Investment DANA Advisors OVERVIEW: 4 TH QUARTER 2017 DA N A LIMITED VOLATILITY BOND STRATEGY
THE WISE CHOICE HERITAGE A strong family culture Since our founding in 1980, Dana has remained independent and Employee-owned. Our investment firm is built on trust, integrity, and professional experience. QUALITY Excellence in meeting client expectations Dana strives to provide personalized client service and excellence in everything it does. We are uncompromising in our efforts to deliver superior results to clients. EXPERTISE Focus on what we do best Dana has assembled an investment team with diverse skill sets and specialized knowledge. We are adept at navigating challenging market environments and developing customized solutions. CONSISTENCY Adherence to a uniform process Dana implements a uniform investment process to minimize volatility and improve consistency of returns. We seek repeatable and predictable results to most effectively grow cumulative wealth. Investment DANA Advisors 2
DANA INVESTMENT ADVISORS Dana Investment Advisors was built on the belief that adhering to a defined investment process allows our professionals to focus on the fundamentals of consistent outperformance through security selection. Founded in 1980 Employee-owned Domestic equity, taxable and tax-exempt fixed income, and ESG asset manager Manage $7.5 billion as of December 31, 2017 Headquartered in Brookfield, Wisconsin We ve never wavered from our goal of providing above market returns while reducing volatility for our clients. Pensions & Investments Best Places to Work Award 2017 / 2016 / 2015 / 2014 / 2013 / 2012 Dana Investment Advisors has been recognized as the top place to work 2017 Best Places to Work in Money Management by Pensions & Investments. This is the sixth year in a row Dana Investment Advisors has been awarded this industry distinction. We are honored that Pensions & Investments has again recognized us for our strong culture, dedication to our employees, and social impact stated Mark Mirsberger, Firm CEO, adding, Our strong family/employee culture directly impacts our client experience as clients benefit from working with and developing strong relationships with a passionate team that essentially has little to no turnover for decades. 3
DANA FIXED INCOME STRATEGIES INVESTMENT PHILOSOPHY AND PROCESS Investment Philosophy We strive to generate excess risk-adjusted returns through a consistent and disciplined investment process. Top-Down Bottom-Up 4
DANA FIXED INCOME STRATEGIES INVESTMENT PHILOSOPHY AND PROCESS Attractive Income Top-Down Bottom-Up Consistent Risk-Adjusted Returns Principal Preservation Risk Parameters Tax Situation We believe that a well-diversified investment portfolio should contain a variety of fixed income strategies to produce repeatable and predictable results, making it easier to grow cumulative wealth. Dana therefore applies a uniform investment process to improve consistency of returns and reduce volatility. Diversification Stable Returns Lower Volatility 5
DANA FIXED INCOME STRATEGIES INVESTMENT PHILOSOPHY AND PROCESS Economic Policy Top-Down Bottom-Up Top-Down Monetary Policy Market Cycle Recovery Expansion Contraction Recession Geopolitics U.S. GROSS DOMESTIC PRODUCT (GDP) 10% 8% Real GDP*; Most Recent Change as of 29-Dec-2017 = 2.89% Recession Periods - United States 10% 8% 6% 6% Percent Change from Preceding Period 4% 2% 0% -2% -4% 2.89 4% 2% 0% -2% -4% Percent Change from Preceding Period -6% -6% -8% -8% -10% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017-10% * Billions of Chained 2009 Prices (USD), Percent Change from Preceding Period, Seasonally Adjusted Annual Rate (SAAR) Source:U.S. Bureau of Economic Analysis, Real Gross Domestic Product [A191RL1Q225SBEA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/a191rl1q225sbea, March 28, 2018. 6
