TERM CAPITAL APPRECIATION The relatively steady and predictable cash ows produced by Real Assets support attractive current income streams. As indicated in Exhibit 10, the average historical income return across Real Assets has meaningfully outpaced equities and compares favorably with bonds. Additionally, current Real Asset yields remain signicantly higher than both traditional asset classes. These attractive income streams may protect the value of an investment during recessionary environments and can also provide an important cushion against rising interest rates. Furthermore, the sustainable and predictable nature of these income streams leads Real Assets to offer a compelling option for investors with regular cash distribution requirements. Exhibit 10: Comparative Income Returns and Current Yield

Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; represents average annual returns over the duration of data available for each index.

Source: Brookeld Investment Management research and estimates; FactSet; S&P Dow Jones Indexes; Merrill Lynch Global Quantitative Strategy; MSCI; IBES; Worldscope; data as of December 31, 2012 and reects median EBITDA growth in each respective time period. Brookeld.com | For Clients Only. Not for Redistribution. B

As demonstrated in Exhibit 10, investment in Real Assets also provides meaningful capital appreciation potential. These long-lived, hard assets tend to increase in value over time, as replacement costs rise and operational efficiencies are achieved, particularly for well-located assets with high barriers to entry.

Real Assets The New Essential

EQUITY-LIKE UPSIDE Although a signicant portion of Real Asset revenue streams are subject to long-term, contractual agreements, the asset class also retains exposure to an improving economic environment. Whether it is realized in the form of improved leasing of vacant property space, growing throughput on toll roads, rising volumes of energy demand, expanded harvesting of timber assets, or climbing food prices, Real Assets reap the benets of a strong global economy. While Real Asset current income protects value on the downside, operational leverage enhances value on the upside. Exhibit 11: Average Annual Returns during Periods of Economic Recovery

Agrilands Ag grilands Global population growth and increasing consumption levels Growing demand for biofuels Slowing yield growth rates

COMPELLING ABSOLUTE AND RELATIVE RETURNS As evidenced in Exhibit 13, Real Assets have produced impressive absolute and relative returns over the last 10 years, outperforming both the global equity and global bond markets. Exhibit 13: Attractive Return Prole

Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; represents average annual returns during periods of economic recovery, as dened by the National Bureau of Economic Research, over the duration of data available for each index.

Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013

GROWTH POTENTIAL In addition to meaningful leverage to an improving economic climate, fundamental trends in each underlying asset class are leading to attractive growth momentum. While several of these trends may require a longer time horizon to materialize, we believe they provide a clear and sustainable path upon which Real Assets can continue to produce compelling income and capital appreciation. Exhibit 12: Growth Drivers for Real Assets
Property Employment growth leading to increased leasing demand Low levels of new supply Infrastructure Global population growth Existing infrastructure in need of repair or refurbishment New infrastructure development in emerging markets from growing wealth and urbanization Acceleration of privatization activity leading to an expanded investible universe Declining availability of public capital to fund needed expenditures Timberlands Recovery of U.S. housing market Asias increasing wood demand Reduced supply from Canada and Russia Supply constraints due to conservation, development and damage caused by the Mountain Pine Beetle Demand for wood ber as an alternative energy source

LOW VOLATILITY AND COMPARATIVELY HIGHER RISK-ADJUSTED RETURNS This relative outperformance becomes even more impressive when viewed on a risk-adjusted basis, as the volatility of Real Asset returns has historically been lower than that of equities, while returns have been greater than that of bonds. Importantly, while Real Assets tend to retain value during economic downturns and participate in value creation during economic upturns, performance generally lacks sharp movements in either direction. When combined with the stability of Real Asset cash ows, the resulting risk-adjusted returns have meaningfully surpassed those achieved by either equities or bonds. Exhibit 14: Comparison of Sharpe Ratios across Real Assets and Investment Alternatives

Source: MSCI, Barclays, l Bloomberg, l b NCREIF, S&P Dow Jones Indexes; d d data as of June 30, 2013; Sharpe Ratio based upon 10-year average annualized total returns and standard deviations of performance; assumes a risk-free rate of 3.0%.

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Real Assets The New Essential

The Sharpe Ratio Dened The Sharpe Ratio is a measure of return per unit of risk. The gure is calculated by subtracting a risk-free rate, such as the yield of the 10-year U.S. Treasury bond, from the rate of return achieved from an investment. This net return is then divided by the standard deviation of performance results. The resulting ratio indicates whether investment returns have sufficiently rewarded investors for the level of risk assumed. The higher the Sharpe ratio, the greater the level of risk-adjusted performance.

Real Assets in a Rising Interest Rate Environment Recent developments in global capital markets have led to the potential for rising long-term interest rates, which has brought to the forefront the question of Real Asset performance in a rising rate environment. While we claim no unique insight on monetary policy, our views on the matter have been shaped by our deep experience as an owner and operator of these assets and as an active participant within global capital markets. We rmly believe that Real Assets are uniquely positioned to generate attractive performance across various market cycles, due to their generally stable, long-term, contractual revenue streams combined with considerable leverage to economic growth. During periods of higher nominal interest rates (whether from higher real rates in a more positive growth environment or higher ation low growth environment), grow gr owth th e nvir nv iron onme ment nt o r from from h ighe ig her r in in at atio ion n in a l ow g rowt ro wth h en envi viro ronm nmen ent) t), we believe the increased revenues from these assets will more than offset any potential valuation decline from rising discount rates. In gaining an appreciation for the performance of Real Assets across varying cycles, it is essential to understand the impact of interest rates and ination on each of the main value components of an investment. First, Real Asset revenue streams are positively impacted by interest rates and ination in several ways. Infrastructure and power assets tend to operate under regulated and contractual revenue agreements that span several decades. These agreements often contain either direct, explicit inationlinked revenue increases or revenue growth formulas that are derived from interest rates and/or ination. The revenue streams derived from in-place commercial property leases also tend to perform favorably in higher an inationary y environment, as lease rolls lead to high g er revenues while rising replacement costs lead to higher asset valuations. Secondly, interest rates remain very low and xed interest rate loans enhance equity returns as revenues increase. The economic effect of debt revaluations accrues to owners and can create meaningful embedded value. Long-term, xed rate debt with a low coupon is benecial in a rising interest rate and inationary environment, due to the stable nature of the debt service payments relative to higher revenues. Thirdly, Real Asset expenses tend to grow more slowly than revenues. While the revenue implications of rising interest rates and ination tend to be positive, the impact of expense growth is often more subdued or passed on to end users. Additionally, Real Assets tend to require low sustaining capital expenditures, which helps to minimize overall expense growth. Lastly, in anticipation of interest rate increases, capitalization rates for Real Assets did not decrease as much as xed income yields in recent years. Asset valuations are generally based upon cash-ow projections discounted at an appropriate, risk-adjusted rate of return. This discount rate is, in turn, inuenced by both the level of benchmark interest rates and the level of demand in the investment marketplace for the asset class. We expect that as bond yields rise, Real Asset capitalization rates will lag this movement, as they have maintained wider spreads to absorb interest rate increases. In summary, we expect Real Assets to produce positive and consistent performance and stable cash ows over the long term, irrespective of interest rates movements or capital market cycles. While short-term volatility will ebb and ow, Real Assets will remain the New Essential.

