WINDHAVEN DIVERSIFIED GROWTH STRATEGY QUARTERLY PROFILE JUNE 30, 2013

Transcription

1 WINDHAVEN DIVERSIFIED GROWTH STRATEGY QUARTERLY PROFILE JUNE 30, 2013 INVESTMENT PHILOSOPHY Windhaven Investment Management, Inc. is an SEC-registered* investment advisor managing more than $17 billion of client assets using diversified portfolio strategies that invest in a wide range of asset classes and may include exposure to U.S. and international equities and fixed income, REITs, gold, currencies, and commodities. The firm employs a proprietary model that combines economic, fundamental, and behavioral factors to rank the relative risk and return attractiveness of this diverse set of asset classes in order to attempt to take advantage of perceived investment opportunities across the global capital markets. Windhaven primarily utilizes index ETFs to gain exposure to the over 40 asset classes currently analyzed in Windhaven's research universe. The strategies emphasize risk management as a primary objective and attempt to generate attractive returns while reducing volatility and maximum drawdown over full market cycles. GROWTH OF $1MM SINCE 2002 $2.0MM $1.0MM $2.25MM $1.92MM $1.83MM INVESTMENT OBJECTIVE The objective of the Windhaven Diversified strategy is to achieve equity-like returns over full market cycles but with less risk. Diversified is designed as a moderate investment strategy that is structured to benefit from economic prosperity, while simultaneously maintaining a primary focus on risk management against a variety of potential economic scenarios including recession, deflation, credit contraction, inflation, and geopolitical uncertainties. INVESTMENT STRATEGY $0.5MM WINDHAVEN DIVERSIFIED GROWTH GLOBAL GROWTH BENCHMARK U.S. BLENDED BENCHMARK Hypothetical growth of $1MM assumes client was invested in Windhaven beginning on 1/1/2002. Calculations are based on historical composite performance. information is based on historical index performance. You cannot invest directly in an index. Both assume reinvestment of dividends and interest and do not reflect the effects of taxes. The strategy consists of two portions, a "core" and a "tactical," both of which are dynamic in nature. The core portion is broadly diversified across a wide range of asset classes with risk management as the primary consideration, while the tactical portion is allocated to asset classes which attempt to take advantage of shorter-term opportunities across the global capital markets. COMPOUND ANNUAL RETURNS (AS OF 6/30/2013) Trailing Returns Quarter b YTD b 1 Year 3 Years 5 Years 10 Years Since 1/1/2002 a Windhaven c -2.7% 0.5% 5.5% 7.9% 3.0% 7.2% 7.3% U.S. Blended (60% U.S. Equities, 40% U.S. Bonds) d 0.8% 7.1% 11.7% 12.5% 6.7% 6.5% 5.4% Global e -1.4% 2.0% 8.7% 8.7% 3.1% 6.5% 5.8% CALENDAR RETURNS Returns Windhaven c 3.1% 25.8% 7.7% 9.4% 14.0% 11.9% -15.4% 13.2% 8.0% 0.7% 10.5% U.S. Blended d -9.8% 18.5% 8.3% 4.0% 11.1% 6.2% -22.1% 18.4% 12.1% 4.7% 11.3% Global e -5.6% 21.0% 11.1% 8.3% 12.2% 10.9% -25.8% 22.1% 10.6% -0.8% 10.7% * Such registration in no way implies that the Securities and Exchange Commission approves or endorses Windhaven, its strategies, or any of its marketing materials. Risk is measured in terms of maximum drawdown and volatility. Over short periods of time, the Diversified strategy has exhibited risk characteristics similar to those of an all-equity portfolio, but over longer time periods the maximum drawdown and volatility have been less than those of an all-equity portfolio. a The time period shown is the longest time period for which all three Windhaven strategies existed concurrently. b Partial year total return, not annualized. c Performance is based on the actual return of the respective Windhaven Diversified, net of all fees and expenses. d The U.S. Blended consists of 60% S&P 500 Total Return Index and 40% Barclays U.S. Aggregate Bond Index. e The Global is comprised of 55% MSCI All Country World Index (ACWI), 40% Barclays U.S. Aggregate Bond Index, and 5% S&P GSCI Total Return Index (GSCI). Data Source: Bloomberg.

