1607 GROUP AT MORGAN STANLEY

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1 W E A L T H M A N A G E M E N T

2 I. Overview TABLE OF CONTENTS: II Portfolio III Income Growth Portfolio IV. Investment Team WEALTH MANAGEMENT

3 WEALTH MANAGEMENT O V E R V I E W

4 Our Business: Boutique fundamental investment management team within Morgan Stanley New York City & Richmond, Virginia The Portfolio Managers have worked together for 13 of the last 16 years Long term track record and long term core client base reflect investor trust and satisfaction ABOUT 1607 Morgan Stanley Resources The resources at Morgan Stanley provide us with top notch research, back office support, custody, and trade execution Portfolio Managers THOMAS Y CATLETT: 27 years of experience, including Morgan Stanley, Three Chopt Capital, and Citigroup. Hampden Sydney College and The University of Virginia Darden Business School CHARLES T ROSE III: 16 years of experience, including Morgan Stanley, Pelagic Capital (Tiger Management), and Citigroup. The University of Virginia and Columbia University Business School W E A L T H M A N A G E M E N T 1

5 Our Core Investment Beliefs We aim to provide the benefits of equity investing while minimizing the potential for permanent capital loss. Key elements of this philosophy and process are: A research driven, bottom up, fundamental process OUR CORE A focus on absolute returns. We do not match index exposures or evaluate ourselves versus any index over short periods of time Tax Efficiency. The portfolios are naturally low turn over. We seek to maximize after tax returns Concentrated portfolios. We believe that over diversification adds tail risk and complexity with diminishing benefits Our investment process is straightforward, understandable, and repeatable W E A L T H M A N A G E M E N T 2

6 1607 GROUP & MORGAN STANLEY: A Powerful Combination Research Process Decades of Portfolio Management Experience INVESTMENT Morgan Stanley s Global Presence 1607 PORTFOLIO 1607 INCOME GROWTH PORTFOLIO CUSTOMIZED EQUITY AND BOND PORTFOLIOS BUSINESS TEAM COMPOUNDING INVESTOR CAPTIAL In-house Compliance and Support Staff at Office Level W E A L T H M A N A G E M E N T 3

7 WEALTH MANAGEMENT 1607 PORTFOLIO

8 1607 Portfolio Long Term Capital Appreciation 1607 PORTFOLIO Concentrated, fundamental, long only, equity portfolio Typically investments; all cap, any sector, principally U.S. Overarching goal: Long term capital appreciation Top criteria for stock selection: quality of management, growth prospects, and valuation No macro calls; No market timing Valuation discipline and lengthy research process is our primary tool for risk control Typical Investment Attributes Exceptional Leadership: proven management teams with a deep bench and high integrity Natural Compounders: Flywheel business models that compound cash flows, earnings, and book value W E A L T H M A N A G E M E N T 5

9 THE PROCESS THE 1607 PORTFOLIO PROCESS Leadership Barriers Cash Flow World Class Management Teams, that are ROIC Operating Companies With High Barriers to Entry & Reoccurring Revenue, producing Growth Reliable Free Cash Flow & Strong Balance Sheets, High Return on Invested Capital, and the Valuation Ability To Substantially Grow Earnings. All Put Through Rigorous Valuation Test W E A L T H M A N A G E M E N T 6

10 DIFFERENTIATING PORTFOLIO CHARACTERISTICS Each entity is in its own separately managed account CHARACTERISTICS Monthly account statements and performance provided by Morgan Stanley Full transparency. Including 24/7/365 internet access to accounts. Daily liquidity. Accounts can be invested or liquidated within minutes of a client request One single flat fee; no performance fee Typically low turnover (15-30% per yr) and tax efficient Concentrated portfolio W E A L T H M A N A G E M E N T 7