HEDGE AGAINST INFLATION With inationary concerns on the rise, we believe Real Assets represent an attractive investment in long-lived, physical resources that tend to increase in value as land and input costs rise. Additionally, Real Asset revenue streams often respond favorably to higher ination, as shorter term contractual revenues (i.e., one-year apartment leases) benet from frequent resets while longer term lease structures (i.e., 30-year airport concessions) often include regularly scheduled rent escalations linked to ination. Importantly, end-user demand tends to be relatively inelastic and often insulated from ination, due to the essential nature of the goods and services provided by Real Assets. Indeed, demand often increases during inationary periods, particularly when rising prices are spurred by economic growth and improving levels of employment and consumption. As a result of these various drivers, Real Asset returns tend to exhibit greater correlations with ination than traditional investment alternatives. Exhibit 15: Correlation of Asset Class Returns with Ination

Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes, U.S. Bureau of Labor Statistics; data as of June 30, 2013; represents the correlation of annualized returns for Property, Timberlands, Agrilands, Bonds and Stocks with historical Consumer Price Index over the duration of data available for each index; represents correlation of quarterly returns for Infrastructure with historical Consumer Price Index given the limited time series of data.

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Real Assets The New Essential

GEOGRAPHIC DIVERSIFICATION Real Assets provide access to a global opportunity set across multiple asset classes. When combined with a variety of investment vehicle options detailed in the following section we believe diversication of investment across geography, currency and asset class can be readily achieved. This diversity can provide enhanced insulation against regional economic trends and cycles. PORTFOLIO DIVERSIFICATION Real Asset returns have historically exhibited low correlations to traditional equity and xed income investments. The addition of Real Assets to a mixed-asset portfolio may therefore provide important diversication benets, lowering overall volatility and enhancing riskadjusted returns. Exhibit 16: Correlation of Real Asset Returns with Equities and Bonds
Stocks Property Timberlands Agrilands 0.23 -0.05 0.11 Bonds -0.08 0.15 -0.03

In an attempt to discern the correlation of infrastructure asset performance excluding the impact of capital market uctuations, an analysis was conducted utilizing a recently established private infrastructure market data series. The Preqin Infrastructure Quarterly Index is calculated based upon cash ow transactions and Net Asset Values as reported by over 130 individual unlisted infrastructure partnerships. While this index dates back only to the rst quarter of 2008, the ve-year life span of this data series has been one of the most volatile periods on record. As such, the results of a correlation analysis utilizing this data should provide a meaningful context. Exhibit 17: Correlation of Private Market Infrastructure Data with Equities and Bonds
Stocks Bonds -0.05

Private Market Infrastructure

-0.11

Source: Source: Source : MSCI, MSCI, B MSCI Barc Barclays, arclay lays s, Blo Bloomb Bloomberg, omberg erg, P Preq Preqin; reqin; in; da data ta as of Dec Decemb December ember er 31, 31 2012; 2012; represents correlation of quarterly returns of the Preqin Infrastructure Quarterly Index with the MSCI World Index (stocks) and the Barclays Global Aggregate Bond Index (bonds) since the rst quarter of 2008, which is the earliest date for which data is available across all indexes.

Source: MSCI, Barclays, Bloomberg, NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; represents correlation of quarterly returns for each respective index with the MSCI World Index (stocks) and the Barclays Global Aggregate Bond Index (bonds) since the rst quarter of 2003.

We believe the low correlations produced by this analysis are indicative of the relationship between infrastructure asset performance and that of the listed markets. Accordingly, we believe this comparison provides further support for our belief that Real Assets can provide powerful diversication benets for a mixed-asset portfolio. HOW TO ACCESS THE OPPORTUNITY Depending on an investors needs surrounding liquidity, time horizon and capacity to invest, there are a number of options for participating in the global Real Asset investment opportunity. While the specic characteristics of these options vary meaningfully, we believe they share a common ability to provide attractive current income streams and capital growth potential. Exhibit 18: Typical Characteristics of Real Asset Investment Options
Private, Unlisted Funds Unlisted Fund of Funds Listed Mutual Funds ExchangeTraded Funds Private Fund Publicly Invested in Traded Debt Equity Securities Investments

In regards to infrastructure, it is important to note that the proxy for infrastructure asset performance utilized throughout this paper is a listed index. As private market investment in infrastructure is relatively new, having evolved in earnest over the last 20 years, an index of private market asset performance with a meaningful track record does not currently exist. Accordingly, the Dow Jones Brookeld Global Infrastructure Composite Index was chosen as the most appropriate proxy for the asset class. This listed index is currently comprised of more than 125 assetrich infrastructure companies, with a total market capitalization of over $1.0 trillion1 and historical data dating back to December 31, 2002. While we believe this index provides an effective representation of the infrastructure asset class, it does reect the performance of publicly traded equity securities. The listed nature of the index provides many benets to investors, including liquidity, ease of investment and diversity across geography and asset type. However, the index has also exhibited inated correlation levels in recent years, as it has been affected by many of the same capital market trends that have inuenced the equity and bond markets.

