Guided Portfolios Disciplined portfolio management

A business-like approach to a task that often is emotionally driven Adapts the portfolio to a changing investment outlook Roadmap in place for unexpected developments Investment Advantages of Discipline Investment Process

“To invest successfully over a lifetime does not require a stratospheric I.Q., unusual business insight, or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” - Warren Buffet

Guided Portfolios A set of pre-determined rules and guidelines designed to bring discipline to the management of equity portfolios. The Guiding Principles  Diversify the portfolio across industry sectors in a way that fits the global economic outlook  Choose high quality companies in each sector according to objective guidelines  Adhere to disciplined rules for making changes to the portfolio

The Investment Strategy The underlying investment strategy uses a combination of top down (sector allocation) and bottom up (company evaluation) analysis.

Top-Down Analysis Recommended Portfolio Structure –Strategy Committee Asset Allocation Sector Allocation Discussion –Economy –Earnings –Interest Rates –Valuation –Sectors

Industry Outlook Equity Market Indices Relative to Equilibrium Real short-term interest rates - U.S. & Canada Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04 % U.S. Canada Top-Down Analysis Interest Rates Government Policy Fiscal Balances Employment InventoriesCurrencies Commodity Prices Normalized Earnings Capacity Utilization GDP Growth Labour CostsInflation Business Investment Inventory Levels Retail Sales Consumer Debt Growth Rates US Business Capital Spending

Bottom-Up Analysis  Individual companies assigned a score based on three research disciplines:  fundamental, quantitative, technical  Bottom scoring companies eliminated from universe of stocks  Independent Selection Committee applies Qualitative Screen  End result is a list of quality companies suited to the forecast environment

Company Screening Process 1000s of Companies in Sector Short List of Companies in Sector Index Filter Only companies listed in S&P/TSX & S&P 500 Indices Fundamental Screen Quantitative Screen Technical Screen Companies eligible for portfolios. Ideal candidates for new positions. EQUITY GRID Qualitative Screen Independent Selection Committee

Bottom-Up Analysis Adding Value with the Fundamental Screen Fundamental Score CanadaUnited States

Bottom-Up Analysis Adding Value with the Quantitative Screen QuaDS Score Value Models Price/Recurring Earnings Price/Estimated Earnings Price/Normalized Earnings Price of Growth Model Three Stage Dividend Discount Model Dividend Yield Price/Book Value VALUE COMPOSITE Growth Models Earnings Growth Revenue Growth Dividend Growth Return on Equity Estimated Return on Equity Normalized Return on Equity GROWTH COMPOSITE Predictability Models Total Return Stability Earnings Stability Confidence of Earnings Estimates Non-Recurring Item Frequency PREDICTABILITY COMPOSITE Momentum Models Earnings Momentum Revenue Momentum Total Return Momentum Estimate Revision Earnings Surprise MOMENTUM COMPOSITE

Bottom-Up Analysis Adding Value with the Technical Screen Two Time PeriodsTwo Trend Types Technical Score Intermediate Term Long Term Absolute (is it going up/down?) Relative (is it going up/down relative to the index)

Stock Selection Committee Adding Value with the Qualitative Screen Attributes Include:  A business model that generates excess capital;  A strong management team;  A strong competitive position;  A financially healthy customer base;  A favourable industry environment;  A history of product innovation and/or a competitive cost structure.

The 3-Discipline Process  Designed to leverage the value added of the individual disciplines by seeking securities with positive scores across all three selection techniques. Universe FundamentalQuantitative Technical

How Important is Removing the Bottom Scoring Stocks?

The Resulting Portfolio Portfolio Structure The portfolio is structured appropriately, with exposure to those sectors likely to outperform, while ensuring the portfolio is not overexposed to those sectors likely to underperform. Portfolio Components The portfolio only holds quality companies that have passed multi-disciplinary screening process

Managing the Portfolio A clear set of guidelines provide the decision making framework required to manage equity portfolios in a disciplined manner.

The decision to BUY, HOLD, and SELL, will be driven by the guidelines below.  Match Sector Recommendations  Only Hold Recommended Companies  Rebalance Large Positions

Match Sector Recommendations  What will be done?  Top-Down analysis will from time to time dictate changes in the number of positions to be held in each sector in the portfolio.  This may require that specific issues be replaced by ones in different industries.  Why?  These changes ensure the portfolio is always structured to fit the current market outlook.

Only Hold Recommended Companies  What will be done?  Recommended companies are monitored to ensure they meet the requirements to remain in the Guided Portfolio universe.  Companies that no longer qualify are removed from the universe, and under the guidelines must be sold from the portfolio.  Why?  These changes ensure the portfolio always owns only companies that are highly ranked across the independent analytical disciplines.  Forces the portfolio to deal promptly and decisively with companies whose fortunes deteriorate.

Rebalance Large Positions  What will be done?  Typically, new portfolios are approximately equally allocated across twenty stock positions.  Over time, positions may grow to represent a greater percentage of the portfolio. Positions will be rebalanced if they’ve grown past a certain threshold.  Why?  This process ensures the portfolio does not become overexposed to one particular company.

Expectations & Benefits Managing expectations and avoiding key pitfalls will help you realize the benefits and work towards your long term objectives

Expectations The portfolio will not always be buying at the “low” and selling at the “high”. But, the portfolio will always…  own the highest quality companies that have attractive potential within their peer groups  be structured to meet the current economic and market outlook  be appropriately diversified across various industries and sectors

The Benefits  Brings a business-like approach to a task that is too often emotionally driven.  Forces the portfolio to deal with negative developments promptly.  Adapts the portfolio to a changing economic and market environment.  Ensures the portfolio always owns quality companies that have met high standards.  Places emphasis on portfolio structure and not just on the individual companies within.