INVESTMENT PHILOSOPHY

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1 INVESTMENT PHILOSOPHY Theoretical Underpinning and Practical Application of Investment Strategies Overview Benjamin Graham (founder of Value Investing and mentor to Warren Buffett) defines investing as follows: one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting those requirements are speculative. (Page 18 The Intelligent Investor). The simple premise for undertaking risk in wealth management is that the current risk free rate of return (Bank of Canada one year bond for example) is insufficient to meet your lifestyle goals at retirement. Most financial retirement projections utilize a real rate of return (return above inflation) of 3% - 4%. Inflation today being about 2% requires a 5%-6% return to meet income needs. However the Bank of Canada one year bond has a yield of about 1% resulting in a 4%-5% deficit in required return. Based on this reality, the IP Strategies Team has studied and developed a robust investment model with the prime objective of providing our clients with the required rate of return to meet financial objectives with a strong risk management overlay to reduce risk. The following pages will provide a synopsis of current market conditions and our disciplined approach to provide a measured response to the risks and opportunities of the market with a singular focus to achieve your long term investment return requirements. Theoretical Underpinning The strength is in the combination of income and capital gains. Using the above example of a 6% required return; it is the combination of income and capital gains that provides the investor with a more consistent return pattern to achieve results. Just like real estate investments the primary focus is on the receipt of net rental income to the investor, knowing that the value of the real estate will increase over time. Similarly, it is entirely possible to construct an investment portfolio, using a combination of quality fixed income, equities and alternative investments to provide the investor with the comfort of consistent cash flow while enjoying the potential for capital gains. It is our opinion that a portfolio with a 4% income yield coupled with an associated capital gain is a more predictable and rational approach towards long term wealth management rather than relying on a portfolio with a focus on capital gains only.

2 Practical Application of the IP Investment Philosophy to Current Market Conditions Based on the combination of Fixed Income and Equities, research indicates that both markets are undergoing a major shift in trends that requires careful consideration for the management of investment portfolios as follows: Secular Trend #1: Fixed Income Since the early 1980 s bond yields have been declining to historical lows creating the longest bull market in bonds ever. Decreasing interest rates have generated capital gains for bond investors over this period, as can be seen in the chart. However, with interest rates at historical lows, investors are receiving less interest income and now face a risk of capital loss should interest rates rise from here. While it is impossible to determine the exact date of interest rate increases recent comments by both the US Fed Chair (Yellen) and Governor of the Bank of England (Carney) have both stated that interest rates will rise sooner than anticipated by the market. The current bond market is priced to perfection and highly sensitive to any interest rate increases as shown in our sensitivity analysis below. This analysis indicates the following: Current coupon is at historical low ranging from.93% (1 year) to 3.5% (30 year bonds) If the ten-year bond yield increases by 1%, the investor will realize an 8.7% capital loss in value. This would result in a total return of -6.2% Conversely if the yield drops by 1%, a capital gain of 8.7% would be realized.

3 However, it is our opinion that interest rates will rise rather than fall in the future, as current bond yields are at historical lows and inflation will eventually return due to the amount of financial stimulation that has been injected into the economy by the central banks since The IP Fixed Income Strategy Based on the analysis presented above, our fixed income strategy is designed with the following risk management parameters: We manage duration risk associated with long term bonds as indicated above. Therefore our current duration is short to avoid unnecessary capital loss on the portion of the investment portfolio that is to provide a strong element of safety, income and reduced volatility. We manage credit risk by maintaining an investment grade fixed income portfolio. We carefully watch credit spreads to capture increased yield when prudently available in the credit spread between corporate and government bonds, and high yield and corporate bonds. We manage liquidity risk with the use of fixed income ETF securities that give us the ability to sell the position with minimal bid/ask liquidity costs and the ability to move swiftly among the duration curve and credit spread continuum in order to capture maximum return with preservation of capital as the foremost objective of this asset class. We secure alternative fixed income solutions with Cortland Credit and Picton Mahoney Income Opportunity solution which provides a 5% - 6% return with very short duration and minimal correlation to rising interest rates. These are institutional solutions that offer greater stability in our fixed income strategy. Based on our current view of interest rates and the objectives stated, our fixed income strategy is represented in the following chart: Current Fixed Income Allocation Cortland Credit 10% PM Income Opp. Fund 10% Horizon Floating Cash Rate 1% 5% Short Duration High Income 18% Laddered Pref. Share 19% Short Provinical Bond 18% 1-5 Year Laddered Corp. Bond 19%

4 The above Fixed Income Allocation maintains the following attributes: Duration of the fixed income portfolio is only 2.2 years vs the index benchmark of 7.2 years, which represents 70% less interest rate sensitivity, thus mitigating capital loss Coupon is 4.61% vs the benchmark of 3.09%. This represents a 49% increase in yield Should the bond yield increase by 1% the IP total return would be +2.37% vs % for the bond index. Should interest rates decline by 1%, the IP total return would be 6.84% vs 10.25% for the bond index Given our view on interest rates and the aforementioned views of the central bankers we do not foresee the 1% decline as a realistic outcome. However, should the economy deteriorate we will then quickly reposition the portfolio to take advantage of this economic situation. Secular Trend #2: Equities As with the bond market, we note that the stock market 1 trends have also resulted in a new secular trend as represented in the following chart: 1 For the purposes of this illustration this chart represents the Dow Jones Industrial Average as long term data is available for this index. This index is used as a proxy to all other equity indexes that are correlated to world markets and therefore it is viewed that other equity indexes would behave similarly to this index.