2 RISK/RETURN METRICS (1/1/2002 6/30/2013) a Windhaven U.S. Blended Global Measure Diversified b 60% U.S. Equities, 40% U.S. Bonds c d Compound Annual Return 7.3% 5.4% 5.8% Maximum Drawdown e -25.4% -32.5% -35.4% Volatility (Annual Standard Deviation) 9.1% 9.2% 9.9% Sharpe Ratio Alpha 2 to S&P 500 Total Return Index Beta 2 to S&P 500 Total Return Index UP/DOWN CAPTURE (SINCE 1/1/2002) a 100% 61% 61% 56% RISK VS. RETURN (SINCE 1/1/2002) a 12% -43% ANNUALIZED RETURN 8% 4% WINDHAVEN U.S. BLENDED (60% EQ/40% BD) GLOBAL UP CAPTURE -100% -59% -58% DOWN CAPTURE 0% 0% 4% 8% 12% 16% STANDARD DEVIATION OF RETURNS S&P 500 Total Return Index U.S. Blended (60% U.S. Equities, 40% U.S. Bonds) Global Windhaven Diversified ASSET ALLOCATION (AS OF 6/30/2013) Equities 53% Wilshire 5000 S&P 500 Russell 2000 Nasdaq 100 Dividend Appreciation S&P 500 Low Volatility EAFE FTSE 100 DAX Japan Hedged Equity Emerging Market Equities Emerging Market Consumer Equities Real Estate 3% U.S. REITs Hard Assets 8% Gold DB Commodity Index Fixed Income 34% U.S. Aggregate Bond Index U.S. T-Bonds U.S. High Quality Corp Bonds 1-3 yr Corp U.S. Short Duration High Yield U.S. TIPS Asian Local Bonds Cash Investments f 2% Cash Investments ASSET ALLOCATION GUIDELINES (AS OF 6/30/2013) Asset Class Range U.S. Equities 12% 45% Non-U.S. Equities 2% 48% Equity Range 19% 64% U.S. Fixed Income 24% 71% Non-U.S. Fixed Income 0% 43% Fixed Income Range 27% 74% Hard Assets 4% 24% Real Estate 0% 19% a The time period shown is the longest time period for which all three Windhaven strategies existed concurrently. b Performance is based on the actual return of the respective Windhaven Diversified, net of all fees and expenses. c The U.S. Blended consists of 60% S&P 500 Total Return Index and 40% Barclays U.S. Aggregate Bond Index. d The Global is comprised of 55% MSCI ACWI, 40% Barclays U.S. Aggregate Bond Index, and 5% S&P GSCI. e The time period shown here is short. We anticipate that potential drawdowns in this strategy may be different. See "Notes - Risk Measures" disclosure #1atthe end of this document for additional information. f Cash investments are highly liquid, short-term securities and may include, but are not limited to, U.S. government Treasury bills, bank certificates of deposit, bankers' acceptances, corporate commercial paper, and other money market instruments. Data Source: Bloomberg.

