Fortigent Alternative Investment Strategies Model Wealth Portfolios
Important Disclaimers The information provided is for educational purposes only and is not intended to be, and should not be construed as, investment, legal, or tax advice. Past performance is not a guarantee or indicator of future performance. Fortigent makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based upon information that Fortigent considers reliable, is not guaranteed as to accuracy or completeness. 1
About Fortigent 2
Fortigent Background High Net Worth Focus Over 15 years as a premier outsourced provider for advisors serving high net worth clientele HEADQUARTERS Greater Washington, DC FOUNDED 1996* EMPLOYEES 100+ ASSETS ON PLATFORM $60 billion+ ASSET ALLOCATION DUE DILIGENCE MARKET RESEARCH ALTERNATIVE INVESTMENT ASSETS $8 billion in alternatives** MEDIAN END CLIENT SIZE $7 million+ SEC-registered Investment Advisor * As a division of CMS Financial Services ** Included in the $50 billion in assets on platform 3
Historical Focus on Alternatives Fortigent predecessor begins offering outsourced investment research Inclusion of AI strategies benefits investors through the 2000 bear market (tech crash) First implementation of alternative investments in client portfolios Fortigent first begins recommending AI mutual funds First multistrategy AI mutual fund added to Fortigent platform Fortigent clients surpass $5 billion invested in AI assets Inclusion of AI strategies benefits investors through 2008-2009 financial collapse Introduction of core-satellite framework for AI investing Fortigent clients surpass $2 billion in AI mutual fund investments Launch of Fortigent Model Portfolios 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Deeply experienced research team provides guidance on more than $8 billion in alternative investment strategies More than 15 years of experience analyzing and recommending AI strategies Industry thought leader on appropriate inclusion of AI strategies within diversified HNW portfolios Innovative core/satellite portfolio construction approach for building appropriate AI exposures 4 2013 Fortigent, LLC.
Why Alternatives? 5
WHY ALTERNATIVES? What are alternative investments? Alternative investing simply means less constraints on the way the portfolio is managed: Inherently active approach Can trade across asset classes Less constrained by benchmarks Ability to go long or short Flexibility to use derivatives Nontraditional investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Long/Short is an investment strategy generally associated with hedge funds. It involves buying long equities that are expected to increase in value and selling short equities that are expected to decrease in value. Derivatives are not suitable for all investors and certain options strategies may expose investors to significant potential losses such as losing the entire amount paid for the option. Currency Risk is a form of risk that arises from the change in price of one currency against another. 6 Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. The fast price swings in commodities and currencies will result in significant volatility in an investor s holdings. 2013 Fortigent. For Financial Professional Use Only.
Maximum Drawdown (%) WHY ALTERNATIVES? Benefits of Alternative Investments Alternatives historically have provided diversification benefits and portfolio downside protection allowing for more consistent performance over time Alternative investments historical characteristics: Reduced draw-downs (loss of capital) compared to equity market exposures Less sensitivity to equity market movements and volatility Lower correlation to traditional stock and bond portfolios Calendar Year Returns 30% 20% Maximum Drawdown (May 2011 Sept 2011) 0 10% 0% -5-10% -20% -30% -40% -20% -37% 2007 2008 2009-10 -15 Morningstar Long/Short Equity Category Morningstar Multialternative Category S&P 500 Index Morningstar Multialternative Category HFRI Fund Weighted Composite S&P 500-20 May-11 Jun-11 Jul-11 Aug-11 Sep-11 There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. You can not invest directly in an index. Past performance is no guarantee of future results. The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 2,000 single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve month track record of active performance. The HFRI Fund Weighted Composite Index does not include Funds of Hedge Funds. The Standard & Poor s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. See back page for additional disclosures. 7
