RAFI Dynamic Multi-Factor Emerging Markets Index

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1 RAFI Dynamic Multi- RAFI Roadmap: A guide to better investor outcomes RAFI Dynamic Multi- benchmark asset class EM Cap-Weight Large-Mid Equity What is the Process? 1. Separate the universe into large companies and small companies. 2. Form individual factor sleeves: RAFI Construction Measures Select Weighting Rebalance Momentum Standard, Idiosyncratic, and Fresh Momentum Top 50% by weight Cap Weight Full Quarterly Value RAFI Cap Top 25% by weight RAFI Weight Quarterly staggered Low Volatility Global, Industry, and Country Systematic Risk Top 25% by weight RAFI Weight Quarterly staggered Quality Profitability and Investment Top 25% by weight RAFI Weight Quarterly Staggered Size Average of four factor portfolios (value, quality, low volatility, momentum) built within small universe and rebalanced quarterly. Due to lack of liquidity, size is excluded from the. 3. Implement trading controls to minimize turnover. 4. Use value and momentum measures to determine the weight to each factor. Web: info@rafi.com 1

2 RAFI Dynamic Multi- Will the Strategy Deliver? This strategy is expected to deliver excess returns in the future because it is theoretically and empirically robust. Every investor should ask five questions before investing: 1. Who is on the other side of the trade? 2. Has the strategy worked over long and varying time-periods net of changes in valuation? 3. Does the strategy produce similar results across different regions? 4. Does the the strategy produce similar results across slightly different definitions (E.G. P/B vs. P/S)? 5. Is the strategy investable in the real world net of costs? Why This Strategy Delivers Theory Empirical Evidence 1. Who's On the Other Side of the Trade? 2. Excess Return* 3. Regions That Worked 4. Definitions That Worked 5. Trading Costs** RA Momentum RAFI Value RAFI Low Volatility RAFI Quality The Patsy 1.13% 5 of 5 3 of % Momentum premium delivers because uninformed investors are slow to react to new information about a company. The Performance Chaser 6.31% 5 of 5 4 of % Value premium delivers because performance chasters under-own value securities (preferring fast-growing glamour stocks), driving prices down, yields up, and future returns higher. The Gambler 1.77% 5 of 5 1 of % Low volatility premium delivers because of investors' preference for gambling leads them to over-own high volatility securities as "lottery tickets". The Empire Builder 0.69% 5 of 5 3 of % Quality premium delivers because investors are drawn to the glamour of empire building companies and underappreciate conservatice capital allocators with wide economic moats. SOURCES: CRSP/Compustat and Worldscope/Datastream DATA: From 7/1/2002 to 12/31/2017 *NOTE: Gross of trading costs. *NOTE: Annualized trading costs are estimated as the market impact of transactions, assuming $1B in AUM. Web: info@rafi.com 2

3 RAFI Dynamic Multi- Historical Excess Returns, by US 6.31% 0.19% 6.12% 2.44% 0.17% 2.26% 1.13% 1.08% 0.06% 1.77% 0.09% 1.68% 0.69% 0.12% 0.57% RAFI Dynamic Multi- RA Momentum RAFI Value RAFI LV RAFI Quality Excess Return (net of trading costs) Trading Costs Gross Excess Return SOURCES: CRSP/Compustat and Worldscope/Datastream DATA: From 7/1/2002 to 12/31/2017 NOTE: Annualized trading costs are estimated as the market impact of transactions, assuming $1B in AUM. Learn More SEPTEMBER 2016 Will Your Deliver? An Examination of Robustness and Implementation Costs JASON HSU, VITALI KALESNIK, NOAH BECK, & HELGE KOSTKA Learn More FEBRUARY 2017 Forecasting and Smart Beta Returns (Hint: History is Worse than Useless) ROB ARNOTT, NOAH BECK, AND VITALI KALESNIK Web: 3

4 RAFI Dynamic Multi- What to Expect? The RAFI Dynamic Multi- shows 2.4% in annualized excess returns since However, those results have come with a wide range of outcomes (+- 8% or more) in any given year. Calendar Excess Returns 95 th Percentile 9.3% Performs well during periods when multiple factors outperform at the same time. Excess Return (Ann.) 2.4% Benchmark 5 th Percentile -4.0% Performs poorly during periods when multiple factors underperform at the same time Last 5-Years Next 5-Years Historical Excess Return Realized Excess Retun 2017 YTD NOTE: Based on rolling returns from simulated data SOURCES: CRSP/Compustat and Worldscope/Datastream DATA: As of 12/31/2017 Rolling Excess Returns 10% Longer investment horizons produce more predictable returns. 9.3% 95 th Excess Return (Ann.) 5% 0% 3.7% 2.4% 2.4% 0.8% 0.0% Historical Excess Return 5 th Cap Weight -5% -4.0% 1-Year 3-Year 5-Year 10-Year NOTE: Based on rolling returns from simulated data SOURCES: CRSP/Compustat and Worldscope/Datastream DATA: As of 12/31/2017 Web: info@rafi.com 4

