Director of Investment Strategy Buckingham Strategic Wealth Creating more efficient Portfolios and reducing the risk of black swans KEVIN GROGAN Director of Investment Strategy Buckingham Strategic Wealth

Markets are highly efficient. All risky assets should have similar risk-adjusted returns, similar Sharpe ratios.* Portfolios should be broadly diversified across unique/independent sources of risk. Traditional portfolios are dominated by single risk. Beliefs *The Sharpe Ratio is a measure of the risk-adjusted return of an investment. A higher ratio indicates a greater return for a unit of risk. The Sharpe Ratio is calculated as the average annual portfolio return less the average annual risk-free rate (one-month T-bills) divided by the portfolio’s annualized standard deviation.

Beta Dominates the Risk of the Typical Portfolio Typical portfolio: 60% Stocks/40% Bonds Equity volatility: 20% BAM bond portfolio: (4–5 year average maturity) Volatility 5% Equity risk: 60 x 20 = 1200 Bond risk: 40 x 5 = 200 Total risk: 1200 + 200 = 1400 Percentage equity risk: 1200/1400 = 86% Problem compounded by low rates; people chasing yield and moving into equities.

Which Distribution Would You Choose? Expected Return Negative Return Positive Return Probability Density Portfolio A The above example is for illustrative purposes only and is not intended to represent actual portfolios or actual returns.

Which Distribution Would You Choose? Expected Return Negative Return Positive Return Portfolio A Portfolio B Probability Density The above example is for illustrative purposes only and is not intended to represent actual portfolios or actual returns.

Unique sources of risk and return 1964–2016 Factor Beta Size Value Momentum Profitability Quality 1.00 0.29 -0.26 -0.18 -0.28 -0.52 0.02 -0.13 -0.22 -0.53 -0.23 0.11 0.03 0.27 0.72 The table provides the annual correlations of the six equity factors to each other in the U.S. for the period from 1964 through 2016. With the sole exception of the high correlation between the related profitability and quality factors, the correlations are low to negative. Notice in particular the negative correlations of the momentum premium to the beta, size, and value premiums. This demonstrates the diversification benefit of adding exposure to the momentum factor to a portfolio that has exposure to these other factors. As I mentioned, there is a second way to use tilting. Instead of focusing on increasing expected returns while holding risk about the same, you can focus on reducing risk while holding expected returns about the same. That’s accomplished by lowering your exposure to market beta at the same time you’re increasing your exposure to the other factors — you need less exposure to beta to achieve the same expected returns because the equities you do hold have a higher expected return than does the market portfolio. The result is that your portfolio has now become more diversified in terms of its exposure to factors — your exposure to beta went down, while your exposure to the other equity factors went up. In addition, Because you are now holding more bonds, your exposure to term risk went up, further diversifying the portfolio. And because stocks are so much more volatile than bonds a typical 60 percent stock/40 percent bond portfolio has much more than 60 percent of the risks concentrated in the stock allocation, or market beta. This is a point that is lost on most investors. Let’s see why this is the case. [GO TO NEXT SLIDE – do the math] Data supplied by Fama/French Data Library and AQR Capital Management. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results.

Unique risk S&P 500 Index Small-Cap Stocks Small-Cap Value Stocks Equal Weighting 1998 28.6% –2.3% –10.0% 5.4% 2001 –11.9% 17.6% 40.6% 15.4% Data supplied by Fama/French Data Library and AQR Capital Management. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results.