Direct Asset Managed Investment Account Ease of Invesment Liquidity Governance Rights Investment Diversication Portfolio Diversication

STRONG

LIMITED

As of June 30, 2013


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Real Assets The New Essential

These investment options are available across the universe of Real Asset opportunities, with more established asset classes offering a wider variety of investment options. Exhibit 19: Availability of Real Asset Investment Options
Direct Asset Investment Property Managed Account Private, Unlisted Funds Unlisted Fund of Funds ExchangeTraded Listed Mutual Funds Funds Publicly Traded Equity Securities Private Fund Invested in Debt Investments

Capitalizing on the Real Asset Investment Opportunity While the potential benets of Real Assets are readily observable and the options for investment are numerous, the ability to capitalize on the opportunity is more complex. As these assets tend to be large-scale, capital-intensive investments, signicant access to capital is typically required in order to fund initial acquisitions as well as ongoing capital expenditures. As not all Real Assets are created equally, investment sourcing and underwriting play a vital role in understanding the key drivers of asset performance and determining asset value. Factors such as asset quality, location, lease or concession structure, ownership basis and growth potential must all be considered when evaluating a potential investment. operations tend be industry-speci As Real Rea eal l Asset Asse As set t op oper erat atio ions ns t end en d to b e in indu dust stry ry-spe speci ci c and and often ofte of ten n driven by complicated regulations, operational experience is necessary in order to maximize efficiency and productivity. As Real Assets are generally long-lived assets often subject to longlasting contractual agreements, a long-term, patient investment philosophy may be needed to fully realize the value of an investment.

Infrastructure

Timberlands

Agrilands


* Limited pure-play investment opportunities

Interestingly, when deciding among this opportunity set, it is important to note that correlations among Real Assets are quite low, as indicated in Exhibit 20. This suggests that the optimal asset allocation should include more than one component asset class, which can serve to enhance overall portfolio returns while diversifying total portfolio risk. Exhibit 20: Correlations Among Real Asset Constituents
Property Infrastructure Timberlands 1.00 0.27 0.33 0.27 1.00 -0.10 0.33 -0.10 1.00 0.22 0.03 0.74 Agrilands 0.22 0.03 0.74 1.00

Property Infrastructure Timberlands Agrilands

Source: NCREIF, S&P Dow Jones Indexes; data as of June 30, 2013; represents correlation of quarterly returns since the rst quarter of 2003, which is the earliest date for which data is available across all indexes.

Given the complexities of Real Asset investment and operations, specialized expertise can assist investors seeking to access the asset class and benet from its attractive characteristics. Along every step of the investment process sourcing, underwriting, acquiring, nancing, operating and monetizing a specialized asset manager with focused Real Asset experience can help to ensure an investments full value creation potential is achieved.

EVOLVING REAL ASSET ALLOCATIONS Institutional investors globally are recognizing the potential benets of investment in Real Assets and are evaluating the options for accessing the opportunity. Many institutions are leading the way forward, having increased their allocations to Real Assets meaningfully in recent years. As indicated in Exhibit 21, these allocations can move swiftly, leading to signicant capital ows seeking investment in Real Asset opportunities1. Exhibit 21: Illustrative Examples of Increasing Real Asset Allocations Example A Canadian National Pension Plan | C$183.5 billion | As of June 30, 2013 Asset Allocation in 20 2000 000 Asset Allocation in 2013 20 013 3

The examples included herein are based on Brookelds internal research of certain company annual reports and have been chosen and presented to illustrate the change in asset allocations of certain investors. The examples presented herein are not intended in any way to be exhaustive of the investors investing or not investing in real assets. An investment in real assets involves signicant risk, including loss of the full amount of the investment.

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Example B U.S. University Endowment | $32.7 billion | As of June 30, 2013 Asset Allocation in 1995 Asset Allocation in 2013

Example C U.S. State Dened Benet Pension Plan | $117.5 billion | As of April 17, 2013 Asset Allocation in 2000 Asset Allocation in 2012

Example D Australian Superannuation Fund | A$89.0 billion | As of June 30, 2013 Asset Allocation in 2008 Asset Allocation in 2013

Source: Company annual reports


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Real Assets The New Essential

We expect this trend to accelerate over the next decade, as investors come to view Real Assets as an attractive alternative to traditional equity and xed income investments. The early movers proled in Exhibit 21 have set the foundation for this important shift in asset mix and have demonstrated the potential for Real Asset allocations to increase meaningfully over a relatively short period of time. CONCLUSION PART I The current economic environment is presenting numerous challenges for investors to navigate. At a time when liability requirements are increasing, the opportunity to invest for yield has been diminished and the outlook for growth has been subdued. With rising interest rates and the potential for higher ination on the horizon, investors are looking beyond the traditional array of investment options in search of a more attractive alternative. Amid the constraints of the current environment, we believe Real Assets can provide the path forward. With an attractive combination
Brookeld's Real Asset Expertise

of yield, stability, and growth, Real Assets offer the potential to protect investment value on the downside while maintaining exposure to the upside. Indeed, based upon our own 100-year history of owning and operating these assets, we believe they combine the most appealing attributes of traditional equity and xed income investments. Accordingly, we believe Real Assets provide a unique opportunity to generate compelling risk-adjusted returns across market cycles. Investors across the globe are recognizing the attractive, long-term benets of investment in Real Assets. As this trend continues to accelerate, we expect institutional allocations to the asset class to grow materially over the next decade. We believe the foundation for this shift has been established and the investible universe is poised to expand to meet this rising demand. As the "New Normal" gives way to the market cycles that lie ahead, we believe the stage has been set for a new alternative to emerge and for Real Assets to become the New Essential.