3 DEFINITIONS Alpha: A measure of a fund's risk-adjusted return. Alpha can be used to measure the value added or subtracted by a fund's manager. It is calculated by measuring the difference between a fund's actual returns and its expected performance, given its level of market risk as measured by beta. An alpha of 1.0 means the fund produced a return 1% higher per year than its beta would predict. An alpha of -1.0 means the fund produced a return 1% lower per year. Beta: Beta measures the risk of a particular investment relative to the market as a whole (the "market" can be any index or specified benchmark). It describes the sensitivity of the investment to broad market movements. For example, in equities, the stock market is assigned a beta of 1.0. An investment which has a beta of 0.5 will tend to participate in broad market movements but only half as much as the overall market. Maximum Drawdown: A measure of risk that captures the largest percentage drop of an investment from any peak to trough in a given period. It is generally calculated using month-end data. It will show in percentage terms how much money you would have lost (as a percentage) until you return to the investment's breakeven point. For example, if you began with a $100,000 investment and you lost $30,000 before that investment returns to its breakeven level, then your "maximum drawdown" would be measured as 30%. Sharpe Ratio: A return/risk ratio developed by William Sharpe. The return (numerator) is defined as the incremental average return over and above the risk-free rate (T-Bills). Risk (denominator) is defined as the standard deviation of these investment returns, i.e., portfolio manager return over and above the risk-free rate (T-Bills). This ratio is also known as the Information Ratio, where the benchmark return is being substituted for the risk-free rate. What you are looking for here is excess return generated per unit of risk. In other words, are returns generated by smart investment decisions or by taking on excess investment risk? In an investment analysis, a higher Sharpe Ratio would indicate a manager or an investment achieving higher rates of return per unit of investment risk. Standard Deviation: Standard deviation measures the dispersal or uncertainty in a random variable (in this case, investment returns). It measures the degree of variation of returns around the mean (or average) return. The higher the volatility of the investment returns, the higher the standard deviation will be. For this reason, standard deviation is often used as one measure of investment risk. A more volatile stock or investment would have a higher standard deviation. Up Capture/Down Capture: TheUpandDown Capture is a measure of how well a manager was able to replicate or improve on phases of positive benchmark returns, and how badly the manager was affected by phases of negative benchmark returns. Up (Down) Capture is the average annualized return of Windhaven's strategy during the months the respective benchmark is positive (negative) divided by the average positive (negative) annualized return of the benchmark. Note that a negative Down (Up) Capture suggests an average positive (negative) annualized return for Windhaven's strategy during the benchmark's negative (positive) months. NOTES RISK MEASURES 1 The time period shown here is short. Maximum drawdown is calculated as the worst cumulative peak-to-trough decline from any month-end data point to any other month-end data point. We would anticipate that the potential drawdowns in the Diversified strategy could be in the rand of 25% or more. The actual maximum drawdown since the inception (1996) of this strategy was 25.4%. Maximum drawdown Blended benchmark was 32.5% (November 1, 2007-February 28, 2009). Maximum drawdown for Global was 35.4% (November 1, 2007-February 28, 2009). 2 Alpha and beta are measured against the S&P 500 Total Return Index. NOTES ASSET ALLOCATION GUIDELINES Short-term cash positions, whether in U.S. dollars or other currency, are included in the relevant fixed income section. In between reallocation periods, minimum and maximum ranges may be exceeded or fall below initial minimums based on market activity. The categories used in this report may include a variety of market exposures. For instance, "hard assets" includes exposures to gold, various types of commodities, and energy. Holdings of individual client portfolios may differ, sometimes significantly, from those shown in the model allocations. Allocation guideline ranges are subject to change without notice. NOTES AND DISCLOSURES Barclays U.S. Aggregate Bond Index The market capitalization-weighted index (formerly the Lehman Brothers Aggregate Bond Index; name change November 1, 2008) includes Treasury securities, government agency bonds, mortgage-backed bonds, corporate bonds, and a small amount of foreign bonds traded in the United States. Municipal bonds and Treasury