TOTAL RETURN MARCH 2015 Newfound Case ID: 3377049 1
THE NEWFOUND MISSION Newfound Research s product suite has been designed to balance the desire to pursue growth with the need to avoid large drawdowns. Through active risk management, the suite seeks to participate in bull markets and avoid large losses during bear markets, thus producing compelling risk-adjusted returns over time. 2
ABOUT NEWFOUND RESEARCH Registered Investment Adviser based in Boston, MA focusing on tactical, outcome-oriented investment solutions. Founded in August 2008 to license signals from our core tactical models to other asset managers. $1.5 billion in total assets under advisement. We offer a comprehensive suite of tactically managed ETF portfolios. Our Strategy Suite Equity Risk Managed U.S. Sectors U.S. Factor Defensive Equity Risk Managed Global Sectors Risk Managed Small-Cap Sectors Alternative Income Multi-Asset Income Bond Alternative Total Return Fixed Income Target Excess Yield Liquid Alternatives Dynamic Alternatives Total Portfolio Solutions Tailwinds Conservative, Moderate, and Growth 3
WHY NEWFOUND RESEARCH? DISCIPLINED The rules-based approach mitigates inherent cognitive biases that make decision making difficult. Repeated over time, these biases can compound to create negative results. The objectivity of rules helps eliminate these biases. DEFENSIVE The suite views risk management from the investor s point of view, seeking to participate in bull markets and avoid large losses during bear markets. INNOVATIVE In 2008, Newfound Research helped pioneer the use of absolute momentum and volatility within sector rotation to help govern defensive portfolios. EXPERIENCED The models driving the asset allocation within the suite have been providing live signals for tactical domestic allocation strategies for over 6 years and have been utilized to help power the asset allocation decisions for over $10B. ACCESSIBLE The Newfound suite is available through a variety of product structures, including mutual funds, separate accounts, model licensing, and as UMA platform options. 4
NEWFOUND RESEARCH LLC WHY TACTICAL ASSET ALLOCATION IN FIXED INCOME? WHY NOW? 5
WHY NOT DIVERSIFY WITH JUST BONDS? The market cycle has a dramatic impact on the benefits or cost of diversification as well. In a rising rate environment, traditional diversifiers like bonds may have a negative real return. 15% 10% 5% 0% -5% -10% 10-Year Annualized Real Returns for 10-Year U.S. Treasuries Orange areas represent lost decades of returns, where real 10- Year U.S. Treasury Bond returns over the prior decade were negative. Source: Robert Shiller, Newfound Research. Past performance does not guarantee future results. Data is for the period from January 1871 to December 2014. The 10-Year U.S. Treasury index is a constant maturity index calculated by assuming that a 10-year bond is purchased at the beginning of every month and sold at the end of that month to purchase a new bond at par at the beginning of the next month. You cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. The referenced index is shown for general market comparisons and is not meant to represent the Total Return index or strategy 6
YIELDS FORECAST GRIM FUTURE BOND RETURNS With current yields near long-term lows across the entire term structure, the return outlook for U.S. Treasuries is grim. Subsequent 10-Year Return 18% 16% 14% 12% 10% 8% 6% 4% 2% Bond Valuations vs. Subsequent Nominal 10-Year Returns (1963-2015) 10-Year Rate 3/31/15 R² = 0.87559 0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Starting Yield Source: Newfound Research, Federal Reserve Bank of St. Louis. 1963 is the first year for the information presented because 1953 is the first date with monthly 10-year constant maturity interest rate data. Data is through 2/28/15. Past performance does not guarantee future results. The 10-Year U.S. Treasuries index is a constant maturity index calculated by assuming a 10-year bond is purchased at the beginning of every month and sold at the end of that month to purchase a new bond at par at the beginning of the next month. You cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. The referenced index is shown for general market comparisons and is not meant to represent the strategy. 7
STRETCHING FOR HIGHER YIELDS IS GETTING RISKIER 10x 12% Risk required to achieve various yield targets 5% Yield More risk must be taken to achieve a 4% yield in 2015 than in 2008. Standard Deviation 8 10% 8% 6% 4% 4% Yield 3% Yield 2% Yield 2% 1% Yield 0% 2004 2005 2006 2007 2008 2009 2010 Source: Yahoo! Finance, Newfound Research. ETFs considered for inclusion in the portfolios include AGG (Aggregate U.S. Bonds), BIL (Treasury Bills), CSJ (Short-Term Corporates), HYG (High Yield Corporates), IEF (Intermediate Term Treasuries), LQD (Intermediate Term Corporates), SHV (< 1 Year U.S. Treasuries), SHY (Short-Term U.S. Treasuries) and TLT (Long-Term U.S. Treasuries). Smoothed trailing 252-day dividends used to compute yields. Standard deviation is the standard deviation for the portfolios assuming a covariance matrix equal to the covariance matrix for the entire period. Results calculated by finding the portfolio with the lowest volatility that would have achieved the targeted yield. The analysis is not based on any portfolios managed by Newfound. 2008 is the starting date because that is the first date that data were available for all ETFs included in the analysis. 2015 data are through 3/31/15.