Brookeld Asset Management is a global alternative asset manager with over $175 billion in assets under management. We have over a 100-year history of owning and operating Real Assets, including property, infrastructure, timberlands and agrilands. On behalf of our clients and shareholders, we own and manage one of the worlds largest portfolios of Real Assets. We offer a range of public and private investment strategies that leverage our expertise and experience in markets across the globe. Given our deep history in the ownership and operation of Real Assets and our belief in their future growth potential, we actively invest a very substantial amount of our own capital alongside our clients and partners, ensuring a signicant alignment of interests. We are proud of our track record for success in achieving strong risk-adjusted returns across market cycles. Our focus is on high quality, long-lived, cash ow generating Real Assets that are well-positioned to appreciate in value over time. Asset Class PROPERTY Office, Retail, Residential, Multifamily, Industrial and Hotel INFRASTRUCTURE Transportation, Renewable Power, Energy and Utilities AUM1 Prole 192 office properties comprising 101 million sq. ft. 174 regional malls comprising 154 million sq. ft. 29 million sq. ft. of office and retail development globally 20,000 owned and over 52,500 managed apartments 117,000 residential lot equivalents and 54 million sq. ft. of condo density 7,600 hotel rooms and 146 industrial properties comprising 35 million sq. ft.

$110 billion $41 billion

28 ports, 3,200 km of toll roads and 5,100 km of rail operations in Europe, South America and Australia 193 hydro power plants on 70 river systems in North America and Brazil Nearly 950 MW of wind capacity in key North American markets 1,800 MW of early stage hydro and wind developments Electricity and gas distribution and connections in the U.S., New Zealand, the UK and Colombia 9,900 km of transmission lines in Canada, the U.S. and Chile 2.6 million2,3 acres of timberlands in North and South America

TIMBERLANDS

$4 billion

AGRILANDS

$1 billion

580,000 acres of agricultural land in Brazil, which includes sugarcane for ethanol, soya and corn, pineapple and rubber and a premium cattle operation

As of June 30, 2013. Excludes Private Equity assets under management of $22 billion and Asset Management and Services, Cash and Financial Assets and Other Assets of $5 billion. 2 On July 23, 2013, Brookeld sold 100% of Longview Timber for $2.65 billion. Longview Timber consists of approximately 645,000 acres of high quality timberlands in the U.S. Pacic Northwest. Brookeld continues to invest in timberlands and believes this is an attractive asset class for institutional investors. 3 Total acres does not include management services provided on 1.3 million acres of Crown licensed timberlands in New Brunswick. Brookeld.com | For Clients Only. Not for Redistribution.

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PART II AN INTRODUCTION TO REAL ASSETS


As previously discussed, our denition of Real Assets is focused upon long-lived, hard assets that generate stable and growing cash ow streams. In particular, this investible universe includes Property, Infrastructure, Timberlands and Agrilands.

PROPERTY
An essential component of the global economy, property is an established asset class encompassing commercial and residential real estate assets around the world. These hard assets offer investors relatively steady income streams, a potential hedge against ination, as well as leverage to economic growth. Additionally, property markets are the largest consumer of capital in the world, providing a signicant opportunity for private investment. As such, demand for the asset class has remained strong for many decades, as investors appreciate the fundamental value of property ownership over the long term. The total size of the global property investible universe is currently estimated at over $25 trillion1 across developed and emerging market economies. Within this universe, assets can be classied among key property sectors, the most signicant of which include Office, Retail, Multi-family Residential and Industrial. OFFICE PROPERTY SECTOR The office property sector is comprised of assets ranging from Class A trophy buildings in major gateway cities to single-story buildings in suburban office parks. The key driver of demand for office space across the globe is job growth, particularly within professional service industries. While this creates a degree of sensitivity to macroeconomic factors, any such volatility is partially mitigated by the long-term nature of office leases, which range anywhere from ve to thirty years. A typical office building with an average lease term of eight years would have only 12% to 15% of leases expiring in each year. As a result, 85% or more of revenue would generally be identied at least one year in advance. This predictability, when combined with modest levels of annual re-leasing, leads to relatively stable cash ow streams coupled with upside growth potential. RETAIL PROPERTY SECTOR The retail property sector encompasses three main asset types: local community shopping centers, regional malls and outlet centers. The performance of retail property assets is driven by retailer demand for space in the short term and by trends in consumer spending over the long term. However, property performance tends to be relatively stable due to multi-year lease structures that often incorporate regular increases in contractual rent obligations, usually tied to ination. As a result, retail assets produce relatively stable, long-term cash ow streams that can often weather short-term macroeconomic noise.

MULTI-FAMILY RESIDENTIAL PROPERTY SECTOR The multi-family residential sector is comprised of multi-unit rental apartments. The main performance drivers of these assets include employment levels, the available supply of rental housing and competition from for-sale housing. As the typical duration of a rental apartment lease is only one year, this property sector tends to exhibit greater volatility and sensitivity to macroeconomic variables. However, this enhanced operational leverage provides numerous benets during an up-cycle, allowing apartment owners to capture rising cash ow levels more quickly than owners of other property types. As a result, multi-family residential assets tend to provide meaningful protection against rising ination as well as attractive growth potential during periods of economic expansion.
A Note on Single-Family Housing Although single-family homes are long-lived hard assets, they do not tend to possess the key characteristics we utilize in dening the Real Asset investible universe. Accordingly, we view the development of single family housing as a private equity investment opportunity rather than a Real Asset suitable for long-term institutional ownership. However, this business does require a signicant amount of private investment capital, owing to strong consumer demand for home ownership in many parts of the world. Brookeld participates in this opportunity as a provider of capital through our private equity operations.

INDUSTRIAL PROPERTY SECTOR The industrial property sector is comprised of assets such as bulk warehouse space, distribution centers, light manufacturing facilities and modular office space. Industrial assets are often located within warehouse parks, where individual buildings range in size from 25,000 to over 1 million square feet. Demand for industrial and warehouse assets is derived primarily from inventory storage or the ow of goods through tenant supply chains. Growth in demand is therefore dependent upon trends in consumer spending, manufacturing and import/export activity. Additionally, as industrial assets play a key role in the distribution of commercial goods, these assets tend to be located near major centers of transportation, including ports, airports and roadway systems. The industrial sector is generally viewed as relatively stable and defensive, due to the long-term nature of its lease structures. PROPERTY GROWTH OUTLOOK The nascent global economic recovery is leading to increased demand for property across the globe, driving income and occupancy growth and leading to enhanced levels of protability. Additionally, property development activity slowed considerably following the global nancial crisis due to lower demand as well as a limited availability of construction nancing. Importantly, new development remains signicantly below historical averages, as credit provision has only recently begun to improve.