5 While we have recently experienced a 13+ year secular bear market, current market conditions are indicating that we are returning to a more constructive secular bull market. Investors will still experience market volatility and will require prudent risk management. While we are more constructive on the stock market, it is still prudent to identify stocks with strong fundamental attributes, and ensure proper execution of risk management which should reward investors over the long term. Our theoretical underpinning is based on the fact that a combination of income and capital gains provides a more stable return pattern for investors. The investor gets paid while the stock increases in value over time. The following chart outlines a recent study by RBC Capital Markets 2 on how dividend and nondividend paying stocks have rewarded investors over the long term: The TSX generated an annual return of 6.4% over the 25 years 2.1% for dividend cutters. This attribute is normally associated with high dividend / high payout ratio companies that cannot sustain dividends and are forced to cut (ex. Yellow Pages) 0.7% Non-Dividend Payers such as speculative resource companies 10.2% for Dividend Payers that have good dividends with sustainable payout ratios. (ex. REITS, utilities and other interest sensitive companies) 12% for Dividend Growers that have historically increased dividends over time. (ex. Canadian Banks and large industrials) The results are similar for US and World equity markets. Therefore based on current demographics, the low interest rate environment and strong fundamentals, we believe that companies that have sustainable dividend policies and are financially sound will continue to perform well over time. 2 This study shows the return characteristics from 1986 to 2012 representing a Secular Bear and Secular Bull time period which offers a good representation of this study.

6 The IP Equity Strategy Our equity strategy is focused on Dividend Income and Capital Growth: A concentrated portfolio of securities: o Canadian; US; and International stocks (ADR s) o High quality dividend paying stocks Balance Sheet Attributes: o Large Capitalized stocks with great track records o Strong balance sheet items include: Return of Equity Return on Assets Low Debt to Equity Margin of Safety Attributes (buying below fundamental value): o Lower Price to Earnings (P/E) o Lower Price to Book (P/B) o Higher Dividend o Excellent payout ratio Fundamental Growth: o Earnings and Dividend growth superior to peers (historical & projected) Risk Management: o Bottom Up (equity selection) Focus of quality securities with lower volatility (standard deviation) Portfolio construction with proper diversification provides downside protection Proper liquidity screens to ensure that a stock can be bought or sold immediately if/when necessary Strong sell discipline. If a stock fails our key attributes, it is sold immediately and is replaced by the next best stock based on our selection criteria. o Top Down (Economic and Market Fundamentals) Our Investment Policy Statement allows us to make tactical asset allocation decisions based on: Equity Markets having reached euphoric pricing levels Examination of diverging indicators including earnings growth; P/E ratios, GDP growth; factory orders, equity risk premium calculations, and other economic data Change in the yield curve (flattening, steepening or inverting) The chart(s) below outlines the back tested results of our equity strategy (December 2003 December 2013) which incorporates the following: Equal weighting of US and Canadian securities Effect of foreign exchange impacts (USD) No tactical equity weighting decisions 2% management fee

7 Figure 1: Benchmark consists of 50% TSX Total Return and 50% S&P 500 Total return in Canadian dollars. Figure 2: Benchmark consists of 50% TSX Total Return and 50% S&P 500 Total Return in Canadian dollars

8 As can be seen the IP Equity Strategy provides a strong risk adjusted return with the following results: Ten-year back tested return of 10.24% after a 2% annual management fee Volatility, as represented by standard deviation, is 18% lower than the underlying benchmark Good upside capture (88.5% of the market) with extensive downside protection (56.5% of the market) Current equity yield of 3.38% In 2013, 38 of the 40 companies selected increased their dividends Summarizing the Benefits of the IP Strategies Balanced Portfolio 1. Monthly dividend interest income 2. Capital appreciation 3. Risk management for downside protection and lower volatility 4. Prudent and disciplined investment management 5. PEACE OF MIND DISCLAIMER: Past returns are not necessarily indicative of future performance. You should not rely on or view any past performance as a guarantee of future investment performance. A recommendation of the above investments would only be made after a personal review of an individual s financial objectives. Statistics and factual data and other information presented at the seminar are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Securities are offered through Raymond James Ltd., member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member-canadian Investor Protection Fund.