DANA FIXED INCOME STRATEGIES INVESTMENT PHILOSOPHY AND PROCESS Fundamental Analysis Top-Down Bottom-Up Bottom-Up Cash Flows Credit Research Liquidity U.S. 10 YEAR TREASURY YIELD 3.0% 2.8% 2.6% 2.4% 12/31/2015 2.2685 12/16/2016 2.59 From 12/31/2015 (2.27) to 03/28/2018 (2.79) 3/13/2017 2.6251 7/7/2017 2.3938 10/26/2017 2.453 2.79 3.0% 2.8% 2.6% 2.4% Historically, forecasting the direction of interest rates has proven to be difficult and inconsistent. 2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 2/11/2016 1.6599 6/23/2016 1.7442 7/8/2016 1.3605 11/4/2016 1.7755 2/24/2017 2.3135 9/8/2017 2.0602 2.2% 2.0% 1.8% 1.6% 1.4% 1.2% Instead of relying on consensus forecasts, Dana constructs duration controlled portfolios that perform consistently over a variety of interest rate cycles. Mar 18 Feb 18 Jan 18 Dec 17 Nov 17 Oct 17 Sep 17 Aug 17 Jul 17 Jun 17 May 17 Apr 17 Mar 17 Feb 17 Jan 17 Dec 16 Nov 16 Oct 16 Sep 16 Aug 16 Jul 16 Jun 16 May 16 Apr 16 Mar 16 Feb 16 Jan 16 Source: Board of Governors of the Federal Reserve System (US); 10-Year Treasury Constant Maturity Rate [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/dgs10, 3/28/2018 7
DANA FIXED INCOME STRATEGIES INVESTMENT PHILOSOPHY AND PROCESS Top-Down Bottom-Up Structure Analysis Bullet Securities Amortizing Securities Callable Securities Serial Bonds Security Selection Security Analysis Spread Analysis Duration Analysis Convexity Analysis Maturity Analysis Coupon Analysis (Fixed / Floating) Correlation Effects Diversification Position Sizing Fixed Income Sector Target Portfolio Sector Structure Structure Security Security Duration Quality 8
DANA FIXED INCOME STRATEGIES INVESTMENT PHILOSOPHY AND PROCESS Performance Review Top-Down Bottom-Up Investment Policy Compliance Market Analysis Performance Review Investment Policy Compliance Market Analysis Tracking Error Attribution Credit Ratings Duration Maturity Restriction Industry Concentration Environmental, Social, and Governance Evaluation Spread Analysis Low Quality versus High Quality 9
DANA FIXED INCOME STRATEGIES INVESTMENT PHILOSOPHY AND PROCESS Investment Committee Review Top-Down Bottom-Up Risk Controls Fixed Income Committee Review Internal Controls Best Execution Custodian Reconciliation Accounting Compliance Macro Economics Monetary Policy Sector Rotation Security Selection Compliance Investment Committee Fixed Income Committee Internal Controls Risk controls are a critical element in our investment process. A dynamic market environment calls for ongoing monitoring of portfolio risks to ensure responsible capital growth. Custodian Reconciliation 10
DANA LIMITED VOLATILITY BOND STRATEGY PROFILE AND OVERVIEW Composite Sector Allocation As of December 31, 2017 47.89% - U.S. Agency MBS - Adjustable 31.68% - U.S. Agencies 15.95% - SBA Loan Pools - Adjustable 3.95% - Corporate Bonds Security by security High credit quality Cash flow reinvestment Individual cash-flow needs 0.31% - U.S. Treasuries & TIPS 0.20% - Municipal Bonds 0.02% - Other We avoid Long duration bonds Exotic/speculative securities Low quality securities 11
DANA LIMITED VOLATILITY STRATEGY LIMITED VOLATILITY ASSET CLASSES Asset Classes Used: Treasury Inflation Protected Securities Short duration treasury bonds indexed for inflation U.S. Agency Bonds Step-coupon, callable and bullet bonds issued by Agencies of the U.S. Government Taxable Muni Bonds Bonds issued by U.S. Municipalities Corporate Bonds Fixed and adjustable rate corporate bonds U.S. Treasury Bonds Securities issued by the U.S. Government SBA Adjustable rate pools issued by the small business administration U.S. Agency Mortgage Backed Securities fixed and adjustable-rate MBS/CMBS/CMO securities issued by U.S. Agencies Common Issuers Fannie Mae: A federally chartered, but privately owned, corporation which traces its roots to a government agency created in 1938 to provide additional liquidity to the residential mortgage market. In 1968 Ginnie Mae was spun off from Fannie Mae and Fannie Mae became a government sponsored private corporation. Fannie Mae has had regular capital infusions from the Treasury, and has been under the direction of the Federal Housing Finance Agency since 2008. Ginnie Mae (GNMA): In 1968, Congress established the Government National Mortgage Association, commonly known as Ginnie Mae, as a governmentowned corporation within the Department of Housing and Urban Development (HUD). Ginnie Mae securities