EPRA, Monthly Statistical Bulletin, June 2013


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Exhibit 22: Historical Aggregate U.S. Commercial Property Construction Starts

While the relatively stable, long-term nature of these cash ow streams can provide resiliency through economic downturns, regional mall performance ts perf pe rfor orma manc nce e also also bene ben ene et ts during duri du ring ng periods per erio iods ds of of economic econ ec onom omic ic recovery rec ecov over ery y and and growth. As consumer demand increases, regional mall occupancy levels and rental revenues tend to rise as well. In the current environment, these growth drivers are complemented by the expected lack of new supply of mall space over the next ve years and resilient demand from domestic and international retailers. We believe this combination of potential growth underpinned by sustainable revenues and cash ows provides a solid foundation upon which regional mall assets in particular, and property assets in general, can produce attractive performance results across market cycles.

Source: Citigroup; data as of June 30, 2013.

INFRASTRUCTURE
Infrastructure assets are generally long-lived, capital-intensive assets that provide essential products or services. As such, infrastructure assets are vital to economic development and benet from relatively inelastic demand. These assets are often characterized by sustainable long-term cash ows, ination-linked revenues, high barriers to entry and high operating margins with minimal maintenance capital requirements. Within this dened investible universe, we classify assets into four main categories: Transportation, Renewable Power, Energy and Utilities. TRANSPORTATION The Transportation subsector is comprised of essential infrastructure networks that move freight, bulk commodities and passengers, including railroads, toll roads, seaports, bridges, tunnels and airports. Transportation assets are generally privatized through concession agreements, which are granted by a government body and which set parameters for the operation of the asset, such as: concession length, which is generally in the range of 10 to 99 years, and in some cases indenite; price increase mechanisms, which are often tied to ination; and future capital expenditures required to maintain good operating performance. Given the essential nature of transportation assets, the high barriers to entry, and the structure of concession agreements, volumes generally grow in-line with GDP while pricing increases in-line with ination. The long-term growth potential of volumes and pricing, combined with the low operating costs for most transportation assets, results in attractive investment opportunities. RENEWABLE POWER A growing subset of the Infrastructure asset class, Renewable Power represents one of the most commercially and environmentallyfriendly forms of power generation. As nations across the world seek to reduce carbon emissions in a cost-effective manner, renewable power has become a meaningful provider of global electricity supply. These assets provide energy generation fueled by renewable resources, including water, wind, solar, geothermal and biomass (organic materials). Among these resources, water and wind have provided the most economically feasible sources of renewable energy and have experienced the most signicant growth in both supply and demand in recent years.

As demand begins to recover with the broader economy, this supply imbalance is likely to further drive revenue and occupancy growth for existing property owners. Accordingly, we believe that global property assets, particularly top tier, well-located properties that enjoy some form of barrier to entry, are positioned for meaningful growth in coming years. Furthermore, the global property investible universe is poised for attractive growth as well. While property is an established, stable asset class in many mature markets, economic growth and expanding populations are expected to fuel ongoing development activity. Additionally, aging property assets are likely to be replaced or refurbished, leading to enhanced opportunities for investment. Meanwhile, in emerging market economies, accelerating population growth and urbanization are expected to drive signicant growth in new property development activity. In an attempt to quantify this growth potential, an analysis of the relationship between property markets and GDP can serve as a guide. By calculating the current ratio between these two gures for each major economy around the world and applying this ratio to estimates of 2030 GDP, a projection of growth in the global property market can be developed. While this approach may yield conservative results, as it assumes national property markets will not grow faster than GDP, it serves to balance the mature growth of developed economies with the potentially more robust growth of emerging markets. Importantly, this approach indicates that global property markets may expand by over $15 trillion through 20301, creating a signicant opportunity for investment.
The Benets of Investing in Property Assets Property particularly well-located, quality assets, typically Pr Prop oper erty ty assets, ass sset ets s, p arti ar ticu cula larl rly y we well ll-l loc ocat ated ed, hi high gh q uali ua lity ty a sset ss ets s, t ypic yp ical ally ly generate relatively long-term cash ow streams that offer downside protection as well as exposure to economic growth. For example, the regional mall property sector is characterized by lease maturities that region i al lm all ll propert ty sect tor i s ch haracteri t ized db yl ease mat turiti ities t hat t usually range from ve to seven years, providing a measure of protection against market cyclicality and economic challenges. In addition, regional mall leases often contain operating cost pass-through arrangements that provide added certainty during an unsure operating environment.

EPRA, World Bank, PricewaterhouseCoopers, Brookeld Asset Management

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Hydroelectric power generation facilities are long-lived assets that generate stable, sustainable cash ows and require minimal ongoing capital expenditures. Furthermore, these assets benet from scarcity value and high barriers to entry. As the requirements for permitting, building and operating hydroelectric power plants have grown more complex, these barriers have only increased. Hydro power cash ow streams are generally derived from long-term, ination-linked power purchase agreements with durations of 15 years or longer. Additionally, power generating capacity tends to be highly predictable over time, with historical water ow data for many river systems typically ranging from 50 to 60 years. Importantly, these assets can also provide meaningful upside potential through the storage of excess water ow in reservoirs. This exibility allows for incremental power generation during periods of peak demand and premium pricing. The technology and systems underlying hydro power assets have been utilized for over a century and are both well-proven and economically viable. Indeed, hydroelectricity is a cost-competitive source of production, as there are no associated fuel costs or input commodity risks, while the source of energy is readily available and sustainable. As the need to replace aging electricity systems or develop new sources of power continues to increase, particularly in a manner that is both environmentally-friendly and cost-effective, renewable power is poised for meaningful growth. Renewable power currently represents 26% of global electricity generating capacity and over 21% of actual generation. With a current installed base of 1,300 gigawatts worldwide, the renewable power industry is adding in the range of 100 gigawatts of new supply each year, which corresponds to approximately $200 billion of annual investment. As a result, industry projections indicate that renewable energy, particularly hydro and wind power, will be the fastest growing source of electricity generation over the next 30 years1. Exhibit 23: Growth in Electricity Generation by Energy Source 2010-2040
Forecasted Generation as a Percent of Actual 2010 Levels

