THE PRUDENT SPECULATOR STRATEGY

Transcription

1 THE PRUDENT SPECULATOR STRATEGY All-Cap Value Strategy Growth of a Hypothetical $100,000 Investment Performance from March 10, June 30, 2016 TPS: 17.70% S&P 500: 10.78% John Buckingham leads a team that scrutinizes hundreds of stocks for money management clients and newsletter subscribers to The Prudent Speculator investment newsletter, of which he is the editor. John has been a part of AFAM since 1987 and is one of the company s largest shareholders. He has served as the firm s Director of Research since 1989 and Chief Portfolio Manager since John has also appeared on numerous television and radio programs. Jason R. Clark, Vice President, Senior Portfolio Manager, has been a part of the firm s Research and Portfolio Management Department since Within research, Jason is primarily focused on fundamental analysis of individual stocks and industries. Within Portfolio Management, Jason is responsible for active account management, providing education about the firm s investment strategies and working with the firm s current Private Wealth clients. AFAM Capital, Inc.

2 THE PRUDENT SPECULATOR STRATEGY FAQ What makes The Prudent Speculator different from other strategies? The initial Prudent Speculator portfolio has been in existence since Very few asset managers have a track record this long. Also, as an all-cap strategy, we have the flexibility to go larger- or smaller-cap (go anywhere for value), which has been very helpful over our tenure. Who is actually managing the portfolio? Our portfolios are managed by John Buckingham, Chief Investment Officer and Jason Clark, Senior Portfolio Manager. The Portfolio Managers are supported by the Research Team and proprietary framework. Can you explain this framework? They use a proprietary scoring system, which ranks companies based on valuation metrics and fundamentals that we believe to be predictive over the years. With the help of the research team, the next step is to review potential investments to ensure they are additive to the strategy. Where do I custody my account? Most of our clients use Fidelity and Charles Schwab to custody their assets. What is your fee structure? Our management fee starts at 1.25% and decreases based on the total amount that we manage for the household. Is this a fund, or do I own actual stocks? You will own individual stocks through a separately managed account registered in your name. This is not a mutual fund. What is the average turnover of this portfolio? The annual turnover in this portfolio has historically averaged between 20-25%. Why so many stocks? As broad portfolio diversification is a core tenet, we have found that investing in stocks optimally allows us to seek to minimize risk and maximize opportunity. More concentrated portfolios run the risk of having one or a few poorly performing positions seriously injure a portfolio. Conversely, many mutual funds or indices hold several hundred stocks. Why can t I just do this myself? People tend to hire asset managers for one of three reasons: They do not have the time to dedicate to managing a portfolio of stocks, it is hard to maintain a disciplined approach when emotion can impact investing decisions, or because they are concerned about a spouse or loved one trying to manage the portfolio in their absence. The latter group prefers to have a plan in place before something happens. Are you a fiduciary? As a registered investment advisor, we are a fiduciary to our advisory clients. This means that we have a fundamental obligation to act and provide investment advice in your best interests. Can I use an IRA or Roth IRA? Yes. IRA s (Roth, Traditional, Rollover, Inherited), Trusts, Joint, Individual, etc are all welcome. Is my money tied up for any period of time? While this is a long-term-oriented investment approach, we invest in liquid securities that trade on the major stock exchanges, so cash can be raised should a need arise. There is no lock-up period. 201-AFAM-5/25/2016 Please refer to the last page for important disclosure information.