Inflation-Protected Securities are excluded due to tax treatment issues. Citigroup World Government Bond Index (CWGBI) The Citigroup World Government Bond Index (CWGBI) is a market capitalizationweighted index consisting of the government bond markets. Country eligibility is determined based on market capitalization and investability criteria. All issues have a remaining maturity of at least one year. S&P GSCI Total Return Index (GSCI) A composite index of commodity sector returns, representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. MSCI All Country World Index (ACWI) A free float-adjusted market capitalizationweighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007, the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices. The developed market country indices included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The emerging market country indices included are: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. S&P 500 Total Return Index The S&P 500 is the Standard & Poor's composite index of 500 stocks, a widely recognized, unmanaged index of common stock prices. The S&P 500 Total Return Index is the total return version of the S&P 500 Index. Dividends are reinvested on a daily basis. All regular cash dividends are assumed reinvested in the S&P 500 Index on the ex-date. IMPORTANT INFORMATION ABOUT WINDHAVEN RISKS Please refer to Windhaven's ADV Part 2 for more information. Past performance is not indicative of future returns, and the value of investments and the income derived from them can go down as well as up. Future returns are not guaranteed and a loss of principal may occur. Diversification strategies do not ensure a profit and do not protect against losses in declining markets. Windhaven s risk-management process includes an effort to monitor and manage risk, but should not be confused with (and does not imply) low risk. There are risks associated with any investment approach, and Windhaven strategies have their own set of risks to be aware of. First, there are the risks associated with the long-term core strategic holdings for each of the strategies. The more aggressive the Windhaven strategy selected, the more likely the strategy will contain larger weights in riskier asset classes, such as equities. Second, there are distinct risks associated with Windhaven strategies' shorter-term dynamic allocations, which can result in more concentration toward a certain asset class or classes. This introduces the risk that Windhaven

4 could be on the wrong side of a tactical overweight, thus resulting in a drag on overall performance or loss of principal. Some specialized ETFs can be subject to additional risks. Investment returns will fluctuate and are subject to market volatility such that an investor s shares, when redeemed or sold, may be worth more or less than their original cost. Asset classes and the proportional weightings in the strategies may change at any time without notice, subject to the discretion of Windhaven Investment Management. International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, political instability, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks. Hard assets can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions. Performance Calculation The Performance results for the Windhaven strategies referred to herein include all discretionary, fee-paying accounts within the Diversified Conservative, Diversified, and Diversified Aggressive strategies, including those clients that are no longer with the firm. Accounts are included in each composite after the first full month under management to the present or to the cessation of the client relationship with Windhaven. Investment results are time-weighted performance calculations representing total return. s are valued monthly, and portfolio returns are asset-weighted by using beginning-of-month market values plus weighted cash flows. Monthly geometric linking of performance results is used to calculate annual returns. Total return figures are calculated using trade date accounting. All realized and unrealized capital gains and losses as well as all dividends and interest from investments and cash balances are included. The performance figures presented are net of brokerage commissions and all other expenses, including the firm s investment advisory fee. The investment results shown are not representative of an individually managed account s rate of return, and differences can occur due to factors such as timing of initial investment, client restrictions, cash movement, etc. Securities used to implement the strategies can differ based on account size, custodian, and client guidelines. and Performance Criteria for choosing the benchmarks for each Windhaven strategy are as follows: Diversified Conservative The Barclays U.S. Aggregate Bond Index was chosen as the benchmark for the Diversified Conservative strategy because clients will