The signicant growth forecasted for the renewable power asset class is expected to be driven by efforts to ensure the sustainability of the global economy and environment. More specically, several key trends are expected to lead to accelerating demand for renewable energy. Declining competition from coal and nuclear generation coal plants are increasingly facing legislative pressures to undertake signicant environmental compliance expenditures, leading to an accelerating trend towards the retirement of coal generation facilities. Additionally, following the recent Fukushima nuclear disaster in Japan, public concern over the safety of nuclear power generation has delayed or halted new development activities in the U.S. and has caused other nations to legislate the early retirement of existing nuclear capacity. Increasing global acceptance of climate change in recent years, increasing concern over global warming has become a signicant catalyst for environmental policy action around the world, including new legislation mandating renewable power procurement targets and implementation of feed-in-tariffs that offer cost-based compensation to renewable energy producers. Improving cost competitiveness of new technologies technological developments over the last decade continue to reduce the costs of newer renewable power generation technologies such as wind, solar and geothermal, enhancing the competitiveness of renewable resources and providing an attractive means to meet increasingly stringent environmental standards. Government policies at least 64 countries, including all 27 European Union member nations, have national targets for renewable energy supply. Additionally, 37 U.S. states and nine Canadian provinces have established Renewable Portfolio Standards requiring electricity distributors to obtain a minimum percentage of their power from renewable energy resources by specied target dates and/or have initiated policy goals that require utilities to offer long-term power purchase contracts for new renewable supply. ENERGY The Energy subsector encompasses oil and gas pipelines, processing plants, storage facilities and district energy systems. Energy infrastructure assets are generally owned on a free-hold basis, resulting in indenite cash ow streams. Many assets have long-term (30 years or longer) contracts with energy exploration and development companies, which source oil and natural gas, and utility companies, which consume these resources. Similarly, district energy systems provide heating and cooling to central business districts under long-term contract arrangements. These contractual commitments provide attractive cash ow stability. Commodity price uctuations generally do not impact the cash ow prole of energy infrastructure assets, as income streams are based largely upon the transport and storage of commodities. These fees are generally not signicantly impacted by changes in the cost of the commodity itself. Energy infrastructure assets also benet from impressive growth potential as additional infrastructure is required to transport energy from new sources, such as natural gas extracted from newly tapped shale reserves.
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Source: U.S. Energy Information Administration International Energy Outlook 2013

U.S. Energy Information Administration

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Real Assets The New Essential

UTILITIES Utilities are typically regulated assets that transmit and distribute essential products and services to communities, such as electricity, natural gas and water. These assets include electricity transmission and distribution systems, water distribution systems, wastewater collection and processing systems, and communications towers. Due to their natural monopoly status, these assets enjoy relatively inelastic demand. However, these assets are also highly regulated by governmental authorities, which determine the rate that can be charged to the end user. These established rates are typically determined so as to provide a fair return on invested capital to the asset owner, including a recovery of operating costs, capital costs and capital expenditures. Additionally, the regulatory body often includes estimates of ination when determining future rate growth. As a result, regulated assets tend to generate relatively stable and predictable cash ow streams tied to ination. Further value creation opportunities are possible through operational efficiencies, growing market share and system expansions.
The Benets of Investing in Infrastructure Assets Infrastructure assets tend to generate stable and growing cash ows while beneting from high barriers to entry and generally low maintenance capital requirements. These attributes are embodied in electricity transmission systems located in local and regional markets throughout the world. These systems typically serve as the backbone to essential power supplies, fueling economic growth and development. As an asset investment, electricity transmission systems benet from high replacement costs and limited competition. Additionally, the revenue derived from operation of these assets tends to be highly regulated, often with pricing provisions that ensure a real return on investment. In some cases, this return is based upon the replacement cost of the transmission system, rather than the depreciated value of the asset base, providing for stable, predictable and growing cash ows. In addition to stable cash ow streams, electricity transmission systems benet from GDP and population growth, which tend to drive increasing power requirements. We believe the combination of this critical provision of electricity, the regulated nature of the underlying revenue stream and the growth potential of power demand should provide for attractive cash ows over the long term, demonstrating the benets of investment in this asset class.

A recent analysis conducted by the Organization for Economic Cooperation and Development (OECD) projects the level of investment needed to meet these growing demands will equal 3.5% of world GDP through the year 2030, or more than $55 trillion. This required investment is expected to encompass all infrastructure asset types, with a particular need for the development or modernization of roads, power networks, water systems and telecommunication networks. Exhibit 24: Expected Global Infrastructure Investment through 2030

Source: OECD, McKinsey Global Institute Infrastructure Productivity: How to Save $1 Trillion a Year (2013)

Importantly, the need for infrastructure spending is global in nature, spanning developed and emerging markets alike. While the risk and return prole for investment will vary by market, the demand for capital to fund infrastructure development is a common theme heard around the world. In the U.S., the American Society of Civil Engineers has recently estimated the total level of investment needed by 2020 across all infrastructure categories to be $3.6 trillion in order to complete overdue maintenance on existing infrastructure and modernize aging systems1. Within Europe, the European Commission has projected overall investment needs for transportation, energy and telecommunication networks at EUR 1 trillion through 20202. Across Asia, the United Nations has forecasted that urban populations will increase by 650 million people by 2030, led mainly by China, India and Indonesia. In order to meet the requirements of an increasingly urbanized society, recent estimates indicate $11.5 trillion will need to be invested in infrastructure development over the same time period3. As economic distress has depleted government resources to fund these needed infrastructure expenditures, private capital investment in the asset class has accelerated and is expected to continue to grow over the next decade and beyond.

INFRASTRUCTURE GROWTH OUTLOOK Several signicant, large-scale trends are fueling infrastructure spending worldwide and are expected to drive infrastructure returns for decades to come. These trends include: Global population growth, which is creating demand for new infrastructure; Aging existing infrastructure in the developed world, much of it built over 50 years ago, is in need of refurbishment or replacement; Growth in emerging markets, where new infrastructure development is required as increasing wealth, urbanization and motorization rates lead to enhanced electricity and transportation needs; and A shortage of capital due to strained government budgets, the traditional source of funding.
Brookeld.com | For Clients Only. Not for Redistribution.

