Graduate Seminar: ETF Advisor Roundtable: Building a Resilient ETF Portfolio

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1 Graduate Seminar: ETF Advisor Roundtable: Building a Resilient ETF Portfolio Matt Hougan President ETF.com Bryan Novak Director of Trading Astor Investment Management Channing Smith Managing Director Capital Advisors, Inc

2 Graduate Seminar: ETF Advisor Roundtable: Building a Resilient ETF Portfolio Channing Smith Managing Director Capital Advisors, Inc

3 About Us Founded in 1978 Approximately $1.4 billion AUM 6 investment strategies available as SMAs, UMAs or mutual funds *AUM as of June 30, 2014 See end of presentation for disclosures

4 We re Different Because Our strategies adjust to changing market conditions systematically Portfolio changes are driven by objective data Transparency is one of our highest priorities No surprises! See end of presentation for disclosures

5 Our Strategies Adjust to Pre-Conditions Based on Valuation U.S. Stock Market Valuation Cycles Average % of Valuation Subsequent 3-Yr. Periods Pre-Condition 3-Yr. Return Negative Cheapest Quartile 16.82% None Most Expensive Quartile 6.43% 32.6% It is not possible to invest directly in the index represented Source: Robert Shiller ( ); Standard & Poor s; Ibbotson; Bloomberg LP ( ); Capital Advisors, Inc. Note: Valuation was defined by the Shiller P/E Ratio as of each month-end between Jan and Dec The Cheapest Quartile represents all 3-year holding periods that began with a month-end Shiller P/E less than 11.7, while the Most Expensive Quartile represents periods that began with a Shiller P/E above 19.9.

6 Our Strategies Adjust to Pre-Conditions Based on Trends U.S. Stock Market Average Monthly Returns Frequency of Negative Months Month after Bullish Pre-Condition 1.18% 34.8% Month after Bearish Pre-Condition 0.28% 46.1% It is not possible to invest directly in the index represented Source: Capital Advisors, Inc.; Robert J. Shiller; Ibbotson Associates; Standard & Poor s Note: In this study the pre-condition was defined by the relationship between the price of the market index relative to its trailing 10-month moving average as of each month end from January 1872 through December A bullish pre-condition means the month-end price of the index was above its moving average. A bearish pre-condition means the index was below its moving average.

7 Our Strategies Adjust to Pre-Conditions Based on Momentum 10 Global Risk Market Sectors Momentum Rebalance vs. Equal Weight Jan to Dec Momentum Cumulative Return Eq. Weight Cumulative Return MSCI World Monthly Return Note: Source: Capital Advisors, Inc. The study compared a static, equal-weight allocation among 10 global equity market indices to a systematic quarterly rebalancing strategy that over-weights 3 top-performing sectors over the previous 12 months, while underweighting 3 under-performing sectors. The 10 sectors are large growth; large value; mid-cap; small-cap, international; emerging markets; Japan; natural resources; real estate; and high-yield bonds. It is not possible to invest directly in the strategy reflected in this study.

8 Dynamic Asset Allocation Valuation * Trends * Momentum Take more risk when the outlook is favorable Take less risk when it is not See end of presentation for disclosures

9 Commitment to Transparency 1) Define the investment universe and trading rules in advance 2) Execute according to each strategy s pre-defined process 3) Inform investors every time there is activity in a strategy

10 Contact Information Advisor Support Shawna Moore Investment Team Keith C. Goddard, CFA Channing S. Smith, CFA Monty L. Butts Jamie L. Wilson South Utica Place, Suite 150 Tulsa, Oklahoma Direct Toll Free Fax

11 Disclosures This commentary does not purport to be a statement of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources believed to be reliable. Opinions expressed herein are subject to change without notice. This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be reliable; however its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. This presentation may not be construed as investment advice and does not give investment recommendations. Any opinion included in this report constitutes the judgment of Capital Advisors, Inc. as of the date of this report, and are subject to change without notice. Index Descriptions: S&P 500 Total Return Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market, calculated by reinvesting dividends. MSCI World Index captures large and mid cap representation across 23 Developed Markets countries. With approximately 1,600 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. The Equal Weight strategy represents a systematic equal-weight allocation of 10% each in the following 10 market indices: S&P 500 Growth and S&P 500 Value style Indices divide the complete market capitalization of each parent index into growth and value segments. S&P MidCap 400 Index serves as a barometer for the U.S. mid-cap equities sector. To be included in the index, a stock must have a total market capitalization that ranges from roughly $750 million to $3 billion. S&P SmallCap 600 Index measures the small cap segment of the U.S. equity market. The index is designed to be an investable portfolio of companies that meet specific inclusion criteria to ensure that they are liquid and financially viable. MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. MSCI Japan Index is constructed based on the MSCI Global Investable Market Indices Methodology, targeting a free-float market capitalization coverage of 85%. S&P North American Natural Resource Index is an equity index that represents U.S. traded securities across a broadly defined North American Natural Resource sector. S&P Indices uses GICS to determine a company s classification. The index is modified-capitalization weighted, where a stock s weight is capped at a level determined on a sector basis. FTSE NAREIT U.S. Real Estate Index: An equity index that represents traded securities in the U.S. market structured as real estate investment trusts. Merrill Lynch US High Yield Master II Index is a commonly used index for high yield corporate bonds. The index is a broad measure of the domestic market for corporate bonds with ratings below investment grade.

