2017 Strategy Review. CAN SLIM Investment Program. 1 Cash Scaling

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1 2017 Strategy Review CAN SLIM Investment Program December 31, 2017 The following report provides in-depth analysis into the objective, investment process, and the successes and challenges of the strategy throughout What is CAN SLIM? --- The NorthCoast CAN SLIM Investment Program is a separate account strategy which encompasses the philosophy of William O Neil s original stock selection process, CAN SLIM. The strategy, built from the original guidelines, has evolved into a comprehensive portfolio solution for today s investor. The strategy invests in leading growth stocks in favorable market environments and scales to cash to preserve gains when bear market risk is high. Positions are managed through a combination of CAN SLIM guidelines and a proprietary stock scoring system designed to build a comprehensive growth portfolio. What is the objective? ---The CAN SLIM Investment Program aims to achieve two goals, both equal in their importance to long-term performance: 1) capital appreciation and 2) downside risk protection. CAN SLIM aims to accomplish its stated objectives utilizing three unique tactics 1 Cash Scaling Utilize cash as a hedge when data indicates bear market risk is rising 2 Universe - Create a group of equal-weighted growth stocks that historically outperform the general market 3 Stock Selection - Select stocks that exhibit the best risk-adjusted return potential & complement existing portfolio holdings Three ways CAN SLIM aims to make money: Find a group of stocks that outperforms the general market over time; Select the best riskadjusted stocks from that group; Scale to cash when risk outweighs future return potential 1 Cash Scaling The first step in the investment process is to determine the proper equity exposure by understanding the current risks in the market. Identifying the current risk level is accomplished through the analysis of 40+ market-moving indicators across four broad dimensions: macroeconomic, sentiment, technical, and valuation. Our research has identified specific data points as the indicators that help forecast future equity market performance. When used together, they help determine the appropriate equity exposure in the strategy (more information on the market exposure model is available in the Cash Scaling Whitepaper by clicking here). These adjustments in equity exposure, also known as Cash Scaling, constitute the primary tactic to preserve capital in the portfolio. However, it is important to note that during bull-market cycles, cash in the portfolio will generate a drag or hindrance to growth. Each of the four dimensions represents approximately a quarter of the investment level. If each of the four dimensions are bullish, we ll be 10 invested in equities. If indicators within any of the dimensions signal a more risk-averse environment, we ll adjust the exposure accordingly. The aggregate is key as no one individual dimension should dictate overall exposure. The dimensions can vary - even drastically - but the overall score is critical to a risk-adjusted target exposure. NorthCoast Asset Management info@northcoastam.com northcoastam.com 1

2 Macroeconomic Sentiment Technical Valuation The chart below displays the 2017 daily exposure target according to the individual dimensions. Each dimension indicated varying levels of target exposure throughout the year but when combined, led to a bullish outlook for the majority of Our equity exposure ranged between 7-10 throughout 2017, with an average level of 88%, which is the highest average investment level since inception of the managed strategy Daily Outlook ( Navigator ) <-- Risk-averse Outlook Bullish --> Technicals Sentiment Macroeconomic Valuation P/E Multiples reached historic highs in 2017 Positive job growth, decreased regulation, consumer & producer optimism and longterm momentum indicated strong equity growth in 2017 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec *Source: NorthCoast Asset Management. 1/1/ /31/2017 NorthCoast maintained a bullish posture throughout 2017 Over the course of the year, macroeconomic, technical and sentiment indicators all provided rationale for maintaining an almost full investment level. The U.S. economy continued its stable growth pattern and international economies strengthened. Technical indicators remained positive with long-term momentum as a key contributor. Sentiment indicators hit their peak in 2017 as optimism of decreased regulation, tax reform and trade policy excited both producers and consumers. Only valuation indicators provided viable caution as equity prices continued to outpace their respective earnings. 10 NorthCoast CAN SLIM Equity Exposure 1/1/ /31/2017 CAN SLIM Equity Exposure Equity Index (S&P 500) Performance CAN SLIM Equity Exposure Equity Index Performance 1 Jan Feb Mar May Jun Aug Sep Nov Dec *Source: NorthCoast Asset Management, Bloomberg. 1/1/ /31/2017 NorthCoast Asset Management info@northcoastam.com northcoastam.com 2

