Quantitative s Beyond Beta Powered by:
Quantitative s (QPs) are a suite of asset class-specific investments that blend the benefits of beta investing with the portfolio customization of managed accounts. Three varieties of QPs can improve after-tax and risk-adjusted results in a costeffective manner. Market Series QPs feature low-cost access to important market segments coupled with opportunities for customization and tax management. Factor-Enhanced QPs provide the potential for excess returns via increased exposure to value, momentum, and quality factors. Impact QPs explicitly focus on companies with high sustainability ratings and/or environmental, social, and governance priorities. PMC s Quantitative Research Group (QRG) provides the research framework, construction techniques, and portfolio management experience that drive the QPs. 2 Envestnet PMC: Quantitative s FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY
Elevate the Beta Investing Experience PMC s suite of QPs help address important investor needs that are often overlooked by one-size-fits-all passive investments. Return Momentum Time Value Customizable Market Exposure Many of our QPs are designed to provide cost-efficient beta exposure, tracking the characteristics and returns of well-known indices. Since the investor owns the underlying securities, they have opportunities for personalization and tax management. Exposure to Factors Producing Excess Returns For investors who want to outperform the market but lack conviction in active stock picking, the Factor-Enhanced QPs tilt to factor exposures that increase the potential for improved risk-adjusted returns. The portfolios are based on research from both PMC and industry leaders that suggest a handful of factors remain statistically significant over time. The Pursuit of Tax Alpha In combination with Envestnet's Overlay Services offering, the portfolios can help minimize an investor s tax bill and capture tax-management alpha via: minimizing realization of short-term capital gains; tax-loss harvesting, PMC tax management technology and risk models; and PMC Consulting to help address investor-specific tax situations. Align Holdings with Investor Needs At both the security level and the industry level, our QPs address concerns such as conflicts of interest, social responsibility, or industry overexposures. Additionally, the portfolio can be tailored to complement an investor s other holdings. FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY Envestnet PMC: Quantitative s 3
Market Series QPs: Construction The Market Series contains a subset of the constituents of a major market index and is designed to mimic the portfolio characteristics of the index as a whole. Each portfolio in the Market Series is available in four managed account formats. The Market Series Construction Process 300 3000 constituents Index Constituents PMC obtains index constituents from index sponsors (e.g., Russell, BNY Mellon). The tracking indices have between 300 3000 constituents. Optimization PMC develops target portfolio characteristics (e.g., # of positions, tracking error, etc.) and optimizes using a proprietary risk model. Management Review PMC reviews the optimized portfolio to ensure target characteristics are satisfied. 80+ positions Market QP The resulting Market Series model is a concentrated portfolio of 80+ positions closely tracking the underlying index. Market Series QPs: Domestic Equity Market Series All Cap Core Market Series Large Cap Core Market Series Large Cap Growth Market Series Large Cap Value Market Series Small Cap Core Market Series QPs: International Equity Market Series International Developed Markets ADR Market Series Emerging Markets ADR Market Series Global Low Minimum SMA Ideal for Asset class exposure, core/satellite constructs Asset class exposure, portfolio customizations Minimum Investment As low as $60k $100k Tax Management Strategies Envestnet Overlay Services; advisor-initiated tax loss harvesting Envestnet Overlay Services; advisor-initiated tax loss harvesting Customization Security/industry restrictions Security/industry restrictions 4 Envestnet PMC: Quantitative s FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY
Factor-Enhanced QPs: Construction The Factor-Enhanced QPs contain a subset of the constituents of a major market index and are designed to provide increased exposure to three key factors momentum, value, and quality that historically have provided improved risk-adjusted results over the long term. Each portfolio is available in either a UMA Sleeve or SMA Beta account format. The Factor-Enhanced Construction Process Parent Index: 300 3000 constituents Factor-Enhanced Index: Re-weighted constituents Index Constituents PMC obtains index constituents from index sponsor. The tracking indices have between 300 3,000 constituents. Factor Selection/ Constituent Ranking PMC selects factors momentum and value and ranks the index constituents on their exposure to the factors. Management Review PMC constructs the portfolio with the stocks having the greatest exposures to the selected factors. 80+ positions Factor- Enhanced The resulting Factor-Enhanced model consists of 80+ positions having the largest exposures to the most robust factors historically generating excess returns. Category Factor Combination: Value, Momentum, Quality (V+M+Q) Factor Combination: Value and Quality (V+Q) Factor Exposure: Low Volatility Domestic Equity Factor-Enhanced Large Cap: V+M+Q Factor-Enhanced Small Cap: V+M+Q Factor-Enhanced All Cap: V+M+Q Factor-Enhanced Large Cap: V+Q Factor-Enhanced Small Cap: V+Q Factor-Enhanced All Cap: V+Q Factor-Enhanced Low Volatility International Equity Factor-Enhanced International ADR: V+M+Q Factor-Enhanced Emerging Markets ADR: V+M+Q Factor-Enhanced International ADR: V+Q Factor-Enhanced Emerging Markets ADR: V+Q Global Equity Factor-Enhanced Global Equity: V+M+Q strategy Factor-Enhanced Global: V+Q Low Minimum and/or SMA Factor Combinations Ideal for... V+M+Q, V+Q, and Low Volatility Asset class exposure, core/satellite constructs Minimum Investment $100K Tax Management Strategies Customization Envestnet Overlay Services; advisor-initiated tax loss harvesting Security/industry restrictions FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY Envestnet PMC: Quantitative s 5