NEWFOUND RESEARCH LLC OUTCOME ORIENTED FIXED INCOME 9
FIXED INCOME A VERSATILE TOOL FOR INVESTORS Historically, fixed income has helped investors achieve a number of different financial objectives. Investors will place more or less emphasis on certain objectives depending on their personal financial circumstances. Equity / Growth Assets Fixed Income Focus of Total Return Why do investors hold fixed income? 1 2 3 Capital Preservation* Income Diversification 4 Tail Hedge * We do not directly consider capital preservation since this objective can often best be achieved by buying and holding high quality fixed income instruments to maturity. As such, the Total Return strategy focuses on objectives 2, 3 and 4. There is no assurance that the strategy will achieve its investment objective. Newfound reserves the right to substitute the ETFs used in the investment universe. 10
NOT ALL FIXED INCOME IS CREATED EQUAL Certain fixed income exposures are better suited to meet a given objective (income, diversification, or tail hedge) than others. Fixed Income Scorecard by Objective March 2012 to March 2015 +1.00/-1.00 are the best/worst scores on a given attribute Income Diversification Tail Hedge High Yield +1.00 EM Bonds (USD) +0.58 EM Bonds (Local) +0.54 Corporates +0.23 20+ Yr. Treasuries -0.01 1-3 Yr. Treasuries +1.00 Treasury Bills +0.84 Barclays Aggregate +0.82 Agency Bonds +0.82 7-10 Yr. Treasuries +0.77 20+ Yr. Treasures +1.00 7-10 Yr. Treasuries +0.38 Barclays Aggregate +0.21 Corporates +0.21 MBS +0.17 Barclays Aggregate -0.15 7-10 Yr. Treasuries -0.36 Int. Treasuries -0.45 MBS -0.49 Agency Bonds -0.59 Floating Rate -0.81 1-3 Yr. Treasuries -0.89 Treasury Bills -1.00 MBS +0.71 Floating Rate +0.59 Corporates +0.56 20+ Yr. Treasuries +0.22 High Yield -0.05 EM Bonds (USD) -0.18 Int. Treasuries -0.21 EM Bonds (Local) -1.00 Agency Bonds +0.16 1-3 Yr. Treasuries +0.14 Treasury Bills +0.12 Floating Rate +0.12 High Yield -0.19 EM Bonds (USD) -0.25 Int. Treasuries -0.36 EM Bonds (Local) -1.00 Income is measured using yield as estimated as the difference between total return and price return. Diversification is measured using both correlation of monthly returns and severity and duration of drawdown. Tail Hedge is measured using downside capture versus the S&P 500 (SPY ETF). High Yield is represented by the ishares iboxx $ High Yield Corporate Bond ETF (HYG). EM Bonds (USD) is represented by the PowerShares Emerging Market Sovereign Debt ETF (PCY). EM Bonds (Local) is represented by the Van Eck EM Local Currency Bond ETF (EMLC). Corporates is represented by the ishares iboxx $ Investment Grade Corporate Bond ETF (LQD). 20+ Yr. Treasuries is represented by the ishares 20+ Year Treasury ETF (TLT). Barclays Aggregate is represented by the ishares Core U.S. Aggregate Bond ETF (AGG). 7-10 Yr. Treasuries is represented by the ishares 7-10 Year Treasury ETF (IEF). Int. Treasuries is represented by the SPDR Barclays International Treasury Bond ETF (BWX). MBS is represented by the ishares MBS ETF (MBB). Agency Bonds is represented by the ishares Agency Bond ETF (AGZ). Floating Rate is represented by the ishares Floating Rate Bond ETF (FLOT). 1-3 Yr. Treasuries is represented by the ishares 1-3 Year Treasury Bond ETF (SHY). Treasury Bills is represented by the SPDR 1-3 Month Treasury Bill ETF (BIL). Past performance does not guarantee future results. 11
ALTERNATIVE ETFS CAN COMPLEMENT FIXED INCOME +0.19 Average correlation to the Russell 3000 (IWV) -0.11 Average correlation to 7-10 Year U.S. Treasuries (IEF) 1 0.8 0.6 0.4 0.2 0-0.2-0.4-0.6 Correlations July 2011 to March 2015 Beta Long/Short Value Long/Short Managed Futures Merger Arbitrage Diversified Alternatives Hedge Fund Replication -0.8-1 Correlation to Russell 3000 (IWV) Correlation to 7-10 Year Treasuries (IEF) * As of 3/31/2015 Source: Yahoo! Finance, Newfound Research. Past performance does not guarantee future results. Russell 3000 is the ishares Russell 3000 ETF (IWV). 7-10 Year Treasuries is the ishares 7-10 Year Treasury Bond ETF (IEF). Value L/S is the ProShares RAFI Long/Short ETF (RALS). Beta L/S is the QuantShares U.S. Market Neutral Anti-Beta Fund (BTAL). Managed Futures is the WisdomTree Managed Futures Strategy Fund (WDTI). Merger Arbitrage is the MNA IQ Merger Arbitrage ETF (MNA). Diversified Alternatives is the PowerShares Multi-Strategy Alternative Portfolio (LALT). Hedge Fund Replication is the ProShares Hedge Replication ETF (HDG). July 2011 is the starting date for the analysis because that is the first date that pricing data is available for all of the ETFs. The referenced data is shown for general market comparisons and is not meant to represent the Newfound Total Return index or strategy. 12