Factor Return and Risk (%) 1927–2016 Mean Return Standard Deviation Sharpe Ratio Beta 8.4 20.5 0.41 Size 3.4 13.8 0.24 Value 5.0 14.2 0.36 Momentum 9.3 15.9 0.58 Profitability* 3.0 9.6 0.31 Quality** 4.1 9.9 P1 6.5 8.8 0.74 P2* 5.3 5.4 0.97 P3** 5.6 1.14 The table provides the premium for each of the factors, its volatility, and its Sharpe Ratio. It also provides the same information for three naïve i/n portfolios: P1 is allocated 25 percent to the four factors of beta, size, value and momentum. P2 is allocated 20 percent to each of the same four factors and adding an allocation to the profitability factor. P3 is allocated the same way, substituting the quality factor for the profitability factor. Note how the low correlations among the factors led to the Sharpe Ratios of the three portfolios being higher than the Sharpe Ratios of any of the individual factors. This demonstrates the benefits of diversifying across factors. We can also see the benefits of diversifying across factors in the following table which shows the odds of underperformance over various time horizons. [GO TO NEXT NOTES] Data supplied by Fama/French Data Library and AQR Capital Management. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. *1964-2015 **1958-2015

60% Market Equity* 40% 5-Yr Treasuries** The Power of Diversification Redux 1999–2016 60% Market Equity* 40% 5-Yr Treasuries** 30/70 Risk Target 3 20/80 Risk Target 6 Annualized Return 5.7% 5.4% 5.6% Standard Deviation 10.1% 6.1% 4.8% Sharpe Ratio1 0.43 0.63 0.81 Worst Calendar Year Return –19.1% -10.9% -6.9% Reduce stock allocation Tilt stock allocation toward size and value premiums Result: less volatility with similar expected return *60% S&P 500 Index/30% MSCI EAFE Index (Net Div.)/10% MSCI Emerging Markets Index (Gross Div.) **Ibbotson Intermediate 5-Year U.S. Treasury Note ***Risk Target 3 Portfolio Allocation: 26.5% U.S. Adjusted Market-2/ 25% U.S. Small Cap Value Index/ 8.5% U.S. Large Cap Value Index/ 6.2% International Market Equity / 11.6% International Large Value/ 12.2% International Small Value/ 10% Emerging Markets. Calendar year data used. ****Risk Target 6 Portfolio Allocation: 60% U.S. Small Cap Value Index/ 30% International Small Value/ 10% Emerging Markets Index. 1The Sharpe Ratio is a measure of the risk-adjusted return of an investment. A higher ratio indicates a greater return for a unit of risk. The Sharpe Ratio is calculated as the average annual portfolio return less the average annual risk-free rate (One-month T-bills) divided by the portfolio’s annualized standard deviation. For additional information on the Risk Target Portfolios, please see “The Important Disclosures Regarding Simulated Strategies.” The table provides the premium for each of the factors, its volatility, and its Sharpe Ratio. It also provides the same information for three naïve i/n portfolios: P1 is allocated 25 percent to the four factors of beta, size, value and momentum. P2 is allocated 20 percent to each of the same four factors and adding an allocation to the profitability factor. P3 is allocated the same way, substituting the quality factor for the profitability factor. Note how the low correlations among the factors led to the Sharpe Ratios of the three portfolios being higher than the Sharpe Ratios of any of the individual factors. This demonstrates the benefits of diversifying across factors. We can also see the benefits of diversifying across factors in the following table which shows the odds of underperformance over various time horizons. [GO TO NEXT NOTES] Data supplied by Dimensional Fund Advisors. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading.

Which Distribution Would You Choose? Expected Return Negative Return Positive Return Portfolio A Portfolio B Probability Density Portfolio C The above example is for illustrative purposes only and is not intended to represent actual portfolios or actual returns.

How to Create Even More Efficient Portfolios, Further Reducing Tail Risk Adding alternative investments: unique sources of risk/return Reinsurance Alternative lending Variance risk premium Long/short alternative style premium

Benefit of Adding Portfolio of Alternatives with Unique Risks Expected Return (%) Expected S.D. (%) Reinsurance 7.5 12.5 Alternative Lending 6 5 Variance Risk Premium 9.5 10 Long-Short Alternative Style Premium 7 Equal-Weighted Portfolio Please see Important Disclosure for Expected Return/Forward Looking Annual Return Expectation Assumptions

Expected Impact of alternatives Sharpe Ratio Return Volatility Slightly Slightly True when used in either taxable or tax-advantaged accounts.