11 WEALTH MANAGEMENT 1607 INCOME GROWTH PORTFOLIO

12 1607 INCOME GROWTH PORTFOLIO 1607 Income Growth Portfolio Risk Adverse Dividend Growth Concentrated, quantitative & fundamental process, long only, equity portfolio Typically positions; all cap, global, limited sectors Overarching goal: Risk adverse dividend growth Top criteria for stock selection: dividend growth, no cyclicality, no financials, low payout ratio, low debt No macro calls; No market timing After our screening process and valuation ranking narrows the investable universe to less than 100 potential investments, we use our bottom up fundamental analysis to invest the portfolio Typical Investment Attributes Key component: A low payout ratio helps provide a margin of safety and allows the dividend to grow It s not all about the yield: We believe that a growing and compounding yield is more powerful than a static high yield W E A L T H M A N A G E M E N T 9

13 24,000 Stocks Start with 24,000 possible investments. Remove yields under 2.5%, and market caps below $10bil. THE PROCESS 500 Stocks Remove Financials, Deep Cyclicals, Utilities 300 Stocks Earnings Yield and ROIC Rank. Remove low volume. 100 Stocks Fundamental Analysis (see page 6) 25 INVESTMENTS W E A L T H M A N A G E M E N T 10

14 Quantitative OUR PROCESS We screen for stocks with yields above 2.5% We use a system that ranks companies based on return on invested capital and cash flow yields We eliminate financials and deep cyclicals We eliminate utilities because the sector has a poor history of dividend growth We are left with an investable universe of under 100 names that rank high enough to warrant consideration Fundamental Our bottom up process on the top potential investments focusing on: Dividend payout ratio Management quality: integrity, competency, incentive to create shareholder value Growth prospects: reoccurring revenue streams, barriers to entry, pricing power, large and stable market share External risks: competitive, sector, geographic, legal We target 20 to 25 investments with an emphasis on quality, dividend safety, and dividend growth. It s not ALL about yield. Too often funds that solely invest for dividends overlook basic fundamentals in a search for yield. W E A L T H M A N A G E M E N T 11

15 WEALTH MANAGEMENT INVESTMENT TEAM

16 INVESTMENT TEAM Thomas Catlett is a Financial Advisor and Portfolio Manager Director for discretionary equity accounts within Morgan Stanley. Prior to Morgan Stanley, Tom was the Chief Investment Officer at Three Chopt Capital, a Registered Investment Advisor focused on equity managed accounts. Tom has managed discretionary accounts since Along with team member Charles Rose, he manages the 1607 Group s flagship 1607 All Cap Portfolio and 1607 Income Growth Portfolio. Tom s Wall Street career began in The Institutional Equities Division at Kidder Peabody in He then managed a sales team at Citi Smith Barney in the US Equities Division that provided Institutional Equity Coverage for several of the world s largest hedge funds, including Soros Fund Management and Tiger Management. Tom and his sales team also managed discretionary accounts for his Institutional clients and their families. Today, the 1607 Group at Morgan Stanley counts the founders and chief executives of several of the world s largest hedge funds and fund of funds companies as clients, as well as a number of retired senior executives of major Wall Street firms. Tom is a Registered Investment Advisor and is a graduate of the Darden Graduate Business School at The University of Virginia, and Hampden Sydney College. He commutes to New York and he lives in Richmond VA with his family Thomas.Catlett@morganstanley.com Charles Rose is a Senior Portfolio Manager and Financial Advisor with the 1607 Group at Morgan Stanley. Along with his team he oversees the team s flagship all cap strategy (the 1607 All Cap Portfolio), and the 1607 Income Growth Portfolio which focuses on compounding dividend yield. The team also serves as a Family Office to a select number of their clients. Prior to Morgan Stanley, Charles was an equity Analyst at Pelagic Capital Advisors, a long/short hedge fund under the Tiger Management umbrella. Charles opened and worked from Pelagic s London office from and was responsible for the firms overseas investments. He travelled extensively through Europe, the Middle East, Africa, and Asia performing bottom up, fundamental due diligence on the fund s investments. From 2005 to 2007 Charles acted as the Head Trader/Analyst at Three Chopt Capital while attending business school. Charles began his career in the Institutional Equity Sales division of Citigroup where he also managed discretionary accounts for high net worth clients. Charles sits on the Board and the Finance Committee of the New York Institute for Special Education and is member of the Shadwell Society, part of the Jefferson Scholars Foundation at the University of Virginia. He is an avid sailor and holds an MBA from Columbia Business School and a BA from the University of Virginia. He currently resides in Greenwich, CT with his wife and two children Charles.Rose@morganstanleypwm.com W E A L T H M A N A G E M E N T 13