American Society of Civil Engineers: 2013 Report Card for Americas Infrastructure European Commission: A Growth Package for Integrated European Infrastructures, October 2011 HSBC Global Research: Bridging the Gap, May 2013

Real Assets The New Essential

17

TIMBERLANDS
Timberlands provide essential products for the global economy on a sustainable basis. Across the globe, timberlands produce the raw materials utilized in a variety of industries, including lumber and plywood for use in construction, furniture and ooring and pulpwood for use in the manufacture of paper, packaging and wood panels such as oriented strand board and particleboard and in bioenergy generation. Importantly, while demand for these products tends to be correlated to the economic growth cycle, timberlands also experience biological growth irrespective of market cycles. This biological growth can lead to capital appreciation during periods of slowing economic fundamentals, which may then be harvested when the economy once again improves. The global investible universe of private timberlands is estimated at approximately $160 billion, with a majority of this opportunity located in the U.S. Of this amount, institutional investors currently own approximately $40 billion, with the remainder held by private owners and/or publicly traded timber REITs ($32 billion) and corporations having integrated manufacturing and timberlands operations. Exhibit 25: Estimated Value of Investible Global Private Timberlands

The Benets of Investing in Timberlands With an attractive combination of biological growth during periods of economic strain and harvesting potential during periods of economic prosperity, we believe timberlands represent a compelling investment opportunity. Recent experience during the 2009-2010 market downturn provides a valuable illustration of these characteristics. Over the course of several years, the combination of the global nancial crisis and the collapse of the U.S. housing market led to a signicant reduction in demand for lumber and wood products. Accordingly, timberland harvesting and production volumes were substantially reduced. However, this diminished production did not harm the underlying value of the asset; rather, this period of time allowed timberlands to continue to grow and become more valuable. As the global economy began to recover and the U.S. housing market rebounded, demand for the products and materials produced by timberlands returned, leading to a re-acceleration of harvesting and production levels. Importantly, the biological growth that occurred during the economic downturn was able to be realized once the economy improved. We believe this ability to generate value over time, smoothing out the effects of market cycles, is both meaningful and attractive. When combined with a declining supply of available timberlands, we believe the asset class epitomizes the benets of Real Asset investment.

AGRILANDS
Agricultural lands source the worlds food supply, producing commodities that experience generally inelastic demand. The global farmland universe consists of close to 1 billion harvested hectares, of which approximately two-thirds are concentrated in the top 15 countries. However, the investible portion of this universe is more limited, due to restrictions on corporate or institutional ownership in developed economies as well as insufficient infrastructure or scale limitations in emerging markets. Exhibit 26: Top Net Exporters of Agricultural Products
Soy Brazil U.S. Argentina Paraguay Corn U.S. Argentina Ukraine Brazil Cotton U.S. India Brazil Australia Beef India Australia Brazil U.S. Sugar Brazil Thailand Australia India Wheat U.S. Australia Russia Canada Rice India Vietnam Thailand Pakistan

Source: Bloomberg, Brookeld estimates; data as of June 30, 2011.

TIMBERLANDS GROWTH OUTLOOK The global timber supply and demand outlook is projected to be very positive in the next decade onward due to several signicant macroeconomic, geopolitical and industry-specic trends. Recovery of the U.S. housing market Asias increasing demand for wood and Chinas signicant wood decit Reduced economic wood supply from Canada due to a reduction in public land Annual Allowable Cut Challenges facing the Russian forest industry, including a lack of adequate infrastructure to access forested areas, a degradation in forest quality due to selective harvesting, labor shortages and, most importantly, signicant cost increases Reduced supply of timber due to the Mountain Pine Beetle epidemic in Western Canada and U.S. inland, which is affecting select pine species Increased demand for wood ber as an alternative energy source Conservation efforts

Source: USDA; data as of 2012.

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AGRILANDS GROWTH OUTLOOK Tightening supply and growing demand for many agriculture products are indicating the potential for long-term growth in the agricultural sector. Strong macroeconomic fundamentals, including global population growth, improving consumption in the developing world and growing demand for biofuels, are leading to increasing demand for agricultural commodities. As a result, it is estimated that world food production will need to increase between 60% and 90% by 2050 in order to meet expected food demand. However, while demand is on the rise, yield growth rates have been slowing over the last decade due to a fundamental shift in supply expansion from productivity enhancement to acreage expansion. As increasing acreage is a more costly and time consuming method of expanding production, supply growth has had difficulty keeping pace with demand. While these signicant supply and demand trends continue to evolve, we expect institutional investment opportunities in global agriland assets to increase meaningfully. Exhibit 27: Inventory and Price of Major Food Crops

Much of the growth witnessed in recent years is attributable to a combination of operational performance and technological advances. Pioneering government-sponsored agricultural research and innovation tackled several of the key deciencies in sub-tropical agriculture, including the development of new seed varieties, advancement of region-speci research, and new operational farm techniques that regi re gion on-s spe peci ci c so soil il r esea es earc rch, h, a nd n ew o pera pe rati tion onal al f arm ar m te tech chni niqu ques es t hat ha t have considerably raised farm yields. Brazilian producers have used this information and innovation to transform tropical agricultural production, cultivating two and occasionally three crops each year on the same area. As a result, Brazils per acre agricultural productivity is today at least equivalent to, and in some cases better than, that of the U.S. The key erences between markets land value, which is about diff di ffer eren ence ces s be betw twee een n th the e tw two o ma mark rket ets s li lie e in l and an d va valu lue e, w hich hi ch i s ab abou out t on onee third lower in Brazil4 than in the U.S. and logistics, which still represents a major bottleneck in Brazil. Importantly, when properly addressed, improvements in infrastructure and logistics are expected to considerably further improve Brazilian agricultural competitiveness. As Brazilian agriculture advances further and local infrastructure improves, we expect the market to continue to offer attractive investment opportunities.
1

Companhia Nacional de Abastecimento (CONAB) U.S. Department of Agriculture 3 Empresa Brasileira de Pesquisa Agropecuria (EMBRAPA) 4 AGRA FNP
2

SUMMARY
As indicated by this introduction and overview, Real Assets represent a diversied set of investment opportunities, with exposure to a wide variety of geographies and underlying assets. However, these opportunities are united by common characteristics of investment and a shared ability to generate relatively attractive yield, stability and growth. Accordingly, we believe these assets are collectively poised to benet as Real Assets gain recognition as the New Essential portfolio investment.