Return (%) WHY ALTERNATIVES? Improving Risk & Return Characteristics Alternative investments generate higher portfolio returns with lower volatility (Jan 1990 - Dec 2011)* 9 8.5 8 7.5 7 40/60 portfolio 60/40 portfolio 6.5 Traditional Equity-Bond Portfolio 3 5 7 9 11 13 15 Risk (%) Traditional + 20% Alternatives *Indices Represented: Barclays Aggregate Bond Index, S&P 500 Index, HFRI Fund Weighted Composite This Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. The HFRI Fund Weighted Composite Index is a global, equal-weighted index of over 2,000 single-manager funds that report to HFR Database. Constituent funds report monthly net of all fees performance in US Dollar and have a minimum of $50 Million under management or a twelve month track record of active performance. The HFRI Fund Weighted Composite Index does not include Funds of Hedge Funds. The Standard & Poor s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indexes mentioned herein are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. 8
Fortigent Investment Process 9
I N V E S T M E N T P R O C E S S Core Satellite Framework An Intelligent Approach to Portfolio Construction Fortigent surrounds a core allocation of diversified alternatives with five distinct satellites: Core Strategies Representative of the broad universe of alternative investment strategies Multi-strategy in nature; serves as the anchor for each portfolio Long/Short Equity Hedged strategies that maintain long and short positions in equities Diversified Credit Strategies focused on the fixed income opportunity set Event Driven Strategies executing trades based on varying forms of corporate activity, such as mergers, bankruptcies, etc Market Neutral/Relative Value Non-directional strategies that exploit valuation discrepancies between securities of any type Trading Strategies Diversifying strategies that offer uncorrelated sources of returns through investments in global securities markets TRADING STRATEGIES MARKET NEUTRAL / RELATIVE VALUE DIVERSIFIED CREDIT CORE: Diversified Alternatives LONG / SHORT EQUITY EVENT DRIVEN There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. Market Neutral strategies seek to create a portfolio not correlated to overall market movements and insulated from systemic market risk. Long/Short is an investment strategy generally associated with hedge funds. It involves buying long equities that are expected to increase in value and selling short equities that are expected to decrease in value. 10
I N V E S T M E N T P R O C E S S Institutional Level Due Diligence Due diligence: More than just crunching numbers Fortigent populates the core and satellite allocations from its platform of best of breed managers 15 year history investing with alternative investment managers enables Fortigent to carefully evaluate the rapidly evolving field of alternative investment mutual funds An unbiased, open architecture approach to manager selection Rigorous search, selection, and ongoing due diligence of investment managers Full transparency requirements for manager approval 7 STEPS Idea Sourcing We use proprietary databases, industry contacts and publications, direct solicitation, and ideas from our community of advisors Quantitative Screening Comprehensive, subtractive process utilizing the foremost industry databases Risk Analysis We focus on multiple measures of risk (volatility, drawdowns, upside / downside ratios, Sharpe, tail risk, etc.) Qualitative Analysis Evaluation of the investment professionals, philosophy, process and investment approach, and risk management Operational & Compliance Analysis Focus on trading, risk management, portfolio management, and firm integrity Onsite Verification Onsite visits serve to revalidate the quality of the investment team, business, and investment solution Formal Approval Two-level approval process research team and executive team Standard deviation: A historical measure of the variability of returns. If a portfolio has a high standard deviation, its returns have been volatile; a low standard deviation indicated returns have been less volatile. Correlation is a statistical measure of how two securities move in relation to each other. Correlations are used in advanced portfolio management. 11
Fortigent Portfolios 1 2
P O R T F O L I O S Strategies for Different Investors Fortigent offers portfolios targeting three distinct investment objectives: Designed to capture the performance of a traditional 80/20 equity/fixed income portfolio with lower volatility, improved maximum drawdown potential, and lower market beta Alternative Strategies - Growth Designed to capture the performance of a traditional 40/60 equity/fixed income portfolio with lower volatility, improved maximum drawdown potential, and lower market beta Alternative Strategies Growth with Income Alternative Strategies Income with Moderate Growth Designed to capture the performance of a traditional 60/40 equity/fixed income portfolio with lower volatility, improved maximum drawdown potential, and lower market beta Alternative strategies may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor's portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Beta measures a portfolio's volatility relative to its benchmark. A Beta greater than 1 suggests the portfolio has historically been more volatile than its benchmark. A Beta less than 1 suggests the portfolio has historically been less volatile than its benchmark. 13
