Innealta Capital Tactical ETF Portfolios

Transcription

1 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

2 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 strategies aiming to preserve capital during difficult market cycles. The Innealta Capital Tactical ETF 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. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses. About Innealta Capital The Sector Rotation Portfolio provides exposure to domestic equity. The Country Rotation Portfolio provides international exposure to developed and emerging countries. The Risk-Based Portfolios provide exposure to global equities. All portfolios allocate money toward fixed income during bearish equity markets. A quantitative asset management firm based in Charlottesville, VA 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 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 Tactical Asset Allocation (TAA): An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors. Rebalancing assets may incur a taxable event. 2

3 Investment Philosophy: A Tactical Asset Allocation Approach With the aim of preserving your capital, money is moved between and within certain asset classes depending upon current risk-adjusted returns for U.S. equities, international equities, and fixed income instruments. Tactical Opportunities Over Time Risk-adjusted rates of return for equities and fixed income vary over time. This presents tactical opportunities. The chart below illustrates this fact. The Tactical ETF solutions attempt to address these opportunities by moving a greater percentage of your investment dollars to the asset classes with the highest risk-adjusted rate of return at that time. 1 Year 5 Year 10 Year Multi-Asset Class Equity Barclays Capital US Aggregate Source: Innealta Capital via Morningstar. Standardized trailing performance is as of December 31, The referenced indices are shown for general market comparisons and are not meant to represent portfolio performance. The multi-asset class all equity portfolio consists of 40% Russell 3000, 40% MSCI EAFE, and 20% MSCI Emerging Markets. Barclays Capital US Aggregate is an unmanaged index which you cannot invest into directly. Past performance is no guarantee of future results. Risk-Adjusted Return: a measure of how much risk is involved in producing an amount of return. Generally expressed as a number or rating. 3

4 Investment Objective: Creating and Preserving Wealth Gains Needed to Offset Stock Market Losses The value of a dollar preserved during a market downturn is worth more than the value of a dollar made during a market upturn. The objective of the Innealta Capital Tactical ETF Portfolios is to try to avoid downside losses and protect capital in bear markets. 1. It takes a 150% Gain to offset a 60% Loss 900% 2. The S&P 500 lost 57.33% of its value from October 2007 to March /12/07 (Intraday High): 1, /06/09 (Intraday Low): Source: Morningstar, Innealta Capital 11% 25% 43% 67% 100% 150% 233% 400% -10% -20% -30% -40% -50% -60% -70% -80% -90% Actual Loss -10% -20% -30% -40% -50% -60% -70% -80% -90% Gain Required to Offset Loss 11.10% 25.00% 42.90% 66.70% 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. Unmanaged index returns do not reflect any fees, expenses or sales charges, past performance is no guarantee of future results, and one cannot directly invest in an index. Risk-Adjusted Return: a measure of how much risk is involved in producing an amount of return. Generally expressed as a number or rating. 4

5 Investment Methodology Discipline: A Quantitatively Driven Approach All Innealta portfolios utilize a predictive model that seeks to incorporate both risk control and alpha generation. To select whether to invest in an equity position 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. Alpha Generation: a risk-adjusted measure of the active return on an investment. It is a measure of the manager s contribution to performance. 5

6 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 tactically alters 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 ETFs 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% Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. 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. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Volatility: A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. 6

7 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 tactically alters 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 ETFs Country ETFs Strategic Weight 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. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. 7

8 Risk Based Core Portfolios Global Strategies for Diverse Risk Tolerances Strategy The Risk Based strategies apportion portfolio assets to individual equity asset classes based on the specific risk/reward characteristics of each. Dollars not allocated to equities are invested in a basket of primarily fixed income ETFs. Three globally diversified portfolios are offered with the following secular tactical asset allocation mixes: Conservative, Moderate and Growth. The three diversified Risk Based portfolios are first developed using a blend of asset allocation technologies. Next, we select what we believe are the best set of ETFs for each asset class in the secular model. Our investment team then applies a tactical overlay to the secular ETF-based portfolios. Bullish or bearish signals generated by the quantitative model are used to adjust equity exposure within each portfolio by +/- 20% relative to the long-term secular tactical asset allocation target in order to try to capture enhanced risk-adjusted returns. During bearish market environments, equity asset class exposures are potentially reduced and the resulting capital is proportionately distributed to the fixed income and other asset class portion of the portfolio. Conversely, during bullish market environments, equity asset class exposures are increased and the allocations to fixed income and other asset classes are proportionately reduced. Secular Tactical Asset Allocation Targets 40% 40% 60% 60% 80% 20% Conservative (+/-8%) Moderate (+/-12%) Growth (+/-16%) Tactical Asset Allocation Range 48% 52% 60% 40% 72% 28% Fully Bearish Target Allocation Fully Bullish Equity Fixed Income and Real Estate Secular Tactical Asset Allocations are used as our target allocations within the Tactical Asset Allocation framework; they are the baseline from which we tactically over- or underweight specific equity asset classes. The secular tactical 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. 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. Asset allocation does not ensure a profit or protect against a loss. 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. 8

9 Fixed Income Portfolio A Critical Component of all Innealta Portfolios Strategy The Fixed Income portfolio dynamically allocates capital across fixed income ETFs and aims to generate above-average yield with defined risk controls by trying to consistently invest in those fixed income sectors that have strong risk-adjusted performance potential and eligible ETF representation. The portfolio is operated within a quantitative framework that seeks to objectively control the portfolio s level yield, modified duration, and volatility. The fixed income portfolio management process starts with the collection of daily information of constituent sectors. This enables the close monitoring of the fixed income universe as it is represented within the ETF space. This information is then incorporated into the quantitative framework so that we can try to algorithmically control for both risk and yield. The framework is implemented as frequently as necessary in order to help capitalize on potential investment opportunities as they arise. Investable ETF Universe 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. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. 9

10 Characteristics 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 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). The Innealta Tactical ETF Risk-Based strategies are based on a quantitatively driven, tactical asset allocation approach that apportions portfolio assets to individual equity classes based on the specific risk/reward characteristics of each. Dollars not allocated to equities are invested in a basket of primarily fixed income 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. 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. 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 carefully before investing. The prospectus contains this and other important information. You can obtain a prospectus from your financial representative. Read carefully before investing. There is no guarantee that any investment strategy will achieve its objectives, generate profits or avoid losses. Tracking number Expiration date 5-13