Perspective on Alternatives Historical Perspective High fees Strategies over-promised and under-delivered Current Perspective Lower fees Academic evidence Increased liquidity

Diversifying across unique sources of risk factors and alternative investments: Creates more efficient portfolios Reduces portfolio volatility Narrows the potential dispersion of returns Reduces tail risks 60/40 isn’t what it used to be

Bam Capital Market Assumptions* 9.0% Expected Equity Return 2.8% Value & Size Premium 1.8% Inflation 4.5% Real Return Less: 0.4% Mutual Fund Expenses 8.6% Net Forward Looking Annual Equity Return Expectation 2.6% Forward Looking Annual Return Expectation 4.1% Annual Standard Deviation Taxable Fixed Income1 3.0% Forward Looking Annual Return Expectation 19.6% Annual Standard Deviation Commodities2 Taxable FI vs Equity: -0.01 Commodities vs Equity: 0.04 Commodities vs Taxable FI: -0.02 Correlations3 Annual Standard Deviation, Equity: 20.0% (1) * Important footnotes and disclosures are provided on the following slide.

Important footnotes & disclosures regarding capital market assumptions Capital Market Assumption Footnotes: Forward Looking Annual Return Expectation is current yield 20-year T-Bonds and the series used to calculate the standard deviation is a linked series of indexes: 1964–1975: Bank of America Merrill Lynch 1-Year US Treasury Note Index; 1976–1984: Barclays Treasury Bond Index 1-5 Years; and 1985–Present: Citigroup World Government Bond Index 1-5 Years. The Forward Looking Commodity Return Expectation was calculated by adding the expected nominal return of fixed income to our expected normal backwardation premium and then subtracting out the operating expense ratio of 0.34 percent and estimated total returns swap transaction costs of 0.25 percent of the DFA Commodity Strategy (DCMSX). The series used to calculate volatility is a linked series of indexes: 1970–January 1991: GSCI Commodity Index and February 1991–Present: Dow Jones UBS Commodity Index. Historical correlation, 1/70 – 12/15. Correlations were calculated using index-linked portfolios. Live funds were used for the last year of the calculation. Based upon the similarity of correlations among Buckingham’s Simulated Strategy Portfolios Risk Target 1, Risk Target 2, Risk Target 3 and Risk Target 6 with fixed income. Important Disclosure for Forward Looking Annual Return Expectation Assumptions: This information includes illustrations of Forward Looking Annual Return Expectation assumptions with similar risk characteristics for the types of portfolios we design for clients. Forward Looking Annual Return Expectation assumptions are based on statistical modeling and are therefore hypothetical in nature and do not reflect actual investment results and are not a guarantee of future results. BAM makes no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation/report. The Forward Looking Annual Return Expectation assumptions and surrounding expectations may differ materially from actual results based a variety of factors, including but not limited to the actual asset allocation determined to be appropriate for any individual clients, market conditions, economic conditions and the length of time a portfolio is held. A portfolio may also have different results based on capital flows, timing of rebalancing decisions, fees charged, taxes or other factors. This information should not be considered as a demonstration of actual performance results or actual trading using client assets and should not be interpreted as such. The results may not reflect the impact that material economic and market factors may have on the advisor’s decision‐making in managing actual client accounts. The investment returns and principal value of investments recommended by our firm will fluctuate and may be worth more or less than their original cost when sold. A client may experience a loss when implementing an investment strategy. Our investment strategy is based on the principles of Modern Portfolio Theory (MPT). The tenets of MPT provide for a passive, long‐term, buy‐and‐hold strategy implemented through globally diversified portfolios. Mutual funds representing asset classes where academic research has demonstrated higher Forward Looking Annual Return Expectations for the level of risk taken are combined into a single portfolio. Portfolios are constructed with low‐correlating components to provide diversification for the purpose of reducing the risk caused by volatility. Commodities may be added to some client portfolios for the purpose of additional risk reduction and not necessarily to provide higher Forward Looking Annual Return Expectations in such portfolios. Any projection or information contained herein, regarding the possibility of any financial outcome, is hypothetical, does not reflect actual investment results, and does not guarantee future results. Investors should consider the objectives, risks, and charges and expenses of an investment company carefully before investing. The Forward Looking Annual Return Expectation assumptions contained herein may vary over time. Additionally, your actual results will vary from the results presented to you in this report. Past performance is not a guarantee of future results.