P O R T F O L I O S Strategies for Different Investors Determine the investment objective most suitable for your goals Fortigent Alternative Strategies fall into two categories: Alternative Strategies For clients who are looking to grow their assets but are concerned with reducing volatility and the impact of down markets Model implemented by using: Less directional or lower volatility managers Occasionally overweight satellite sectors less correlated to global markets Alternative Strategies Enhanced Designed for clients looking to grow their assets with a focus on risk tolerant managers Model implemented by using: More directional or higher volatility managers Occasionally overweight satellite sectors more correlated to global markets Strategy Growth Growth with Income Income with Moderate Growth Alternative Strategies + + + Alternative Strategies Enhanced + + Benchmark (Stock/Bond) 80/20 60/40 40/60 The unmanaged index used for performance comparisons representing stocks is the Russell 3000 Value Index and representing bonds is the Barclay s Capital Aggregate Bond Index. The illustrated indexes are unmanaged and can t be invested into directly. This Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and assetbacked securities. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market. As of the latest reconstitution, the average market capitalization was approximately $4 billion; the 14 median market capitalization was approximately $700 million. The index had a total market capitalization range of approximately $309 billion to $128 million.
I N V E S T M E N T P R O C E S S Tactical Management Alternative investments provide exposure to a broad set of asset classes, each with a unique set of return and risk drivers Each alternative investment category has its own risk/return drivers Understanding the spectrum of risk is integral for making portfolio allocation decisions Understanding the sources of return is critical for assessing periods of opportunity and risk Examples: Long/short equity managers must pay close attention to corporate fundamentals, cross correlations, and the macro environment Diversified credit managers need to understand supply and demand trends, corporate fundamentals, investor preferences, default and recovery expectations, and the interest rate environment FACTORS CONSIDERED* Fundamentals Credit/Default Trends Risk/Volatility Event Risk Interest Rate Risk Leverage Technicals *For Illustrative Purposes Only Tactical portfolios are designed to be monitored over a shorter time frame to potentially take advantage of opportunities as short as a few months, weeks, or even days. For these portfolios, more timely changes may allow investors to benefit from rapidly changing opportunities within the market. 15
Important Disclaimers & Definitions This presentation is for illustrative purposes only. Past performance is not indicative of future results. The information contained in this presentation has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information, and we assume no liability for damages resulting from or arising out of the use of such information. The performance numbers displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. The index is unmanaged and does not incur management fees, transaction costs or other expenses associated with investable products. It is not possible to directly invest in an index. All returns reflect the reinvestment of dividends and other income. Manager composites are gross of all fees, except trading costs. Mutual fund returns are net of all fees. Performance results do not reflect the separate advisory fee that may be charged by your investment advisor (for example, an advisory fee of 1% compounded over a 10-year period would reduce a 10% annual return to an 8.9% return). Morningstar Multialternative These funds offer investors exposure to several different alternative investment tactics. Funds in this category have a majority of their assets exposed to alternative strategies. An investor s exposure to different tactics may change slightly over time in response to market movements. Funds in this category include both funds with static allocations to alternative strategies and funds tactically allocating among alternative strategies and asset classes. Average Gross short exposures is greater than 20%. Morningstar Long-Short Equity Strategy Long-short portfolios hold sizable stakes in both long and short positions in equities and related derivatives. Some funds that fall into this category will shift their exposure to long and short positions depending on their macro outlook or the opportunities they uncover through bottom-up research. Some funds may simply hedge long stock positions through exchange-traded funds or derivatives. At least 75% of the assets are in equity securities or derivatives. 16