5 RAFI Dynamic Multi- The trades at a discount of 33% (0.67x) to the relative valuation of its cap-weighted benchmark. This is fairly valued relative to its median discount of 30% (0.70x). Given current valuations, our Smart Beta Interactive website forecasts an annualized excess return of 2.4% over the next 5 years (gross of costs). Valuations & Return Expectations Subsequent 5-Yr Excess Return (Annualized) 10% 5% 0% -5% CHEAP Rebalance In Median Relative Valuation EXPENSIVE Rebalance Out SOURCES: CRSP/Compustat and Worldscope/Datastream DATA: From 7/1/2002 to 12/31/2017 Price/ Sales Price/ Earnings Price/ Book Price/ Dividend Relative Valuation Historical Average Learn More JULY 2014 Finding Smart Beta in the Zoo JASON HSU, AND VITALI KALESNIK Web: info@rafi.com 5

6 RAFI Dynamic Multi- Past Performance & Characteristics as of Quarterly Commentary Sleeve Allocation The RAFI Dynamic Multi- underperformed the MSCI by 102bps for the quarter ending March While the Value and Quality factor strategies both significantly outperformed the benchmark, their performance could not make up for the poor performance of Low Volatility and Momentum, which accounted for approximately 60% of the portfolio and underperformed by 256bps each. Momentum 33.2% Quality 24.9% Low Volatility 21.7% Value 20.2% DATA: As of 03/31/2018 in USD SOURCE: FactSet Attributions and performance commentary: Trailing Returns QTD 1 Yr 3 Yr 5 Yr 10 Yr ITD* RAFI Dynamic Multi- RAFI Value RAFI Low Volatility RAFI Quality RA Momentum MSCI EMF ( ) - Gross Return 10 Yr Volatility 10 Yr TE** 0.5% 15.1% 9.5% 5.1% 5.0% 22.1% 21.8% 4.0% 3.7% 16.2% 16.2% 7.9% 6.5% 24.4% 24.9% 8.4% -1.1% 12.6% 6.8% 4.5% 6.5% 20.1% 18.6% 8.0% 2.5% 12.7% 7.4% 3.3% 3.8% 16.4% 22.3% 5.3% -1.1% 22.9% 9.3% 6.0% 4.2% 30.9% 21.9% 5.2% 1.5% 25.4% 9.2% 5.4% 3.4% 30.7% 22.5% N/A SOURCE: FactSet Data: As of 03/31/2018 in USD INCEPTION DATE: 01/31/2017 * Inception to Date (ITD) uses the first full month of returns after inception date. All returns prior to inception are simulated, please see disclosures for important information regarding simulated performance. ** Annualized Tracking error calculated against each section s appropriate benchmark using the first full month of returns following index inception. returns prior to inception are simulated. Web: info@rafi.com 6

7 RAFI Dynamic Multi- Characteristics RAFI Dynamic Multi- RAFI Value RAFI Low Volatility RAFI Quality RA Momentum Number of Holdings P/E P/S P/B Dividend Yield Market Cap / $B One-Way Turnover Capacity / $B % % % % % 0.47 SOURCE: FactSet Data: As of 03/31/2018 in USD INCEPTION DATE: 01/31/2017 NOTE: Portfolio characteristics derived from FactSet. Data prior to launch is simulated. One-way turnover data is historical average based on simulated history. Capacity is estimated at 50 basis point market impact level. Correlation of Excess Returns (6/2007-3/2018) RAFI Low RA RAFI Value RAFI Quality Volatility Momentum Tracking Error* RAFI Value RAFI Low Volatility RAFI Quality RA Momentum % N/A % N/A N/A % N/A N/A N/A % RAFI Dynamic Multi- 3.91% SOURCE: FactSet DATA: As of 03/31/2018 in USD *NOTE: Annualized Tracking Error calculated against each s appropriate benchmark using the first full month of returns following index inception. returns prior to inception are simulated. Web: info@rafi.com 7

8 RAFI Dynamic Multi- Top 10 Holdings RAFI Dynamic Multi- US Weights (%) Value Low Vol. Quality Mom. 1 Tencent Holdings Ltd Hon Hai Precision Industry Naspers Limited Class N Alibaba Samsung Electronics Taiwan Semiconductor SK Hynix Hyundai HDFC Bank Limited Sponsored ADR Baidu SOURCE: FactSet DATA: As of 03/31/2018 in USD Top 10 Sectors Sector RAFI Dynamic Multi- RAFI Value RAFI Low Volatility RAFI Quality RA Momentum 1 Basic Materials 12.09% 23.05% 10.74% 13.31% 7.43% 2 Consumer, Cyclical 14.42% 6.87% 16.08% 7.88% 20.24% 3 Consumer, Non-Cyclical 7.29% 1.32% 8.83% 14.31% 3.90% 4 Energy 9.99% 28.91% 6.57% 11.37% 5.89% 5 Financial 19.90% 6.90% 22.13% 4.91% 31.33% 6 Health care 0.58% % 0.82% 0.15% 7 Industrial 4.74% 5.83% 6.97% 5.10% 3.47% 8 Technology 19.23% 10.21% 10.13% 27.84% 22.35% 9 Telecommunications 7.47% 9.16% 9.80% 10.46% 3.72% 10 Utilities 4.29% 7.76% 7.62% 3.99% 1.53% SOURCE: FactSet DATA: As of 03/31/2018 in USD Web: info@rafi.com 8