Important Disclosures Regarding Simulated Strategies The following pages include illustrations of returns for the types of portfolios we design for clients. The Simulated Strategies may or may not be the actual allocation determined to be appropriate for any individual clients, and a client may or may not follow the Simulated Strategies. Clients with the allocations shown may have different results based on capital flows, timing of rebalancing decisions, fees charged or other factors. Our investment strategy is based on the principles of Modern Portfolio Theory (MPT). The tenets of MPT provide for a passive, long-term, buy-and-hold strategy implemented through globally diversified portfolios. Mutual funds representing asset classes where academic research has demonstrated higher Forward Looking Return Expectations for the level of risk taken are combined into a single portfolio. Portfolios are constructed with low-correlating components to provide diversification for the purpose of reducing the risk caused by volatility. Commodities may be added to some client portfolios for the purpose of additional risk reduction and not necessarily to provide higher expected returns in such portfolios. Portfolios are rebalanced to maintain agreed-upon asset allocations. The historical performance information that follows is provided to demonstrate the methodology used in building portfolios using the aforementioned investment strategy. This information should not be considered as a demonstration of actual performance results or actual trading using client assets and should not be interpreted as such. The results may not reflect the impact that material economic and market factors may have had on the advisor’s decision-making in managing actual client accounts. The results are based on the retroactive application of a back-tested model that was designed with the benefit of hindsight and should not be interpreted as the performance of actual accounts. Past performance is not a guarantee of future results. [The advisor has not managed client portfolios in this manner this entire period of time.] The investment returns and principal value of mutual funds recommended by our firm will fluctuate and may be worth more or less than their original cost when sold. A client may experience a loss when implementing an investment strategy. Advisor utilizes both tax-managed funds and corresponding funds that are not tax managed in constructing client accounts. The Simulated Strategies returns presented use fund returns that are not tax managed. While the tax-managed funds are consistent with the passive approach we follow, they should not be expected to regularly track the performance of corresponding taxable funds in the same or similar asset classes. As such, the performance of portfolios using tax-managed funds will vary from portfolios that do not use these funds. Back-tested data does not represent the impact that material economic and market factors might have on an investment advisor’s decision-making process if the advisor were actually advising an investor and should not be considered indicative of the skill of the advisor. The back-testing of performance differs from actual account performance because an investment strategy may be adjusted at any time and for any reason, and can continue to be changed until desired or better performance results are achieved. The back-tested results assume ordinary income and capital gains distributions are reinvested, annual rebalancing and no income taxes. If performance reflects the deduction of an advisory fee billed quarterly in advance, it is indicated on the page. More information about mutual fund fees and expenses is available in the prospectus for each mutual fund. The simulated strategy returns are benchmarked to the Standard & Poor's 500 Index (“S&P 500”), the Morgan Stanley Capital International Europe, Australasia and Far East Index (“MSCI EAFE”), and the Morgan Stanley Capital International Emerging Markets Index (“MSCI EM”). The benchmarks are used for comparative purposes only as commonly utilized benchmarks. Financial indicators and benchmarks are unmanaged, do not reflect any management fees, assume reinvestment of income, are for illustration purposes only, and have limitations when used for such purposes because they may have volatility, credit, or other material characteristics, including no fixed income allocation, that are different from simulated strategies. Investments made for the portfolios Advisor manages according to its strategies will differ significantly in terms of security holdings (including an allocation to fixed income), industry weightings, and market capitalization from those of the aforementioned indices. Advisor has managed numerous other model simulated strategies and has maintained information related to these strategies, including performance information. A complete listing and description of all model simulated strategies is available upon request.

Director of Investment Strategy Buckingham Strategic Wealth Creating more efficient Portfolios and reducing the risk of black swans KEVIN GROGAN Director of Investment Strategy Buckingham Strategic Wealth