17 DISCLOSURES: Consider Specific Investment Needs This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an investment strategy based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Morgan Stanley investment advisory programs may require a minimum asset level and, depending on your specific investment objectives and financial position, may not be suitable for you. This material is intended only for clients and prospective clients of the Portfolio Management program. It has been prepared solely for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument, or to participate in any trading strategy. The individuals mentioned as the Portfolio Management Team are Financial Advisors with Morgan Stanley participating in the Morgan Stanley Portfolio Management program. The Portfolio Management program is an investment advisory program in which the client s Financial Advisor invests the client s assets on a discretionary basis in a range of securities. The Portfolio Management program is described in the applicable Morgan Stanley ADV Part 2, available at or from your Financial Advisor. Past performance of any security is not a guarantee of future performance. There is no guarantee that this investment strategy will work under all market conditions. Morgan Stanley Smith Barney LLC ( Morgan Stanley ), its affiliates and Morgan Stanley Financial Advisors or Private Wealth Advisors do not provide tax or legal advice. Clients should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters. Depending on the composition of your account and your investment objectives, any indices shown in this report may not be an appropriate measure for comparison purposes and are presented for illustration only. The strategy shown in this report does not necessarily seek to track the index, is not restricted to securities in the index and may be more volatile than the index. If this report shows a blend of the benchmarks in the specified allocation, the Financial Advisor might not invest the portfolio in the asset allocation reflected in any blended index, and may rebalance the portfolio (and/or vary the asset allocation) from time to time as the Financial Advisor determines is appropriate. Indices are unmanaged. They do not reflect any management, custody, transaction or other expenses, and generally assume reinvestment of dividends, accrued income and capital gains. Past performance of indices does not guarantee future results. You cannot invest directly in an index. The S&P 500 has been widely regarded as the best single gauge of the large cap U.S. equities market since the index was first published in The index has over $5.58 trillion benchmarked, with index assets comprising approximately $1.31 trillion of this total. The index includes 500 leading companies in leading industries of the U.S. economy, capturing 75% coverage of U.S. equities. This index includes dividend reinvestment. The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 89% of the total market capitalization of the Russell 3000 Index. The Russell Midcap Index is representative of the U.S. market for medium capitalization stocks containing approximately 800 of the smallest companies in the Russell 1000 Index, representing approximately 25% of the total market capitalization of the Russell 1000 Index. Equal dollar amounts of three-month Treasury bills are purchased at the beginning of each of three consecutive months. As each bill matures, all proceeds are rolled over or reinvested in a new three-month bill. The income used to calculate the monthly return is derived by subtracting the original amount invested from the maturity value. The yield curve average is the basis for calculating the return on the index. The index is rebalanced monthly by market capitalization. Portfolio Statistics Glossary Alpha is a mathematical estimate of risk-adjusted return relative to the market (i.e. beta risk) as proxied by the benchmark index. Alpha is essentially the portfolio performance in excess of what would be predicted by the general equilibrium Capital Asset Pricing Model (CAPM). The alpha shown in this report is calculated since the composite s inception. Average Number of Holdings is the average number of securities in the accounts in the composite, calculated as of the date of this report. Beta, also known as market or systematic risk, is the ratio of the covariance of the portfolio s returns with the market returns to the variance of the market returns. The market is usually proxied by an appropriate benchmark index. An investor can think of beta as the tendency of a portfolio s returns to respond to fluctuations in the benchmark index returns. A beta of 1 indicates that, on average for every percentage move in the benchmark index, the portfolio moves by the same amount. The beta shown in this report is calculated since the composite s inception. Composite Dispersion represents the range of portfolio returns from the highest to the lowest portfolio return and includes only portfolios that were in the composite for the entire performance period. Market Value represents the total assets under management in the composite at the end of each performance period. Number of Portfolios represents the total number of accounts under management in the specified strategy as of the date of this report. R 2 (R-Squared) is the proportion of a portfolio s return variance that is explained by variations in the benchmark index returns. R-Squared values range from 0 to 100. It follows that a higher R-Squared allows for a more useful interpretation of the beta, or systematic risk, of the portfolio. The R-squared shown in this report is calculated since the composite s inception. Sharpe Ratio is a risk-adjusted measure derived directly from the CAPM. It is the ratio of the excess return of a portfolio over the risk-free rate of return to the volatility of these excess returns. A high Sharpe Ratio relative to other peers indicates better portfolio efficiency in terms of excess portfolio returns per unit of risk. The Sharpe ratio shown in this report is calculated since the composite s inception. Standard Deviation is a statistical measure of historical variability or spread of returns around a mathematical average return that was produced by the portfolio manager over a given time period. The higher the standard deviation, the greater the variability in the investment manager s returns relative to its average return. The standard deviation shown in this report is calculated since the composite s inception. Top Ten Holdings indicates the largest security holdings in the composite measured as a percentage of the total composite using the market value as of the date of this report. Cash and Cash Equivalents are combined into one holding. Holdings are subject to change daily, so any securities discussed in the report may or may not be included in your account if you invest in this strategy. Your account may also include other securities in addition to or instead of any securities discussed in this report. Individual client accounts may be different based on variations in security purchase price and date, and individual client restrictions. Do not assume that any holdings mentioned were, or will be, profitable. Weighted Average Fee is the average annualized fee for the accounts in the composite as of the date stated in this report, weighted in accordance with the assets in each account as of that date. If you invest in this strategy, your fee may be more or less than the Weighted Average Fee, which in turn affects your net performance.