Investment Objectives Growth will be targeted to an allocation of 80% in equity-oriented alternatives, such as long/short equity and event driven strategies, and 20% in diversifying alternatives (including a 2% cash position), such as market neutral and trading strategies. Investors in this portfolio should have a long time horizon, as performance can deviate from traditional mix of equities and fixed income in short time periods. The portfolio is lower volatility in nature compared to traditional asset class mixes; therefore, the portfolio is expected to lag in sharp market rallies but outperform in market declines. Growth with Income will be targeted to an allocation of 60% in equity-oriented alternatives, such as long/short equity and event driven strategies, and 40% in core alternatives (including a 2% cash position) and diversifying alternatives, such as diversified credit, market neutral, and trading strategies. Investors in this portfolio should have a long time horizon, as performance can deviate from traditional mix of equities and fixed income in short time periods. The portfolio is lower volatility in nature compared to traditional asset class mixes; therefore, the portfolio is expected to lag in sharp market rallies but outperform in market declines. Income with Moderate Growth will be targeted to an allocation of 40% in equity-oriented alternatives, such as long/short equity and event driven strategies, and 60% in core alternatives (including a 2% cash position) and diversifying alternatives, such as diversified credit, market neutral, and trading strategies. Investors in this portfolio should have a long time horizon, as performance can deviate from traditional mix of equities and fixed income in short time periods. The portfolio is lower volatility in nature compared to traditional asset class mixes; therefore, the portfolio is expected to lag in sharp market rallies but outperform in market declines. 17 Tracking # 1-116381 Expiration11/13
Important Disclaimers Asset allocation does not ensure a profit or protect against a loss. Tactical portfolios are designed to be monitored over a shorter time frame to potentially take advantage of opportunities as short as a few months, weeks, or even days. For these portfolios, more timely changes may allow investors to benefit from rapidly changing opportunities within the market. The strategic asset allocation process projects a three- to five-year time period. While the strength of the asset allocation decisions is retested often, we do not anticipate making adjustments until midway through the strategic time frame, which generally is about every two to three years. If significant market fluctuations warrant a change, adjustments may be made sooner. Investing in mutual funds involve risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus. An investment in Exchange Traded Funds (ETFs), structured as a mutual fund or unit investment trust, involves the risk of losing money and should considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks: not diversified, the risks of price volatility, competitive industry pressure, international political and economic developments, possible trading halts, Index tracking error. Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your financial representative. Read carefully before investing. 18
Important Disclaimers A Market Neutral strategy seeks to profit from both increasing and decreasing prices in a single or numerous markets. Market-neutral strategies are often attained by taking matching long and short positions in different stocks to increase the return from making good stock selections and decreasing the return from broad market movements. Market neutral strategists may also use other tools such as merger arbitrage, shorting sectors, and so on. Long/Short funds focus on managers who go long and hedge against the market through options or shorting equity securities with the goal of outperforming the market while limiting volatility. These funds tend to have a higher correlation to equities than other alternative strategies and, therefore, are most appropriate for more aggressive portfolios. Default Rate is the interest rate charged to a borrower when payments on a revolving line of credit are overdue. This higher rate is applied to outstanding balances in arrears in addition to the regular interest charges for the debt. Low correlation means that different asset types have not performed in the same way: When returns on some asset types were declining, returns on others were gaining. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. Alternative strategies may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. LPL Financial is the sponsor of the Model Wealth Portfolios program. Fortigent is an investment strategist that provides model portfolio recommendations to LPL Financial. LPL Financial implements such model portfolio recommendation in client accounts. LPL Financial and Fortigent are affiliated companies. Not FDIC/NCUA Insured Not Bank/Credit Union Guaranteed May Lose Value Not Guaranteed by any Government Agency Not a Bank/Credit Union Deposit Securities and Advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. 19 Tracking # 1-116381 Expiration11/13