Source: IMF and USDA; data as of 2011

An Illustrative Example of the Agrilands Investment Opportunity The evolution of Brazilian agriculture over the last 30 years has provided an impressive example of realized and potential future growth. In the last three decades, Brazil has been transformed from a food importer into one of the world's great breadbaskets by increasing its productive land area by 37%1 and raising agricultural production by 249%1. Today, Brazil supplies approximately 40% of the world's soybean trade2 using just 9% of the country's potential arable land3. It overtook Australia as the world's largest beef exporter and grew to develop the world's second largest cattle herd. It also became the world's largest exporter poultry largest t expo rter t of f po ult ltry and d sugar2. I Importantly, mportantl t tly, i it th has as achi achieved hieved dt this his hi with virtually no government subsidies. Practically all of the recent agriland development in Brazil has occurred in the cerrado biome, an area of savanna about the size of Mexico, located south of the Amazon. This area contains approximately 80 million hectares of agriculturally apt land, 60% of which is currently productive. The region benets from a high annual sunlight average and 1,500 mm of rain, as well as good topography. Yet, until recently, the cerrados highly acidic and infertile soil limited its performance, while the lack of adequate infrastructure to the region, particularly cargo transport, made it uncompetitive3.
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Real Assets The New Essential

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DEFINITIONS
The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. As such, all properties are held in a duciary environment. The Dow Jones Brookeld Global Infrastructure Composite Index is calculated and maintained by S&P Dow Jones Indexes and comprises infrastructure companies with at least 70% of its annual cash ows derived from owning and operating infrastructure assets, including master limited partnerships. Any comparisons, assertions and conclusions regarding the performance of the Dow Jones Brookeld Global Infrastructure Composite Index during the time period prior to its initial calculation on July 14, 2008 is based on back-testing (i.e., calculations of how the index might have performed during that time period if the index had existed). Back-tested performance information is hypothetical and based on index methodology applied and calculated by S&P Dow Jones Indexes and is provided solely for information purposes. The NCREIF Timberland Index is a quarterly time series composite return measure of investment performance of a large pool of individual timber properties acquired in the private market for investment purposes only. All properties in the Timberland Index have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. As such, all properties are held in a duciary environment. The NCREIF Farmland Index is a quarterly time series composite return measure of investment performance of a large pool of individual agricultural properties acquired in the private market for investment purposes only. All properties in the Farmland Index have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. As such, all properties are held in a duciary environment. The MSCI World Index is a free oat-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The Barclays Global Aggregate Bond Index is a market capitalizationweighted index, comprising globally traded investment grade bonds. The index includes government securities, mortgage-backed securities, assetbacked securities and corporate securities to simulate the universe of bonds in the market. The maturities of the bonds in the index are more than one year. The S&P 500 Total Return Index is the total return version of the S&P 500 Index. Dividends are reinvested on a daily basis and the base date for the index is January 1, 1988. All regular cash dividends are assumed reinvested in the S&P 500 Index on the ex-date. Special cash dividends trigger a price adjustment in the price return index. The Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index, comprising investment grade bonds traded on U.S. exchanges. The index includes government securities, mortgage-backed securities, assetbacked securities and corporate securities to simulate the universe of bonds in the market. The maturities of the bonds in the index are more than one year. The Preqin Infrastructure Quarterly Index is calculated on a quarterly basis using data from Preqin's Infrastructure Online product. The models use quarterly cash ow transactions and NAVs reported for over 130 individual unlisted infrastructure partnerships. Standard Deviation measures the degree to which an investments return varies from its mean return.

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20

Real Assets The New Essential

DISCLOSURE
This document is condential and is intended solely for the information of the persons to whom it has been delivered. It may not be reproduced or transmitted, in whole or in part, to third parties except as agreed in writing by Brookeld Asset Management Inc. (BAM and together with its affiliates, Brookeld). The views and opinions expressed in this presentation are the views of Brookeld generally and do not necessarily reect the views of every individual or entity within Brookeld. These views and opinions should not be construed as research, investment advice and/or trade recommendations. These views and opinions should not form the basis for any investment decisions. This document is not intended to, and does not, relate specically to any investment strategy or product that Brookeld offers. It is being provided only for informational purposes to provide a framework to assist in the implementation of an investors own analysis and an investors own views on the topics discussed herein. The views expressed reect the current views of Brookeld as of the date indicated and Brookeld does not undertake to advise you of any changes in the views expressed herein. In addition, the views expressed do not necessarily reect the opinions of any specic investment professional at Brookeld, and may not be reected in the strategies and products that Brookeld offers. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative and informational purposes only. Certain of the information contained herein is based on or derived from information produced by independent third party sources. While Brookeld believes that such information is accurate as of the date it was produced and that the sources from which such information has been obtained are reliable, Brookeld does not guarantee the accuracy, adequacy or completeness of such information, and such information, and the assumptions on which they are based, has not been independently veried. There can be no assurance that an investment in Real Assets will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. This publication is not, and should not be viewed as, a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. Investments in alternative assets, including real assets, involve signicant risks, including loss of the entire investment. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. The information in this publication may contain projections, estimates or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the asset classes described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved. The information in this document, including statements concerning nancial market trends, is based on current market conditions and assumptions, which will uctuate and may be superseded by subsequent market events or for other reasons. Performance of all cited indexes is calculated on a total return basis with dividends reinvested. The indexes do not include any expenses, fees or charges and are unmanaged and should not be considered investments. Investment concepts mentioned in this publication may be unsuitable for investors depending on their specic investment objectives and nancial position. Where a referenced investment is denominated in a currency other than the investors currency, changes in rates of exchange may have an adverse effect on the value, price of or income derived from the investment. Please note that changes in the rate of exchange of a currency may affect the value, price or income of an investment adversely. Brookeld does not assume any duty to, nor undertakes to update forward-looking statements or any other information contained herein. No representation or warranty, express or implied, is made or given by or on behalf of Brookeld or any other person as to the accuracy and completeness or fairness of the information contained in this publication and no responsibility or liability is accepted for any such information. 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