12 Disclosures Additional information, including management fees and expenses, is provided on Capital Advisors Form ADV Part 2. As with any investment strategy, there is potential for profit as well as the possibility of loss. Capital does not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. The investment return and principal value of an investment will fluctuate so that an investor s portfolio may be worth more or less than its original cost at any given time. The underlying holdings of any presented portfolio are not federally or FDIC-insured and are not deposits or obligations of, or guaranteed by, any financial institution. Past performance is not a guarantee of future results. Capital Advisors, Inc. does not provide tax or legal advice and recommends you consult with your tax and/or legal adviser for such guidance. Presentation is prepared by: Capital Advisors, Inc. Copyright 2014, by Capital Advisors, Inc. A complete list of Capital Advisor s portfolio models and performance results is available upon request.

13 Graduate Seminar: ETF Advisor Roundtable: Building a Resilient ETF Portfolio Bryan Novak Director of Trading Astor Investment Management

14 An Overview of Astor Astor s economically driven approach to tactical ETF portfolio construction has provided us with a successful track record for over a decade. The Astor Approach Macro-economic Analysis Tactical Asset Allocation Efficient Investment Vehicles Fundamental analysis of the economy guides investment decision making processes. Portfolio construction utilizes a broad range of asset classes in order to create more favorable risk-adjusted returns (i.e. higher average returns with reduced volatility). Exclusive use of exchange-traded funds in portfolios provides access to multiple asset classes in a liquid, on-exchange format.

15 Macroeconomic Analysis OUR GOAL IS TO INTERPRET THE CURRENT ECONOMIC CYCLE Contraction Decreasing employment and output Cuts in capital spending Falling equity prices Peak Irrational exuberance Rampant prosperity Overbought equity prices Trough High unemployment Erratic stock market Fed acts to stimulate economy Expansion Rising employment Increasing productivity and output Appreciating equity prices - We use broad fundamental indicators such as output and employment as tools to gauge the current phase of the economic cycle. - Economic data of various frequency is gathered using a proprietary method that allows us to generate a singular economic indicator, The Astor Economic Index. 15

16 Impact of Economic Cycles S&P 500 Index Cumulative Return Including Recession: 28.08% Excluding Recession: % Recession Periods S&P 500 Index Nonfarm Payrolls (3m MA) Source: Bloomberg, NBER, Astor Calculations Data: 12/31/99 6/30/14 *Performance represents price only, dividends assumed not re-invested

17 Identifying Economic Cycles Recession Periods S&P 500 Index Nonfarm Payrolls (3m MA) Source: Bloomberg, NBER, Astor Calculations Data: 12/31/99 6/30/14 *Performance represents price only, dividends assumed not re-invested

18 The Astor Economic Index STRONG GROWTH 1,900 ABOVE AVERAGE GROWTH 1,700 1,500 AVERAGE GROWTH 1,300 WEAK GROWTH 1, RECESSION 700 Astor Economic Index S&P 500 Index Source: Astor Calculations Data: 12/31/99 06/30/14

19 Indicators For Non-Equity Investments Indicator & Description Commodities Currencies Fixed Income Real Estate Economic Cycle: Relationship between the current economic outlook and the non-equity asset class Credit Spreads: Absolute levels and trends can provide information on the economy and investor risk appetite Interest Rate Policy: Explicit targets and implicit accommodative/tightening stance of the FOMC Momentum/Moving Averages: Proprietary trend based system to quantify and analyze price specific conditions X X X X X X X X X X

20 Tactical Allocation with Low Correlation Astor 15% 10% 5% 0% -5% -10% -15% Correlation = 0.21 Source: PerTrac, Bloomberg, Astor Data: 12/31/99 6/30/14-20% -5.00% -2.50% 0.00% 2.50% S&P 500 Index 5.00% 7.50% 10.00% Equity Fixed Income Real Estate Commodity Currency Cash Equity 1.00 Fixed Income Real Estate Commodity Currency Cash ASTOR

21 The Benefits of Lower Drawdown and Downside Volatility % % % % % % S&P 500 Astor Maximum Drawdown % % % to Break Even % 15.01% Months to Recover replacement. Source: Bloomberg, Astor Data: 12/31/99-6/30/14 - The broad investment universe and tactical allocation used in the portfolio has significantly lowered the drawdown compared to the broad market. - In 2008, the portfolio experienced approximately 1/10 th of the S&P 500 s decline. - Avoiding drawdowns provides an opportunity for wealth expansion rather than wealth replacement