3 NorthCoast Navigator To get a better understanding of our market posture in 2017, you can review our monthly market update, the NorthCoast Navigator. We provided a few samples below. January 1, 2017 April 1, 2017 July 1, 2017 October 1, 2017 Market momentum continued as global equities advanced despite Federal decision to raise interest rates Stocks pushed higher to close in positive territory as fixed income remained hindered by increasing interest rates Stocks softened as the Federal Reserve raised lending rates amid a strengthening U.S. and global economy Equities continued higher amidst little change in data and rising geopolitical risk Data & Discipline > Fear & Greed Entering 2017 as the 9 th year of a historic bull run, any reasonable investor would have doubts about the continuation of positive equity growth. We certainly had ours, but the data proved otherwise. Hedging equity risk is no easy task, and should be handled with extreme oversight and control. Our daily, systematic investment process which relies on over 40 individual data points to determine the proper equity exposure proved its mettle in 2017 by staying bullishly invested in the face of geopolitical uncertainty, overstretched stock prices and an almost calm before the storm low volatility. Below is a chart we referenced in last year s annual review that we will bring to the forefront again. This chart highlights the outperformance of CAN SLIM versus two competitive hedged offerings. 2 NorthCoast CAN SLIM PowerShares Actively Managed Trust (PHDG) Janus Velocity Tail Risk Hedged (TRSK) CAN SLIM vs Competitive Hedged Managers 1/1/ /31/ Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec *Source: NorthCoast Asset Management, Bloomberg. 1/1/ /31/2017. PAST PERFORMANCE DOES NOT GUARANTEE OR INDICATE FUTURE RESULTS. Cost-efficient downside protection is a key tactic to long-term investment success For over a decade, we ve presented the statistics of bear market declines and the impact significant losses can have on a client s portfolio. However, there are costs associated with playing defense and these costs should be considered when managing a portfolio. Last year, we published a report highlighting this research, titled Proper Benchmarking & the Cost of Playing Defense. You can click here to review the report. NorthCoast Asset Management info@northcoastam.com northcoastam.com 3

4 2 Stock Universe The pond from which we fish Our research demonstrates that stock selection using a multi-factor approach is very powerful. It is preferable to seek out stocks that are balanced across these factors attractive earnings, sustainable relative strength, quality management, and broad institutional support, among others. Therefore, before we consider which stocks to buy or sell on any given day, we must determine a universe of stocks that meets our minimum criteria. This universe is the pond from which we fish. Within the CAN SLIM investment strategy, our universe consists of a group of riskadjusted growth stocks with factors derived from the foundation of CAN SLIM with added attributes which have proven successful over time. While there are multiple factors that contribute to our universe, two prominent factors stood out in 2017: growth & size. Growth stocks outperformed their value counterparts, which helped boost strategy performance, while large-cap stocks (those typically found in the S&P 500 Index) outperformed mid-cap and smallcap equities, generating a strong headwind. Growth > Value If you were to draw a line in the sand between growth stocks (companies where earnings are expected to grow at above-average rate) and value stocks (companies with strong fundamentals but may be trading at a lower price compared to the earnings), CAN SLIM generally favors growth. According to our research, stocks that trade at a reasonable price but indicate growing quarterly and annually are likely to outperform. Seeking growth stocks was a beneficial endeavor in 2017 as the collection of growth stocks that we could select from outperformed their value counterparts. While the S&P 500 Index gained 21.1% in the year, much of the performance was attributed to growth stocks. As seen in the chart to the right, growth-stock ETFs outperformed the general market in Growth Stocks Outperform General Equity Market 1/1/ /31/2017 S&P 500 Index Vanguard S&P 500 Growth ETF (VOOG) ishares Morningstar Large Growth ETF (JKE) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec *Source: NorthCoast Asset Management, Bloomberg. 1/1/ /31/ Compensating for Market-Capitalization Capitalization-Weighted vs. Equal Weighted Performance 21.8% % S&P 500 S&P 500 (EW) Year Annualized Russell 1000 (EW) 7.8% 9.6% 10.3% S&P 500 S&P 500 (EW) *Source.:Bloomberg. S&P 500 Equal Weighted = Guggenheim S&P 500 Equal Weight ETF (RSP). Russell 1000 Equal Weighted = Guggenheim Russell 1000 Equal Weight ETF (EWRI) Russell 1000 (EW) Large > Mid & Small Unlike most market cap-weighted offerings, the CAN SLIM investment strategy applies an equal-weighted bias to its universe. This means we do not rely heavily on the market-capitalization of a company prior to selection. Market cap-weighted offerings favor the largest companies in the index and allocate a larger portion of the investment strategy to these holdings simply based on size. Stocks like Apple, Google, Microsoft, Amazon and ExxonMobil are some examples and are generally included. When it comes to size over time, it typically doesn t matter. The chart to the left shows that 2017 saw a reversal from the 10-year trend of the Equal Weighted S&P 500 Index outperformed the market-capitalization weighted S&P 500 Index. Looking at the 10-year performance, the equal weighted index outperforms the standard, market-cap weighted index by nearly 2% per year. We implement a similar technique as the equal-weighted index by not favoring stocks solely based on their size. In 2017, this particular factor slightly detracted from the strategy s relative performance as larger-cap stocks outperformed midand small-cap stocks. NorthCoast Asset Management info@northcoastam.com northcoastam.com 4