generally use the Diversified Conservative strategy as a substitute for or a complement to a bond portfolio. Diversified A blended benchmark (60% S&P 500 Total Return Index and 40% Barclays U.S. Aggregate Bond Index) was chosen as the benchmark for the Diversified strategy because clients will generally use the Diversified strategy as a substitute for a "balanced fund." Our target risk for the Diversified strategy is "balanced fund" risk. Diversified Aggressive The S&P 500 Total Return Index was chosen as the benchmark for the Diversified Aggressive strategy because clients will generally use the Diversified Aggressive strategy as a substitute for or a complement to an all-equity portfolio. The benchmarks listed above have not been selected to represent an appropriate benchmark with which to compare an investor s performance, but rather are disclosed to allow for comparison of the investor s performance to that of certain well-known and widely recognized indices. Windhaven s Diversified Conservative strategy does not invest solely in bonds, so its performance relative to the benchmarks will be impacted by this difference. Windhaven s Diversified and Diversified Aggressive strategies do not invest to the same degree as their benchmarks in U.S. stocks, so their performance relative to the benchmark will be impacted by this difference. For example, in 2002 and 2008, the S&P 500 Total Return Index declined over 20%. Since Windhaven s Diversified and Diversified Aggressive strategies do not invest in U.S. stocks to the same extent as their benchmarks, the impact of this decline on these strategies was less than on the benchmarks. The following Global benchmarks for each Windhaven strategy were chosen for informational and comparative purposes: Diversified Conservative The Global Conservative is composed of 20% MSCI ACWI, 75% Barclays U.S. Aggregate Bond Index, and 5% S&P GSCI Total Return, rebalanced monthly. Diversified The Global is composed of 55% MSCI ACWI, 40% Barclays U.S. Aggregate Bond Index, and 5% S&P GSCI Total Return, rebalanced monthly. Diversified Aggressive The Global Aggressive is composed of 70% MSCI ACWI, 20% CWGBI, and 10% S&P GSCI Total Return, rebalanced monthly. The Global benchmarks reflect a more diversified mix of indices. Windhaven s strategies may invest more heavily in real estate and currencies than their Global benchmarks, so their performance relative to the Global benchmarks may be impacted by this difference. Windhaven s strategies may not invest to the same degree as their Global benchmarks in stocks, bonds, and commodities, so their performance relative to the benchmark will be impacted by this difference. Reference to an index or benchmark does not imply that the Windhaven strategy will achieve returns, experience volatility, or have other results similar to the index. The composition of a benchmark index may not reflect the manner in which a Windhaven strategy is constructed in relation to expected or achieved returns, investment holdings, asset allocation guidelines, restrictions, sectors, correlations, concentrations, volatility, or tracking error targets, all of which are subject to change over time. Indexes do not include fees and expenses typically associated with investments in managed accounts, and you cannot invest directly in an index. Entities Windhaven Diversified strategies are managed by Windhaven Investment Management, Inc. ("Windhaven"), a registered investment adviser, and are available through Schwab's Managed Account Connection and Managed Account Access programs. Windhaven participates as a separate account manager in those programs, which include other separate account managers and strategies. Please read Schwab's disclosure brochure for important information and disclosures relating to Schwab's managed account programs. Portfolio management is provided by Windhaven, an affiliate of Charles Schwab & Co., Inc. ( Schwab ).Windhaven Investment Management, Inc. is a registered investment advisor and an affiliate of Schwab.

5 WINDHAVEN INVESTMENT MANAGEMENT, INC. WINDHAVEN DIVERSIFIED GROWTH COMPOSITE ANNUAL DISCLOSURE PRESENTATION Year End Total Firm Assets ($MM) %Wrap Portfolio Assets Annual Performance Results 3-Year Standard Deviation * USD ($MM) Number of Accounts Net U.S. Blended Global Dispersion Net U.S. Blended Global , % 4,002 12, % 4.7% -0.8% 0.4% 10.7% 11.3% 12.2% , % 2,038 3, % 12.1% 10.6% 0.4% 12.4% 13.6% 15.1% , % 1,456 2, % 18.4% 22.1% 0.8% 11.7% 12.4% 13.9% , % 901 1, % -22.1% -25.8% 1.0% 10.2% 9.5% 11.2% , % 712 1, % 6.2% 10.9% 0.7% 6.7% 4.6% 5.0% , % % 11.1% 12.2% 0.5% 7.1% 4.3% 4.8% % % 4.0% 8.3% 0.4% 7.3% 5.6% 5.7% % % 8.3% 11.1% 0.6% 7.5% 8.5% 7.7% % % 18.5% 21.0% 1.2% % % -9.8% -5.6% 0.7% *3-Year Standard Deviation is only shown where three years of data are available. Windhaven Diversified was constructed on December 31, 2005 and consists of fully discretionary accounts under the management