22 Advantage of Adding a Tactical Strategy $250,000 Source: Bloomberg Data: 12/31/99 6/30/14 $200,000 $150,000 $100,000 $50, HFRI Total Macro Index - Allocating a portion of a portfolio to a tactical strategy can increase average annualized returns while lowering volatility - Sidestepping a downward move in the market can help to build wealth sooner rather than just replacing wealth lost. 80% S&P 500 Index/20% HFRI Total Macro Index Portfolio Allocation Average Annual Return Max Drawdown S&P 500 Index Standard Deviation 100% S&P 500 Index 3.96% % 15.46% 100% HFRI Macro Index 5.50% -8.02% 5.28% 80% S&P 500 Index/20% HFRI Macro Index 4.47% % 12.59%

23 Contact Information Bryan Novak Senior Portfolio Manager (312) Website -Separately Managed Accounts -Mutual Funds -Unified Managed Accounts Blog ww.astorinsights.com A macroeconomic approach to tactical ETF investing

24 Disclosures All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice in any state where it would be unlawful. There is no assurance that the programs will produce profitable returns or that any account will have results similar to that of the composite. Past performance is not a guarantee of future results. You may lose money. Factors impacting client returns include individual client risk tolerance, restrictions a client may place on the account, investment objectives, choice of broker/dealers or custodians, as well as other factors. Any particular client s account performance may differ from the program results due to, among other things, commission, timing of order entry, or the manner in which the trades are executed. The investment return and principal value of an investment will fluctuate and an investor s equity, when liquidated, may be worth more or less than the original cost. The Sector Tactical Asset Rotation Composite is a tactical strategy focused on the generation of returns through shifts in domestic equity sector allocations. The Composite exclusively uses exchange-traded funds (ETFs) and invests primarily in equities. The Composite will use fixed income and cash as defensive positions when market environments warrant a reduction in risk. The Composite does not invest in inverse funds.

25 Disclosures The Astor returns presented are those of the Astor Sector Tactical Asset Rotation Composite, calculated from the net-of-fee monthly returns. The Sector Tactical Asset Rotation Composite is a tactical strategy focused on the generation of returns through shifts in domestic equity sector allocations. The Composite exclusively uses exchange-traded funds (ETFs) and invests primarily in equities. The Composite will use fixed income and cash as defensive positions when market environments warrant a reduction in risk. The Composite does not invest in inverse funds. The benchmark is the S&P 500 Index. The performance of the S&P 500 Index is shown for comparison because Astor uses index instruments tied to these products. Although the Programs invest in securities which may invest in assets besides equity securities and may invest in assets that move inversely with equities, the performance of the S&P 500 is presented because it is a widely used benchmark and indicator of market performance. The volatility of the index is materially different from the historical returns of the program. S&P 500 annual returns are calculated using S&P cash quarterly prices with dividends reinvested. The S&P 500 Index is an unmanaged composite of 500 large capitalization companies. S&P 500 is a registered trademark of McGraw-Hill, Inc. An investment cannot be made directly into an index. Valuations are computed and performance is reported in U.S. dollars. All performance results are inclusive of reinvestment of dividends. Net-of-fee returns are presented after the deduction of any and all transaction costs as well as advisory fees. Information about the fee schedule applicable to prospective investors is available within the firm s Form ADV Part 2A. From December 31, 1999 to September 30, 2010, the Portfolio Managers were affiliated with a prior firm. During this time the Portfolio Managers were the only individuals responsible for selecting the securities to buy and sell. Knight Capital Group, Inc. acquired the assets and portfolio management team from Astor Financial, LLC. Such performance should not be interpreted as the actual historical performance of Astor Investment Management. The performance presented for the time period from December 31, 1999 to December 31, 2004 is based on the performance of a representative account of the specific strategy. Actual client account performance may differ during this period based on factors such as but not limited to brokerage cost, advisor fees, discretionary decisions by the clients and referring advisors, and custodial limitations, which would have impacted the composite. Net-of-fee performance during this period is calculated assuming a 2.00% annual fee, paid quarterly in arrears. For the period from December 31, 2004 to September 30, 2010, the presented performance is based upon a composite of accounts under management, which was defined to include all accounts in which the model allocations could be fully implemented, and excludes any accounts in which clients have chose to implement reasonable restrictions or those accounts that could not receive timely and accurate electronic data from the account custodian. All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice in any state where it would be unlawful. There is no assurance that the programs will produce profitable returns or that any account will have results similar to that of the composite. Past performance is not a guarantee of future results. You may lose money. Factors impacting client returns include individual client risk tolerance, restrictions a client may place on the account, investment objectives, choice of broker/dealers or custodians, as well as other factors. Any particular client s account performance may differ from the program results due to, among other things, commission, timing of order entry, or the manner in which the trades are executed. The investment return and principal value of an investment will fluctuate and an investor s equity, when liquidated, may be worth more or less than the original cost.

26 Graduate Seminar: ETF Advisor Roundtable: Building a Resilient ETF Portfolio Matt Hougan President ETF.com Bryan Novak Director of Trading Astor Investment Management Channing Smith Managing Director Capital Advisors, Inc