What are Factors? These are certain characteristics common to a broad universe of assets that: Generate persistent long-term excess returns Is the factor successful in many market environments and across market segments and asset classes? Is well-supported by financial economic research Does the factor work not only in-sample but also out-of-sample? Has a reasonable and rational intuition behind it Is there a risk-based or behavioral explanation as to why the factor works? Five Factors: Defined 1 2 3 4 5 Quality Momentum Value Size Low Volatility The tendency for higher quality companies (more profitable and safer) to outperform lower quality companies. The tendency for assets that have performed well over the past year to continue to perform well over the nearterm. The tendency for cheap assets to outperform expensive assets. The tendency for smaller capitalization stocks within a universe to outperform larger capitalization stocks. The tendency for lower beta, less volatile stocks to outperform. 6 Envestnet PMC: Quantitative s FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY
Why Use Value, Momentum, and Quality Factors in Construction? Research has identified hundreds of asset pricing factors that attempt to explain the cross-section of expected returns, but only a handful have been found to exhibit persistence and statistical significance over time. 1 $256 Performance of Value, Momentum and Quality Factors 2 Growth of $1: 6/30/1957 12/31/2017 Growth of $1 (log scale) $128 $64 $32 $16 $8 $4 $2 Momentum Value Quality $74.0 $10.1 $9.5 $1 $0.5 Jun-57 Jun-67 Jun-77 Jun-87 Jun-97 Jun-07 Dec-17 Correlation of Returns 3 6/30/1957 12/31/2017 Value Momentum Quality Value 1.00 Momentum -0.20 1.00 Quality -0.03 0.25 1.00 (1) Source: Harvey, Campbell and Yan Liu and Heqing Zhu (2014). and the Cross-Section of Expected Returns. (2-3) Source: Value and Momentum: Kenneth French Data Library; Quality: AQR Data Library. FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY Envestnet PMC: Quantitative s 7
Impact Quantitative s: Methodology QRG constructs the Impact Quantitative s (Impact QPs) using environmental, social, and governance (ESG) data provided by Sustainalytics and our own proprietary quantitative research process. 300 3000 constituents Constituents QRG obtains index constituents from index sponsors (Russell, S&P, BNY Mellon). The underlying indices have between 300-3000 constituents. Sustainalytics Data Overlay To determine the stocks to comprise the portfolio, QRG evaluates each stock in the index using ESG and carbon data provided by Sustainalytics. Eligibility Flag This parameter allows QRG to reduce the universe of potential stocks by screening out poorly ranked companies in terms of ESG controversies and involvement in activities related to nuclear, alcohol, tobacco, adult entertainment, and weapons. Carbon Intensity Score Using each stock s carbon score, QRG determines the overall carbon score for the underlying index. QRG requires that the resulting carbon intensity score for the QP is materially better than that of the index. Total ESG Score QRG constructs the Impact QP portfolio to achieve a total ESG score that places it in the very top of its peer group. Optimization To ensure close tracking to the index while adhering to ESG principles, QRG optimizes the portfolio using a proprietary risk model and factor construction methodologies. approx. 150+ positions Resulting Impact QP The resulting portfolio consists of about 150 stocks that closely tracks the underlying index and possesses favorable ESG qualities. Impact Category Impact QPs Overall ESG themes in international emerging markets Overall ESG themes in international developed markets Overall ESG themes in domestic large cap companies Overall ESG themes in domestic small cap companies Impact Emerging Markets ADR Impact International ADR Impact Large Cap Core Impact Small Cap Core 8 Envestnet PMC: Quantitative s FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY
Impact Quantitative s Gender Themed: Methodology QRG constructs the Impact Gender-Themed QPs using ESG and gender data provided by Sustainalytics and our own proprietary quantitative research process. 300 3000 constituents Constituents QRG uses the Russell 1000 universe as the starting point for portfolio optimization. QRG has the ability to expand to a wider US domestic and/or ADR universe in portfolio construction. Sustainalytics Data Overlay To determine the stocks to comprise the portfolio, QRG evaluates each stock in the Russell 1000 using gender-related data provided by Sustainalytics. Eligibility Flag This allows QRG to reduce the Russell 1000 universe by screening out poorly ranked companies in terms of ESG controversies as well as those involved in activities related to nuclear, alcohol, tobacco, adult entertainment, and weapons. Gender Diversity Score Using each stock s gender score, QRG determines the overall score of the index. QRG requires that the resulting gender diversity score for the Impact Gender QP is materially better than that of the index. Optimization To ensure close tracking to the index while adhering to gender and ESG principles, QRG optimizes the portfolio using a proprietary risk model and factor construction methodologies. approx. 150+ positions Resulting Impact Gender QP The resulting portfolio consists of about 150 stocks that closely tracks the Russell 1000 and possess favorable gender qualities. Impact Category Impact QPs Diversity and ESG themes in domestic large cap companies Impact Large Cap Core Gender Equity FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY Envestnet PMC: Quantitative s 9