3 THE PRUDENT SPECULATOR STRATEGY Opening An Account Step 1: Complete All Client Documents Client Worksheet The client worksheet provides AFAM Capital with the necessary information to establish and manage your account. Please note: The Prudent Speculator strategy requires a minimum investment of $100,000. Investment Management Agreement The investment management agreement appoints the investment manager to manage the account and contains other important information. Please read it carefully. Fidelity Application If you do not have an existing Fidelity account, please fill out this form. Fidelity Add Advisor Form If you have an existing Fidelity account, please fill out this form. Photo Identification Please provide a copy of the front and back of your driver s license. Step 2: Submit All Completed Documents to the AFAM Capital Operations Team operations@afamcapital.com Fax: Mail: AFAM Capital, Inc FM 2244, Building 3, Suite 170 Austin, Texas Step 3: Introductory Call With Your Portfolio Manager * Once all account paperwork is submitted, and your account is opened and funded, you will speak with one of our Portfolio Managers. This is the final step in the account opening process, and your Portfolio Manager will discuss The Prudent Speculator strategy and the process to build out your portfolio. If you have any questions regarding this process, please do not hesitate to reach out to one of the contacts below for assistance: Heather Solis, Senior Operations Associate: hsolis@afamcapital.com Andrew Miller, Operations Associate: amiller@afamcapital.com Chris Creed, VP, Private Client Business Director: ccreed@afamcapital.com * For relationships greater than $500, AFAM-5/25/2016 Please refer to the last page for important disclosure information.

4 Al Frank Prudent Speculator Second Quarter 2016 Investment Strategy Prudent Speculator Performance Mirroring the nearly four-decade-old TPS Portfolio, the model portfolio of The Prudent Speculator newsletter, Al Frank s Prudent Speculator strategy holds both dividend and non-dividend paying stocks and seeks broad diversification via exposure to a significant number of major market sectors and industry groups through roughly 70 to 90 positions. The manager employs a go-anywhere style focused on uncovering bargain-priced stocks independent of market capitalization. Stock selection is driven by bottom-up fundamental analysis in the context of macroeconomic and industry data. The manager distills company fundamentals and growth prospects into earnings, revenue and stockholders equity estimates applied against a determination of fair-value multiples to arrive at target prices. Stocks with significant appreciation potential relative to these target prices and perceived risk characteristics become available for selection. The manager may sell positions as they reach or approach their target price, if a lower target price results from a reassessment of earnings or valuation multiples, or if a more attractive stock is identified. About Al Frank Asset Management Founded in 1977, Al Frank Asset Management (AFAM) is an independent Registered Investment Advisor based in Aliso Viejo, CA. The firm exercises diligence and prudence in applying a value-based investment philosophy to help meet the investment goals and objectives of individuals, corporations and pension and profit sharing plans. AFAM offers two value-oriented, proprietary mutual funds and individually managed client accounts. AFAM also serves as editor of The Prudent Speculator newsletter, a top-ranked investment newsletter in terms of total return performance according to the Hulbert Financial Digest. Total Firm Assets as of June 30, 2016 $646 million Investment Style All Cap Value Objective Long-term capital growth Portfolio Inception March 10, 1977 Benchmark S&P 500 Return 16% 11% 6% 1% 4% QTD YTD 1 Yr 3 Yr 5 Yr 10 Yr 15 Yr Since Inception Net of Fee S&P 500 Russell 3000 Value Prudent Speculator (Net) S&P 500 Index QTD YTD Yr Yr Russell 3000 Value Index 5 Yr Growth of a Hypothetical $100,000 Investment $60,000,000 $40,000, Yr Yr Since Inception Equity Sectors (GICS) Top 15 Holdings* 15.1% Consumer Discretionary 5.0% Consumer Staples 8.0% Energy 17.8% Financials 9.6% Health Care 13.3% Industrials 20.4% Information Technology 6.7% Materials 2.5% Telecommunication Services 1.5% Utilities Company Name Aetna Inc Comcast Corp Walt Disney Co Brocade Comm. Systems Inc Celanese Corp Ingram Micro Inc Bank of NY Mellon Corp ManpowerGroup Coach Inc Waste Management Inc Apple Inc Intel Corp Johnson & Johnson Barrick Gold Corp Kimberly-Clark Corp Weight $20,000,000 $ Prudent Speculator (Net) S&P 500 Index Equity Market Capitalization 100% 75% 50% 25% Portfolio Metrics* Price to Earnings Ratio Price to Sales Ratio Price to Book Ratio Dividend Yield Prudent Speculator S P 500 Index Russell 3000 Value Index % Micro % Small % Mid % Large % Giant % As of *Data shown are supplemental information to the. Performance data are calculated with daily performance for the trailing three-year period. Portfolio metrics are calculated using Index Method aggregation for the ratios of all holdings in the and benchmark index. SOURCE: Al Frank using data from Bloomberg AF AFAM-7/12/2016

5 Al Frank Prudent Speculator Second Quarter 2016 Performance Total Firm Assets (Millions) Assets (Millions) Number of Accounts Gross Return Net Return Benchmark Return 3-Yr St Dev Benchmark 3-Yr St Dev Dispersion Wrap Fee Paying Accounts Non-Fee Paying Accounts : Data are not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year. dispersion is presented asset-weighted and gross-of-fees. The three-year annualized ex-post standard deviation of the composite and/or benchmark is not presented because 36 monthly returns are not available. Investment Committee John Buckingham Chief Investment Officer Jason Clark, CFA VP, Senior Portfolio Manager Contact Information Al Frank Asset Management FM 2244 Building 3, Suite 170 Austin, TX P: & F: info@alfrank.com alfrank.com Disclosures & Important Information AFAM Capital Inc. (AFAM) claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. AFAM has been independently verified for the periods January 1, 1996 through September 30, 2015 by Ashland Partners & Company LLP. A copy of the verification report(s) is/are available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. Verification does not ensure the accuracy of any specific composite presentation. The firm had assets under management of $646 million as of June 30, The Prudent Speculator includes discretionary equity portfolios that adhere to the stated strategy. The composite was created December 31, 2015 and limits the holdings to 70 to 90 positions. The inception date for the portfolio was March 10, Holdings concentration and turnover characteristics may be different from portfolios in other composites that can accumulate a higher number of securities. For comparison purposes, the composite is measured against the S&P 500 Index, a broad market index of the U.S. equity universe. The S&P 500 is includes the 500 leading companies and captures approximately 80% coverage of available market capitalization. The secondary benchmark is the Russell 3000 Value index. The Russell 3000 index measures the performance of the largest 3000 U.S. companies. It is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is reconstituted annually to ensure new and growing equities are reflected. The Russell 3000 Value index measures the performance of those Russell 3000 index companies with lower price-to-book ratios and lower forecasted growth values. You cannot invest directly in an index. The minimum account size for inclusion in this composite is $50,000. AFAM Capital is an independent, registered investment adviser, wholly owned by AF Holdings, Inc. The firm maintains a complete list and description of composites, which is available upon request. Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. policy requires the temporary removal of any portfolio incurring an aggregate net cash flow of at least 25% of portfolio assets. The temporary removal of such a portfolio occurs at the beginning of the month in which the significant cash flow occurs. The portfolio re-enters the composite at the beginning of the month after a net cash withdrawal and returns to the composite two full months after a net cash inflow. The composite includes portfolios that utilize margin. Past performance is not indicative of future results. The U.S. Dollar is the currency used to express performance. Portfolios eligible for this composite must follow the stated strategy. Live returns are presented net of management fees, gross of withholding taxes on any dividends, interest or capital gains, and include the effects of trading costs and reinvestment of all income. Net of fee performance was calculated using actual management fees charged to the client. Gross returns are shown as supplemental information, include the effects of the reinvestment of all income, and are stated gross of all fees except for transaction fees, when charged. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Effective May 31, 2016, the composite was approximately 48% comprised of non-fee-paying accounts, and the net performance is representative of same. Actual investment management fees will vary, beginning at 1.5% per annum. Our full management fee schedule is described in more detail in Form ADV Part 2A. The Prudent Speculator (TPS) has been the #1 ranked, not adjusted for risk, investment newsletter for the past 20, 25 and 30 years according to The Hulbert Financial Digest (as of ). TPS is focused on value investing and was created for the individual investor. Al Frank founded TPS in March John Buckingham has continued our traditions as editor of TPS. 20 year ranking: 1 out of 54 newsletters, 25 year ranking: 1 out of 35 newsletters, 30 year ranking: 1 out of 21 newsletters. A newsletter s Hulbert Financial Digest s Ranking is based on an average of its several portfolios in the event it recommends more than one (and includes portfolios that the letters have discontinued). Rating is not indicative of future performance and may not be representative of any one client s experience. Valuation metrics are the harmonic weighted-average of the ratios of all the holdings in the and Index. Alpha is a measure of the difference between a portfolio s actual returns and its expected performance, given its level of risk as measured by beta. Beta is a measure of volatility, or systematic risk, of a portfolio in comparison to a benchmark. A beta greater than one indicates more volatility, while a beta less than one indicates less volatility than the relevant benchmark. Annualized Standard Deviation is a measure of the dispersion of investment returns from the mean. A higher standard deviation indicates higher volatility. Sharpe Ratio is a measurement of reward per unit of risk as calculated by the average monthly excess return divided by the monthly standard deviation of excess returns. R Squared is a measure of how close the relationship is between a portfolio and its benchmark. Tracking Error is a measure of the volatility of excess returns relative to a benchmark. Information ratio is a measure of risk-adjusted performance. AFAM Capital is a Registered Investment Advisor. AFAM Capital is editor of The Prudent Speculator newsletter and is the Investment Advisor to certain proprietary mutual funds and individually managed client accounts. Registration of an investment adviser does not imply any certain level of skill or training. AF AFAM-7/12/2016