9 RAFI Dynamic Multi- Regions Sector RAFI Dynamic Multi- RAFI Value RAFI Low Volatility RAFI Quality RA Momentum 1 Asia Pac x China, India 21.78% 11.88% 32.68% 38.97% 11.79% 2 Brazil 7.72% 15.92% 1.62% 8.10% 6.41% 3 China 17.94% 13.79% 3.61% 8.89% 33.57% 4 Ctr & S America x Brazil 4.80% 0.27% 7.30% 8.80% 3.58% 5 Europe x Russia 1.61% 2.95% 3.73% 0.07% 1.65% 6 India 10.47% 1.22% 8.24% 8.70% 14.87% 7 Middle East & Africa 6.87% 11.38% 2.06% 5.74% 7.51% 8 Other 23.04% 25.48% 36.96% 12.45% 19.05% 9 Russia 5.77% 17.11% 3.81% 8.28% 1.57% SOURCE: FactSet DATA: As of 03/31/2018 in USD Web: info@rafi.com 9

10 RAFI Dynamic Multi- Disclosures (1/2) The material contained in this document is for information purposes only. This material is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any transaction. Any offer to sell or a solicitation of an offer to buy or sell shall be made solely by the legally permitted entity registered or licensed with the applicable regulator(s) and only to qualified investors through a regulatory registration statement or subject to an applicable exemption and disclosure document such as a private placement memorandum for pooled investment vehicles, or investment management agreement for separately managed accounts. The information contained herein may be opinions, which are subject to change, at any time, and should not be construed as financial or investment advice on any subject matter. The index data published herein may be simulated and in such instances, no allowance has been made for trading costs, management fees, or other costs, are not indicative of any specific investment, are unmanaged and cannot be invested in directly. As such, the simulated data may have under-or over-compensated for the impact, if any of certain market factors. Further, simulated data is subject to the fact that it is designed with the benefit of hindsight. returns represent back-tested performance based on rules used in the creation of the index, are not a guarantee of future performance or indicative of any specific investment and actual index results may differ. Any information and data pertaining to an index contained in this document relate only to the index itself and not to any asset management product based on the index. es are not managed investment products and cannot be invested in directly. This material is based on information that is considered to be reliable, but RAFI Indices, LLC and its related entities make this information available on an as is basis without a duty to update, make warranties, express or implied, regarding the accuracy of the information contained herein. Investors should be aware of the risks associated with data sources and quantitative processes used in the creation of the index related data. Errors may exist in data acquired from third party vendors, the construction of indices, and in coding related to the index construction process. While RAFI Indices, LLC and its related entities take steps to identify data and process errors so as to minimize the potential impact of such errors on index performance, they cannot guarantee that such errors will not occur. Copyright MSCI. All Rights Reserved. Without prior written permission of MSCI, this information and any other MSCI intellectual property may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. This information is provided on an as is basis, and the user of this information assumes the entire risk of any use made of this information. Neither MSCI nor any third party involved in or related to the computing or compiling of the data makes any express or implied warranties, representations or guarantees concerning the MSCI index-related data, and in no event will MSCI or any third party have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) relating to any use of this information. The trademarks Fundamental, RAFI, Research Affiliates Equity, RAE, and the Research Affiliates trademark and corporate name and all related logos are the exclusive intellectual property Web: info@rafi.com 10

11 RAFI Dynamic Multi- Disclosures (2/2) of Research Affiliates, LLC and in some cases are registered trademarks in the U.S. and other countries. The RAFI trademark is used under license by RAFI Indices, LLC. The RAFI Indices, LLC corporate name and all related logos are the exclusive intellectual property of RAFI Indices, LLC. Various features of the Fundamental methodology, including an accounting data-based non-capitalization data processing system and method for creating and weighting an index of securities, are protected by various patents, and patent-pending intellectual property of Research Affiliates, LLC. (See all applicable US Patents, Patent Publications, Patent Pending intellectual property and protected trademarks located at html#d, which are fully incorporated herein.) Any use of these trademarks, logos, patented or patent pending methodologies without the prior written permission of Research Affiliates, LLC, is expressly prohibited. Research Affiliates, LLC, reserves the right to take any and all necessary action to preserve all of its rights, title, and interest in and to these marks, patents or pending patents. RAFI Indices, LLC is a wholly owned subsidiary of Research Affiliates Global Holdings, LLC and does not offer or provide investment advice or offer or sell any securities, commodities or derivative instruments or products. Any such business may only be conducted through registered or licensed entities and individuals permitted to do so within the respective jurisdiction and only in conjunction with the legally required disclosure documents and subject to the all legally required regulatory filings RAFI Indices, LLC. All rights reserved. Duplication or dissemination prohibited without prior written permission. Web: info@rafi.com 11