carry the full faith and credit guarantee of the United States government. Freddie Mac: A publicly owned or privately owned corporation established by Congress in 1970 to provide a continuous flow of funds to mortgage lenders, primarily through developing and maintaining an active nationwide secondary market in conventional residential mortgages. Like Fannie Mae, Freddie Mac purchases a large volume of conventional residential mortgages and uses them to collateralize mortgage backed securities. Freddie Mac is currently under the direction of the Federal Housing Finance Agency. U. S. Small Business Administration: SBA was created in 1953 as a government agency that provides financing programs to assist small businesses in the U. S. Small business loans are made by banks under standards maintained by the SBA, and the guaranteed portion of the loan can be securitized and sold in the secondary market. These securities typically adjust their coupon monthly or quarterly at a spread above or below the prime rate. 12
DANA LIMITED VOLATILITY STRATEGY A SAMPLE OF ADJUSTABLE RATE RESET INDICES Common Coupon Reset Indices (ARMs/SBAs): The Index Treasury: A common Treasury-based ARM index is the One-Year CMT (Constant Maturity Treasury) index. The One-Year CMT is the average yield of all treasury securities having one year remaining until maturity. The index is calculated weekly or monthly using market reports by five leading government securities dealers. The weekly index is published each Monday in the Federal Reserve Statistical Release H. 15 (519) and can be found on the various wire services. LIBOR: LIBOR is the London Interbank Offered Rate, at which major international banks offer to place deposits with one another for maturities from overnight to five years. This rate has become a popular index worldwide and is used by U.S. institutions. Index options range from a one-month to one-year LIBOR. Fannie Mae offers several index options as well, but the most common securitized Fannie Mae ARM MBS are six-month and one-year LIBOR, as published in The Wall Street Journal. Cost of Funds: The most common cost of funds index (COFI), 11th District COFI, is determined by the monthly weighted-average cost of savings, borrowings, and advances for member institutions of the 11th District Federal Home Loan Bank (FHLB). This district includes Arizona, California, and Nevada. The FHLB of San Francisco reports this index on the last business day of the month. Unlike the treasury indices, COFI indices have traditionally reacted more slowly to short-term market rate movements due in part to the varying maturities of the liabilities that make up the index. CD Index: The weekly average of secondary market interest rates on nationally traded six month negotiable certificates of deposit, as published by the Federal Reserve Board in the Federal Reserve Statistical Release entitled H.15 Selected Interest Rates (Daily) (the H.15 Release ), which is published on the Federal Reserve s website at www.federalreserve.gov/releases/h15/update. Contract Rate Index: The National Average Contract Interest Rate for the Purchase of Previously Occupied Homes by Combined Lenders, as released by the Federal Housing Finance Board. Federal COF Index: The average of the interest rates for marketable U.S. Treasury bills and notes, as calculated and released by Freddie Mac. National COF Index: The Monthly Median Annualized Cost of Funds for OTS-Regulated Institutions, as released by the Office of Thrift Supervision. Prime Rate: The prime lending rate of major banks as published in the H.15 Release. Semi-annual Secondary Market Treasury Index: The weekly average discount prevailing in weekly secondary market trading of six-month U.S. Treasury bills as published in the H.15 Release, as calculated from composites of quotations reported by five leading U.S. government securities dealers to the Federal Reserve Bank of New York. 2 13
Investment DANA Advisors Physical Address: 20700 Swenson Drive Suite 400 Waukesha, Wisconsin 53186 Mailing Address: P.O. Box 1067 Brookfield, Wisconsin 53008-1067 (262) 782-3631 (800) 765-0157