18 Asset Class Risk Considerations Depending on the type of strategy in which you are investing, some or all of the following risks may apply. Equities: Investors should be willing and able to assume the risks of equity investing. The value of a client s portfolio changes daily and can be affected by changes in interest rates, general market conditions and other political, social and economic developments, as well as specific matters relating to the companies in which the portfolio has invested. Companies paying dividends can reduce or cut payouts at any time. Fixed Income: All fixed income securities are subject to market risk and interest rate risk. If fixed income securities are sold in the secondary market before maturity, an investor may experience a gain or loss depending on the level of interest rates, market conditions and the credit quality of the issuer. Sectors: Portfolios that invest primarily in securities of companies in one industry or sector are subject to greater price fluctuation and volatility than portfolios that invest in a more broadly diversified portfolio. Small Cap Companies: Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity. International Investing: International investing involves risks not associated with domestic investing, including political, economic, currency and liquidity risks as well as differences in accounting and limited available information. Emerging Markets: Investing in the securities of such companies and countries involves certain considerations not usually associated with investing in developed countries, including political and economic situations and instability, adverse diplomatic developments, price volatility, lack of liquidity and fluctuations in the currency exchange. Closed End Funds: Closed-end funds, unlike open-end funds, are not continuously offered. There is a one-time public offering and, once issued, shares of closed-end funds are sold in the open market through a stock exchange. Net asset value (NAV) is total assets less total liabilities divided by the number of shares outstanding. At the time of sale, your shares may have a market price that is above or below NAV. There is no assurance that the fund will achieve its investment objective. The fund is subject to investment risks, including possible loss of principal invested. Exchange Traded Funds: An investment in an exchange-traded fund involves risks similar to those of investing in a broadly based portfolio of equity securities traded on an exchange in the relevant securities market, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock prices. The investment return and principal value of ETF investments will fluctuate, so that an investor s ETF shares, if or when sold, may be worth more or less than the original cost. Money Market Funds: An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund may seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in a fund. Options: A call option allows the purchaser to buy the underlying security at a predetermined price (the call strike price ) on or before a specific date (the expiration date or maturity date ). The seller of a call option receives option premium for providing the buyer with the right to buy the underlying stock at the call strike price. By selling a call option and receiving the premium, an investor can increase the yield on an equity position and receive limited downside protection. The investor is, in effect, being compensated today for the decision to sell the stock at a predetermined price in the future. Cash settlement of the call option may defer a sale of the underlying stock Morgan Stanley Smith Barney LLC. Member SIPC. Portfolio Management Group and Consulting Group are businesses of Morgan Stanley Smith Barney LLC. CRC #