5 3 Stock Selection Selecting the best available Stock selection had a slightly positive impact throughout 2017 as big individual winners contributed to the overall portfolio. Stocks like Baxter International (BAX), Applied Materials (AMAT), Sherwin-Williams (SHW), Caterpillar (CAT) and Zoetis (ZTS) contributed a combined +5.7% impact on portfolio performance. While there were no stocks that significantly broke down, a few more than others contributed negatively to the portfolio: Yelp (YELP), Noble Energy (NBL), W W Grainger (GWW), Apache (APA) and Celgene (CELG). CAN SLIM s high active share of 88.1% (as of 12/31/2017) allows individual stock selection to add value more so than closet indexing over time. Overall, there were no significant swings in any of the holdings throughout the year Stock Selection Attribution Best: BAX Baxter, +1.3% PAST PERFORMANCE DOES NOT GUARANTEE OR INDICATE FUTURE RESULTS. More information about the specifics of CAN SLIM stock selection can be found by clicking on the following whitepaper, Stock Selection Whitepaper. Worst: YELP Yelp, -0.7% (Percentage above represents contribution to overall portfolio) Annualized Performance Comparison (as of 12/31/2017) Year 10-Year CAN SLIM Investment Program 18.6% 10.8% 6.2% Competitive Benchmarks Aggressive Allocation Category Average 16.1% 9.2% 5.1% Tactical Allocation Category Average 12.3% 4.6% 3. General Market Indices S&P 500 Index 21.1% 15.1% 7.8% Barclays U.S. Aggregate Bond Index % 4. *Source: NorthCoast Asset Management, Morningstar, Bloomberg. 1/1/ /31/2017. PAST PERFORMANCE DOES NOT GUARANTEE OR INDICATE FUTURE RESULTS. NorthCoast Asset Management info@northcoastam.com northcoastam.com 5

6 The Morningstar Moderate Target Risk Index represents a portfolio of global equities, bonds, and traditional inflation hedges, such as commodities and TIPS. This portfolio is held in a static allocation of 6 equities and 4 fixed income, which is appropriate for U.S. investors who seek average exposure to equity market risk and returns. Data provided by Morningstar. Morningstar Aggressive Allocation Category portfolios seek to provide both capital appreciation and income by investing in three major areas: stocks, bonds, and cash. These portfolios tend to hold larger positions in stocks than moderate-allocation portfolios. These portfolios typically have 7 to 9 of assets in equities and the remainder in fixed income and cash. Aggressive Allocation includes 445 funds. Data provided by Morningstar. Morningstar Tactical Allocation Category portfolios seek to provide capital appreciation and income by actively shifting allocations between asset classes. These portfolios have material shifts across equity regions and bond sectors on a frequent basis. The cumulative asset class exposure changes must exceed 1 over the measurement period. Tactical Allocation includes 329 funds. Data provided by Morningstar. The information contained herein has been prepared by NorthCoast Asset Management LLC ( NorthCoast ) on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. NorthCoast has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information. All opinions and views constitute judgments as of the date of writing without regard to the date on which the reader may receive or access the information, and are subject to change at any time without notice and with no obligation to update. This material is for informational and illustrative purposes only and is intended solely for the information of those to whom it is distributed by NorthCoast. No part of this material may be reproduced or retransmitted in any manner without the prior written permission of NorthCoast. NorthCoast does not represent, warrant or guarantee that this information is suitable for any investment purpose and it should not be used as a basis for investment decisions. PAST PERFORMANCE DOES NOT GUARANTEE OR INDICATE FUTURE RESULTS. This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or investment products or to adopt any investment strategy. The reader should not assume that any investments in companies, securities, sectors, strategies and/or markets identified or described herein were or will be profitable and no representation is made that any investor will or is likely to achieve results comparable to those shown or will make any profit or will be able to avoid incurring substantial losses. Performance differences for certain investors may occur due to various factors, including timing of investment. Investment return will fluctuate and may be volatile, especially over short time horizons. INVESTING ENTAILS RISKS, INCLUDING POSSIBLE LOSS OF SOME OR ALL OF THE INVESTOR'S PRINCIPAL. The investment views and market opinions/analyses expressed herein may not reflect those of NorthCoast as a whole and different views may be expressed based on different investment styles, objectives, views or philosophies. To the extent that these materials contain statements about the future, such statements are forward looking and subject to a number of risks and uncertainties. NorthCoast Asset Management info@northcoastam.com northcoastam.com 6