:: brintoneaton.com Constructing a Portfolio that Successfully Manages Downside Risk Jerry A. Miccolis, CFA ®, CFP ®, FCAS CIO, Brinton Eaton Annual Conference May 23, 2012

:: brintoneaton.com Constructing a Portfolio that Successfully Manages Downside Risk Company confidential1

:: brintoneaton.com Constructing a Portfolio that Successfully Manages Downside Risk Company confidential2 Juan Carlos Artigas Global Head of Investment Research World Gold Council

:: brintoneaton.com Constructing a Portfolio that Successfully Manages Downside Risk Company confidential3 Kenneth R. Solow, CFP ® Chief Investment Officer Pinnacle Advisory Group

:: brintoneaton.com Constructing a Portfolio that Successfully Manages Downside Risk Company confidential4 Erick Goralski Director, Global Markets, ICG Structured Investments Deutsche Bank Securities, Inc.

:: brintoneaton.com Constructing a Portfolio that Successfully Manages Downside Risk Company confidential5

:: brintoneaton.com Modernized Modern Portfolio Theory Constructing a Portfolio that Successfully Manages Downside Risk Company confidential6

:: brintoneaton.com Modernizing MPT  More realistic asset distributions  Non-normal/fat tails  More representative investment horizons  Multi-period/compound returns/risk drag  Rules-based rebalancing  More meaningful risk measures  Shortfall risk  Conditional VaR  More useful dependency measures  Correlations  copulas Company confidential7

:: brintoneaton.com Asset class relationships are complex Company confidential8

:: brintoneaton.com We’ve moved from correlations… Company confidential9

:: brintoneaton.com …to copulas Company confidential10

:: brintoneaton.com Dynamic Asset Allocation Constructing a Portfolio that Successfully Manages Downside Risk Company confidential11

:: brintoneaton.com Our sector rotation strategy is an example of DAA  Stable-weighting  Exit/entry signaling  Trade-offs between stability and responsiveness  Three “momentum” algorithms  Each has its own strengths/ weaknesses  Rules that determine which algorithm to use at different times  Dynamically move between responsiveness and stability based on market characteristics  Filtering  To avoid too-frequent trading  Parameters optimized based on data  Tested “out of sample” with data Company confidential12

:: brintoneaton.com How does this strategy compare to the S&P500 Total Return Index? 13Company confidential

:: brintoneaton.com How does this strategy compare to the S&P500 Total Return Index? 14Company confidential

:: brintoneaton.com Enlightened Tail Risk Hedging Constructing a Portfolio that Successfully Manages Downside Risk Company confidential15

:: brintoneaton.com Our three criteria for an effective buy-and-hold tail risk hedge  Sudden appreciation in severe market downturns  “Severe” denoting sudden, substantial, unexpected decline in market value across most major asset classes, as in 4Q08 (i.e., when diversification doesn’t help)  Appreciation to a degree sufficient to meaningfully offset the decline  No “give-back” during market recovery!  Very low cost  Minimize diversion of funds from productive use  No sacrifice of upside portfolio potential!  Minimal disruption to portfolio  Maintain what works in vastly more likely markets  “Don’t throw the baby out with the bathwater!” Company confidential16

:: brintoneaton.com Our criteria in a picture Company confidential17

:: brintoneaton.com Some combinations are promising Company confidential18

:: brintoneaton.com The combined effect can be game-changing Company confidential19

:: brintoneaton.com Constructing a Portfolio that Successfully Manages Downside Risk Company confidential20

:: brintoneaton.com For further reading on these ideas… Company confidential21