NEWFOUND RESEARCH LLC TOTAL RETURN 13
TOTAL RETURN A simple objective To create a flexible, core bond alternative by generating a conservative long-term total return. A consistent process Each of the three portfolio sleeves uses a disciplined, rule-based process to target a specific objective: income generation, diversification, and hedging equity market volatility. A thoughtful design Dynamically rebalances the three portfolio sleeves such that each contributes equally to the overall return profile of the strategy. There is no guarantee that any investment will achieve its objectives, generate positive returns, or avoid losses. 14
FIXED INCOME WITH A PURPOSE The Newfound Total Return Index uses three independent sleeves: each seeking to optimally achieve a specific outcome (diversification, tail hedge, or income). Dynamic Alternatives (Diversification) Multi-Strategy alternative portfolio with the ability to selectively incorporate a limited amount of equity beta. Hedge Fund Replication Equity Long/ Short Managed Futures Relative Value Merger Arbitrage U.S. Equity Beta U.S. Treasuries TOTAL RETURN International Credit 4% Target Excess Yield (Income) Achieve a yield 4% in excess of 1-3 Yr. Treasuries with minimum volatility Other (MBS, Agency, ) 20+ Year Treasuries Passive U.S. Treasuries (Tail Hedge) There is no assurance that the strategy will achieve its investment objective. Newfound reserves the right to substitute the ETFs used in the investment universe. 15
THE WEEKLY PORTFOLIO PROCESS* Allocations to each sleeve are adjusted by the volatility of that sleeve. A sleeve with relatively lower volatility will receive a relatively higher allocation. By using this methodology, we seek to have each objective contribute equally to overall portfolio returns. Allocations for each of the 3 sleeves (Income: 4% Target Excess Yield, Diversification: Dynamic Alternatives, and Tail Hedge: Passive U.S. Treasuries) are determined independently. Measure volatility of each of the 3 sleeves. Over-weight sleeves with lower volatility and underweight exposures with higher volatility. * For demonstration purposes only of how the over-arching portfolio process works. Exact allocations may not exactly reflect these portfolios. There is no guarantee that the strategy will achieve its objectives. There are no guarantees that the strategy will be positioned correctly for any given market environment. The strategy utilizes various rebalance techniques designed to reducing transaction costs and turnover, which may result in the strategy s actual allocation straying from its target allocation. 16
IMPORTANT DISCLOSURES Newfound began to actively calculate the performance of the Newfound Total Return index on May 6, 2014. Performance results prior to May 6, 2014 are all backtested and hypothetical. Newfound began to manage and trade a brokerage account on June 1, 2014, which sole purpose was to track the performance of the index. Before you invest in the Newfound Total Return strategy, you are strongly encouraged to consult with your financial advisor. Newfound shall have the right at any time, in its sole discretion, to substitute any or all of the ETFs or other securities utilized within the investment strategy. This presentation (including the hypothetical/backtested performance results) is provided for informational purposes only and is subject to revision. This presentation relates to a rule-based index and related investment strategy which are managed by Newfound. This presentation is not an offer to sell or a solicitation of an offer to purchase an interest or shares ( Interests ) in any pooled vehicle. Newfound does not assume any obligation or duty to update or otherwise revise information set forth herein. This document is not to be reproduced or transmitted, in whole or in part, to other third parties, without the prior consent of Newfound. Certain information contained in this presentation constitutes forward-looking statements, which can be identified by the use of forward-looking terminology such as may, will, should, expect, anticipate, project, estimate, intend, continue, or believe, or the negatives thereof or other variations or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of an investment managed using the Newfound index or investment strategy may differ materially from those reflected in such forward-looking statements or in the hypothetical backtested composite results or the index s model performance results included in this presentation. The information in this presentation is made available on an as is, without representation or warranty basis. There can be no assurance that the Newfound index or related investment strategy will achieve any level of performance, and investment results may vary substantially from year to year or even from month to month. An investor could lose all or substantially all of his or her investment. Both the use of a single adviser and the focus on a single investment strategy could result in the lack of diversification and consequently, higher risk. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. You should consult your investment adviser, tax, legal, accounting or other advisors about the matters discussed herein. These materials represent an assessment of the market environment at specific points in time and are intended neither to be a guarantee of future events nor as a primary basis for investment decisions. The hypothetical/backtested performance results and model performance results should not be construed as advice meeting the particular needs of any investor. Past performance (whether actual, hypothetical/backtested or model performance) is not indicative of future performance and investments in equity securities do present risk of loss. The ability to replicate the hypothetical or model performance results in actual trading could be affected by market or economic conditions, among other things. 17
IMPORTANT DISCLOSURES Investors should understand that while the performance results may show a general rising trend at times, there is no assurance that any such trends will continue. If such trends are broken, then investors may experience real losses. None of Newfound nor any other person managed any product or account seeking to track the performance of the index prior to June 1, 2014. No representation is being made that any account will achieve performance results similar to those shown in this presentation. In fact, there may be substantial differences between backtested performance results and the actual results subsequently achieved by any particular investment program. As a result, the index theoretically may be changed from time to time to obtain more favorable performance results. There are other factors related to the markets in general or to the implementation of any specific investment program which have not been fully accounted for in the preparation of the hypothetical/backtested performance results, all of which may adversely affect actual portfolio management results. The information included in this presentation reflects the different assumptions, views and analytical methods of Newfound as of the date of this presentation. The index s performance during the Backtested Period is not based on live results produced by an investor s actual investing and trading, but was achieved by the retroactive application of a model designed with the benefit of hindsight, and, other than the composite results, the index model performance subsequent to May 6, 2014 is not based on live results produced by an investor s investment and trading, and fees, expenses, transaction costs, commissions, penalties or taxes have not been netted from the gross performance results except as is otherwise described in this presentation. The performance results include reinvestment of dividends, capital gains and other earnings. As the Hypothetical Information was backtested, it does not reflect contemporaneous advice or record keeping by an investment adviser. Actual, live client results may have materially differed from the presented performance results. All information presented after the index inception date (May 6, 2014) is the index s model performance, which means it was calculated by Newfound in real-time (not on a backtested basis), but does not reflect the payment of any fees, commissions or expenses (except as otherwise described in this presentation). Accounts and funds managed by an adviser using the Newfound model portfolios are subject to additions and redemptions of assets under management, which may positively or negatively affect performance depending generally upon the timing of such events in relation to the market s direction. The Hypothetical Information and model performance assume full investment, whereas actual accounts and funds managed by an adviser would most likely have a positive cash position. Had the Hypothetical Information or model performance included the cash position, the information would have been different and generally may have been lower. While there have been periodic updates and improvements to the Newfound model, there have not been any material changes in the objectives or strategies of the model that have occurred that may affect results. While Newfound believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information. 18