6 The Prudent Speculator strategy holds both dividend and non-dividend paying stocks and seeks capital appreciation and income via exposure to a significant number of major market sectors and industry groups through roughly 70 to 90 positions. Any investment is subject to risk and loss of principal is possible. Diversification does not ensure profit nor protect against loss. Payment of dividends is not guaranteed, and there can be no assurance that investment objectives will be achieved. For more information on the risks associated with investing, please refer to AFAM Capital s Form ADV Part 2A. The performance information contained herein is created and maintained by AFAM Capital, Inc. and intended to demonstrate AFAM s history with respect to the Prudent Speculator Strategy. Past performance does not guarantee future results, and there can be no assurance that investment objectives will be met. The performance provided should be considered supplemental to AFAM Capital s performance presentations prepared in compliance with GIPS standards, which are available upon request. The U.S. Dollar is the currency used to express performance. Portfolios eligible for performance calculation must follow the stated strategy. Live returns are presented net of management fees, gross of withholding taxes on any dividends, interest or capital gains, and include the effects of trading costs and reinvestment of all income. Net of fee performance was calculated using actual management fees charged to the client. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. The strategy is currently comprised of 100% non-feepaying accounts, and the net performance is representative of same. Actual investment management fees will vary, beginning at 1.5% per annum. Our full management fee schedule is described in more detail in Form ADV Part 2A. The S&P 500 is an American stock market capitalization-weighted index that tracks the 500 most widely held stocks on the New York Stock Exchange or SDAQ. It seeks to represent the domestic stock market by reflecting the risk and return of all large cap companies. A person cannot invest directly in an index. AFAM Capital is a Registered Investment Advisor. Al Frank Asset Management and Innealta Capital are divisions of AFAM Capital. AFAM is editor of The Prudent Speculator newsletter and is the Investment Advisor to certain no-load proprietary mutual funds and individually managed client accounts. AFAM only transacts business in states where it is properly registered or exempt from registration. Registration of an investment adviser does not imply any certain level of skill or training FM 2244, Bldg. 3-#170 Austin, Texas P: F: afamcapital. com 202-AFAM-5/25/2016 AFAM Capital, Inc.