of Windhaven Investment Management, Inc. ( Windhaven ) and its predecessor investment adviser (including wrap accounts and accounts no longer with the firm) that are or were invested in what is now known as the Windhaven Diversified strategy. Windhaven maintains a complete list and description of composites, which is available upon request. Past performance is not indicative of future results. Performance is expressed in U.S. Dollars. The Windhaven Diversified strategy seeks to achieve equity-like returns over full market cycles with less risk (risk is measured in terms of maximum drawdown and volatility). The strategy provides diversification and balance and may have exposure to U.S. and international stocks, bonds, real estate, hard assets and multiple currencies. The Charles Schwab Corporation acquired the assets of Windward Investment Management on November 10, 2010 and formed Windhaven, a new, wholly owned subsidiary. Windhaven is an investment adviser registered under the Investment Advisers Act of The benchmark was changed starting January 1, 2007 and then again January 1, The Diversified was previously compared to the S&P 500 Total Return Index and the Blended Index. The S&P 500 has been removed. The target return and target risk level of the Windhaven Diversified strategy is more closely aligned and correlated with the blended (60% S&P 500 Total Return/40% Barclays U.S. Aggregate Bond Index) benchmark than with the S&P 500, which is 100% equities. Over time, the S&P 500 Index has experienced substantially higher drawdowns than the Windhaven Diversified strategy. The blended benchmark is calculated on a monthly basis.the blended benchmark previously used the Ibbotson Intermediate-term U.S. Government Bond Index. It now uses the Barclays U.S. Aggregate Bond Index which is more widely used as a benchmark. The Global benchmark was added February 1, 2011 for comparison purposes. The Global benchmark is composed of 55% MSCI All Country World Index (ACWI), 40% Barclays U.S. Aggregate Bond Index and 5% S&P GSCI Total Return Index (GSCI). The S&P GSCI is a composite index of commodity sector returns. The MSCI ACWI is net of withholding taxes. The rates used for the MSCI ACWI Index are applicable to Luxembourg holding companies, as Luxembourg applies the highest rates. The Global is rebalanced on a monthly basis. More information regardingthe benchmarks shown is available upon request. Performance is presented net of all expenses applicable to each account in the composite including, without limitation, the firm's management fee, trading fees and brokerage commissions, (mark-ups and mark-downs,) and include the reinvestment of all income. Wrap accounts managed by Windhaven are charged a program fee by their sponsors ranging from 25bps to 150bps. The wrap program fees generally include: investment management; custody and other administrative fees and sponsor related trading costs (transaction costs for trades not executed by the sponsor may be charged separately). Net performance was calculated using actual expenses, including the actual management and/or wrap fee program fees charged. The annual composite dispersion presented is an asset-weighted standard deviation calculated for the accounts in the composite the entire year. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Outside of the wrap programs in which Windhaven participates, Windhaven's standard management fee is 1.00% on the first $5,000,000, 0.85% on the next $5,000,000, 0.75% on the next $15,000,000, 0.60% on the next $25,000,000, and 0.50% on the remaining assets over $50,000,000. Windhaven also serves asa sub-advisor to third-party investment advisors, family offices, and broker-dealers. These accounts are included in the Windhaven Diversified. Clients of third-party firms pay an annual investment advisory fee to Windhaven between 0.50% and 0.80% depending on the individual account size, and the total of a specific third-party firm's assets managed by Windhaven, and may also pay an advisory fee to the third-party firm in addition to Windhaven's investment management fee. Fees for sub-advisory work and introductions through intermediary channels are set at the discretion of Windhaven Investment Management. Actual investment advisory fees incurred by clients may vary. Windhaven Investment Management, Inc. claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. Windhaven Investment Management, Inc. has been independently verified for the periods January 1, 2002 through December 31, 2011 by Ashland Partners & Company LLP. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm's policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The Windhaven Diversified composite has been examined for the periods January 1, 2002 through December 31, The verification and performance examination reports are available upon request Windhaven Investment Management, Inc. All rights reserved. ( ) MKT (05/13)