Impact Quantitative s Catholic Themed: Methodology QRG constructs the Impact ESG Catholic Values QPs by combining our proprietary quantitative research process with Dana Investment Advisors Catholic faith-based environmental, social, and governance criteria. The strategy is constructed in accordance with the United States Conference of Catholic Bishops (USCCB) investment guidelines. 300 3000 constituents Constituents QRG obtains index constituents from index sponsors (Russell, S&P, BNY Mellon). The underlying indices have between 300-3000 constituents. Dana Investment Advisors Data Overlay Each stock in the index is evaluated using data provided by Dana Investment Advisors and adherence to the six pillars outlined by the USCCB: 1) Protecting Human Life; 2) Promoting Human Dignity; 3) Reducing Arms Production; 4) Pursuing Economic Justice; 5) Protecting the Environment; and 6) Encouraging Corporate Responsibility. Eligibility Flag Companies involved in controversial activities are screened out and deemed ineligible for inclusion in the portfolio. These companies may include biopharmaceutical companies that manufacture contraceptives, abortifacients, and those involved in embryonic stem cell research. Catholic Diversity Score QRG constructs the Impact ESG Catholic Values QPs to seek to achieve positive ESG outcomes, tight Catholic values adherence, and low controversy occurrences. Optimization To ensure close tracking to the index while adhering to Catholic values principles, QRG optimizes the portfolio, using a proprietary risk model and factor construction methodologies. approx. 150+ positions Resulting Impact Catholic QP The resulting portfolio consists of approximately 150 stocks that closely track the underlying index and possess favorable ESG and Catholic values qualities. Impact Category Impact QPs Catholic and ESG themes in domestic large cap companies Impact Large Cap Core ESG Catholic Values 10 Envestnet PMC: Quantitative s FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY
Impact Quantitative s: Highlights Industry leadership and partnerships The portfolios are backed by PMC s history in impact investing, expertise in index-based solutions, and long-standing partnerships with industry leaders Sustainalytics and Veris Wealth Partners. Supporting gender initiatives in business and society The Impact Gender QP is built with companies that are focused on gender diversity in terms of the composition of its board members, diversity programs, and discrimination policies. Diverse ESG sector allocation The suite of Impact QPs take a largely sector-neutral approach, providing insight into how well companies are managing the ESG issues to which they are exposed. Consumer Discretionary Industrials Energy Materials Healthcare Utilities Consumer Staples Information Technology Financials Telecommunications Business Services Accessibility for a broad range of investors The Impact QPs are available as an SMA or UMA sleeve on the Envestnet platform. Investors benefit from diversified, customizable, low-cost market exposure, and opportunities for tax management and social impact. Ideal for... Low Minimum Asset class exposure, core/satellite constructs SMA Asset class exposure, portfolio customizations Minimum Investment $100K $100K Tax Management Strategies Customization Envestnet Overlay Services; advisor-initiated tax loss harvesting Security/industry restrictions: ESG, socially responsible investing, impact criteria Envestnet Overlay Services; advisor-initiated tax loss harvesting Security/industry restrictions: ESG, socially responsible investing, impact criteria FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY Envestnet PMC: Quantitative s 11
For more information about PMC Quantitative s Visit investpmc.com/qp or contact the PMC Consulting Team at PMCConsulting@envestnet.com. The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this brochure is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment vehicle. Investment decisions should always be made based on the investor s specific financial needs and objectives, goals, time horizon and risk tolerance. Past performance is not indicative of future results. Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) funds are subject to interest rate risk which is the risk that debt securities in a fund s portfolio will decline in value because of increases in market interest rates. Neither Envestnet, Envestnet PMC nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor. Indexes are unmanaged. It is not possible to invest directly in an index. FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY 2018 Envestnet, Inc. All rights reserved. PMC-BR-QP-1118 / SR #1035760 12 Envestnet PMC: Quantitative s FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY