Sector and Country Rotation Portfolios Actively managed and designed to adjust to market conditions Provide exposure to domestic and international equities using ETFs Strategies based on a quantitatively-driven investment process
Extensive Multi-Asset Class Portfolio Experience Investing for All Types of Market Conditions In today's volatile markets, investors are looking to the financial marketplace to provide solutions aiming to preserve capital during difficult market cycles. The Innealta Capital Tactical Core ETF-Sector Rotation and Innealta Capital Tactical Core ETF-Country Rotation Portfolios, managed by Innealta Capital and their Chief Investment Officer, Gerald Buetow, PhD, CFA, are designed to do well in many types of markets. The investment strategy is based on a quantitatively driven, tactical asset allocation approach making tactical shifts in allocations to capitalize on performance expectations of the various investment options. The quantitative model for these portfolios was created over a period of 15 years and was designed in an effort to determine when equities appear attractive and when investments should be directed to fixed income allocations. The Sector Rotation provides exposure to domestic equity. The Country Rotation provides international exposure to developed and emerging countries. Both portfolios allocate money to fixed income during bearish equity markets. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses. Who is Innealta Capital? A quantitative asset management firm Tactical management of multi-asset class ETF Portfolios Utilizes a proprietary econometric model Due to increasing demand for its solutions, Innealta Capital merged with AFAM, a private, boutique asset management firm, in 2009. Transparent, Turn-Key, Cost Effective, Alternative Strategies Clients have included Morgan Stanley Smith Barney, Envestnet, Ameriprise, Schwab, Fidelity, Lockwood, and many more. Chief Investment Officer: Gerald W. Buetow, Jr., PhD, CFA Former Chief Investment Officer of XTF GAM, LLC Former Director of Research, Atlantic Asset Management, LLC Former VP of Curriculum Development for AIMR Former Director of Quantitative Research at Prudential Investment's Quantitative Investment Management Group managed an enhanced index fund and developed structured securities B.S. in Electrical Engineering, and M.S. & Ph.D. in Finance and Econometrics, Lehigh University M.S. in Finance, University of Texas Dallas Nuclear Engineering Officer, U.S. Navy 2
Tactical Opportunities Over Time With the aim of preserving your capital, money is moved between and within asset classes depending upon current risk-adjusted returns for U.S. equities, international equities, and fixed income instruments. Risk-adjusted rates of return for equities and fixed income vary over time. This presents tactical opportunities. The chart to the right illustrates this fact. The Tactical ETF solutions attempt to address these opportunities by moving a greater percentage of investment to the asset classes with the highest riskadjusted rate of return at that time. Return on Treasuries 2 Return on equities 1 Source: Innealta Capital via Morningstar. The referenced indices are shown for general market comparisons and are not meant to represent portfolio performance. The value of a dollar preserved during a market downturn is worth more than the value of a dollar made during a market upturn. 1 Equity returns represented by a composite index consisting of 40% Russell 3000, 40% MSCI EAFE and 20% MSCI Emerging Markets indices. The Russell 3000 Index measure the performance of the largest 3,000 U.S. companies. The MSCI EAFE Index measures international equity performance and is comprised of 21 MSCI country indices, representing the developed markets outside of North America: Europe, Australasia and the Far East. The MSCI Emerging Markets Index represent emerging equity market performance and is comprised of 26 MSCI country indices. 2Fixed income returns represented by the Barclays Capital U.S. Government Aggregate. The Barclays Capital Aggregate Bond Index covers the U.S.-dollar-denominated, investment-grade, fixed-rate, taxable bond market. One cannot directly invest in an index. 3
Investment Methodology Discipline: A Quantitatively Driven Approach The Innealta Tactical ETF Rotation Portfolios utilize a predictive model that seeks to incorporate both risk control and alpha generation. To select whether to invest in a sector or country at a given time, the model uses a combination of fundamental and technical analysis. The combined model analyzes the attractiveness of equity assets to non-equity assets (bonds, cash, real estate, commodities, etc.). Binary Decision Making Framework The Sector and Country Rotation portfolios both use a multi-factor model that evaluates the risk/reward profile of each sector or country in the portfolio on a daily basis, responding to market movements as they affect various sectors or countries. When the model signals that a particular sector or country s risk-adjusted returns appear more attractive than a non-equity allocation, an ETF representing that particular sector or country is purchased. Conversely, when the model indicates that a sector or country s risk-adjusted returns appear less favorable than a non-equity allocation, the allocation is assigned to fixed income. The Innealta Capital Tactical ETF models seek a defensive approach in bearish markets and become more aggressive in bullish markets. When the model deems equity markets unattractive, dollars are diverted to an actively managed basket of global fixed income ETFs. A Disciplined Framework - Daily Monitoring of Econometric Data Economy The overall economy (includes monetary policy, the shape and level of term structure of interest rates, business cycle identification, personal consumption, credit spreads, and real interest rates). Fundamental Equity attractiveness; fundamental variables are used to measure relative value of each equity market versus bonds. Risk Risk metrics are used to capture the level of uncertainty in the markets. Technical Momentum/market conviction metrics are used to quantify the strength of market movements. 4
Sector Rotation Portfolio Potentially Reduced Portfolio Volatility Strategy The Sector Rotation Portfolio tactically alters exposures among the U.S. S&P 500 GICS sectors based on a proprietary quantitative, econometric model with a strict buy and sell discipline. The model is designed to determine attractive environments for equities and dynamically tilts asset class exposure to capitalize on favorable investment opportunities for one asset class over another. The model has four subcomponents which cover all major aspects of the investment climate including macroeconomic, fundamental, risk and technical factors. The quantitative model responds dynamically to changing investment opportunities and market conditions across the 10 major U.S. S&P 500 economic sectors. The strategy is binary: the portfolio is either entirely in or out of a sector at any given time. If the model determined expected risk-adjusted returns of a particular sector s equity asset class are attractive when compared to fixed income, then the Sector Rotation Portfolio is exposed to that sector s potential equity allocation of 10%; if they are unattractive, then that portion of the portfolio s total investment collateral is invested in an actively managed fixed income portfolio. Sectors are equally weighted. Investable ETF Universe Equity Sector ETFs Strategic Weight Consumer Discretionary 0% or 10% Consumer Staples 0% or 10% Energy 0% or 10% Financials 0% or 10% Health Care 0% or 10% Industrials 0% or 10% Information Technology 0% or 10% Materials 0% or 10% Telecom Services 0% or 10% Utilities 0% or 10% Fixed Income ETFs U.S. Global International-Aggregate International-Regional Aggregate Aggregate Aggregate Aggregate Treasuries Treasuries Sovereign Multi-Sovereign TIPS TIPS Agency Municipal Mortgage Industry-specific Each of these asset classes has its own set of investment characteristics and risks and investors should consider these risks carefully prior to making any investments. 5
Country Rotation Portfolio Granular Access to Specific Country Economies Strategy The Country Rotation Portfolio tactically alters exposures among international markets based on a proprietary quantitative, econometric model with a strict buy and sell discipline. The model is designed to determine attractive environments for equities and dynamically tilts asset class exposure to capitalize on favorable investment opportunities for one asset class over another. The model has four subcomponents which cover all major aspects of the investment climate including macroeconomic, fundamental, risk and technical factors. The quantitative model responds dynamically to changing investment opportunities and market conditions across 28 countries, including several emerging markets. The strategy is binary: the portfolio is either entirely in or out of a country at any given time. If the model-determined expected risk-adjusted returns of a particular country s equity asset class are attractive when compared to fixed income, then the Country Rotation Portfolio is exposed to that country s potential equity allocation of 5%; if they are unattractive, then that portion of the portfolio s total investment collateral is invested in an actively managed fixed income portfolio. Countries are equally weighted and no more than 20 countries can be in the portfolio at any given time. Investable ETF Universe Equity Country ETFs Strategic Weight Equity Country ETFs Strategic Weight Australia 0% or 5% Japan 0% or 5% Austria 0% or 5% Korea 0% or 5% Belgium 0% or 5% Malaysia 0% or 5% Brazil 0% or 5% Mexico 0% or 5% Canada 0% or 5% Netherlands 0% or 5% China 0% or 5% Peru 0% or 5% Colombia 0% or 5% Russia 0% or 5% Egypt 0% or 5% Singapore 0% or 5% France 0% or 5% South Africa 0% or 5% Germany 0% or 5% Spain 0% or 5% Hong Kong 0% or 5% Sweden 0% or 5% India 0% or 5% Switzerland 0% or 5% Israel 0% or 5% Taiwan 0% or 5% Italy 0% or 5% United Kingdom 0% or 5% Fixed Income ETFs U.S. Global International-Aggregate International-Regional Aggregate Aggregate Aggregate Aggregate Treasuries Treasuries Sovereign Multi-Sovereign TIPS TIPS Agency Municipal Mortgage Industry-specific Each of these asset classes has its own set of investment characteristics and risks and investors should consider these risks carefully prior to making any investments. 6
Benefits of Innealta Capital s Tactical ETF Portfolios Extensive experience managing multi-asset class portfolios Binary decision making framework Flexible and adaptive approach focused on risk - ability to seek yield Attempt to reduce portfolio volatility International exposure (granular access to particular countries) Complementary to existing stable of managers Contact Innealta Capital at 855.994.2326 IMPORTANT NOTES The material provided herein has been provided by Al Frank Asset Management (AFAM), Innealta Capital is a division of AFAM, and is for informational purposes only. AFAM serves as investment adviser to one or more mutual funds distributed through Northern Lights Distributors, LLC member FINRA. Northern Lights Distributors, LLC and AFAM are not affiliated entities. Innealta Capital is a division of Al Frank Asset Management (AFAM). AFAM is a Registered Investment Advisor, is editor of The Prudent Speculator newsletter and is the Investment Advisor to two value-oriented no-load proprietary mutual funds and individually managed client accounts. The Innealta Tactical ETF Country and Core Sector Rotation strategies are based on a quantitatively driven, tactical asset allocation approach that apportions portfolio assets to 20 countries in the Country Rotation portfolio and 10 sectors in the Core Sector Rotation portfolio based on the specific risk/reward characteristics of each. Dollars not allocated to equities are invested in an actively managed portfolio of fixedincome exchange traded funds (ETFs). Together, the strategies seek to outperform their benchmarks on a risk-adjusted basis through global diversification, active management, style integrity, minimized security selection risk and cost efficiency. There is no assurance that these objectives will be met. A cash balance of at least approximately 0.50% of assets is assumed to pay for the quarterly advisory fee and other expenses. The ETFs that are included in the models change over time. The allocations prior to September 1, 2008 presented herein, while based on Dr. Buetow s model portfolios, is hypothetical, and the allocations do not represent actual trading results. Hypothetical performance results have many inherent limitations. Although no representation of performance is being made in this presentation, we point out that there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. Another inherent limitation on these results is that the allocation decisions reflected in the performance record were not made under actual market conditions and, therefore, cannot completely account for the impact of financial risk in actual trading. Moreover, changes in the assumptions that were used to calculate the returns may have a material impact on the returns presented. No representations and warranties are made as to the reasonableness of the assumptions. PAST PERFORMANCE AND ESPECIALLY HYPOTHETICAL PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Any investment is subject to risk. ETFs are subject to risks similar to those of stocks, such as market risk, and investors who have their funds invested in accordance with the portfolios may experience losses. Additionally, fixed income (bond) ETFs are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Real estate ETFs are subject to the risk that real estate stocks will decline because of adverse market conditions for the real estate industry or declines in real property values. For more information on the risks associated with an investment in ETFs, please refer to AFAM s Form ADV Part 2A. 0183-NLD-1/30/2012 IDG-Rotation v012512