Larry Swedroe Director of Research

The First Asset Pricing Model 4/25/2017 Source: Jon Mossin, Equilibrium in a Capital Asset Market. Econometrica, October 1966.

Anomalies to the CAPM 4/25/2017 1 Rolf R. Banz, The Relationship Between Return and Market Value of Common Stocks. Journal of Financial Economics, 1981. 2 Sanjoy Basu, The Relationship Between Earnings’ Yield, Market Value and Return for NYSE Common Stocks. Journal of Financial Economics, 1983. 3 Barr Rosenburg, Kenneth Reid and Ronald Lanstein, Persuasive Evidence of Market Inefficiency. Journal of Portfolio Management, Spring 1985.

The Fama-French Three-Factor Model Value: 5.0% Beta: 8.4% Size: 3.4% 1927 - 2014 4/25/2017 Source: Ken French Data Library. 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. Total return includes reinvestment of dividends.

1927 - 2014 Value: 5.0% Beta: 8.4% Size: 3.4% Momentum: 9.5% The Four-Factor Model Value: 5.0% Beta: 8.4% Size: 3.4% Momentum: 9.5% 1927 - 2014 1Mark Carhart, On Persistence of Mutual Fund Performance. Journal of Finance, March 1997. 2Ken French Data Library. 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. Total return includes reinvestment of dividends. 4/25/2017

The Profitability / Quality Factor Stable Growing High Payout Ratio 4/25/2017

Safe Cheap High-Quality Large Buffett’s Alpha Safe Cheap High-Quality Large 4/25/2017 Andrea Frazzini, David Kabiller and Lasse Heje Pedersen, Buffett’s Alpha. Working paper, November 2013. Photo courtesy of https://twitter.com/WarrenBuffett

Buffett’s Alpha Characteristics of High-Quality Stocks Low earnings volatility High margins High asset turnover Low financial leverage Low operating leverage Low specific stock risk 4/25/2017 Andrea Frazzini, David Kabiller and Lasse Heje Pedersen, Buffett’s Alpha. Working paper, November 2013.

Factors in the Performance of Bond Portfolios Average Annual Premium 1927 - 2014 Term: 1.9% Default: 0.3% Source: Ken French Data Library. 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. Total return includes reinvestment of dividends. 4/25/2017

The Arithmetic of Active Management 4/25/2017 Source: William Sharpe, The Arithmetic of Active Management. Financial Analysts Journal, January–February 1991.

The Pool of Victims is Shrinking Households With Equities Holdings 1945: 90% 4/25/2017 Source: Robert Stambaugh, Investment Noise and Trends. Presidential address to the American Finance Association, Philadelphia, Pennsylvania, January 2014.

The Pool of Victims is Shrinking Households With Equities Holdings 2008: 20% 4/25/2017 Source: Robert Stambaugh, Investment Noise and Trends. Presidential address to the American Finance Association, Philadelphia, Pennsylvania, January 2014.

The Pool of Victims is Shrinking TODAY: 40% of Institutional Assets in Passive Strategies 4/25/2017 Source: Robert Stambaugh, Investment Noise and Trends. Presidential address to the American Finance Association, Philadelphia, Pennsylvania, January 2014.

Skill Level of Competition Is Increasing Why There Are No More Skill Level of Competition Is Increasing Why There Are No More .400 Hitters 4/25/2017 Source: This image or file was extracted from a baseball card produced by Bowman Gum. According to the United States Copyright Office, copyrights belonging to Bowman Gum were not renewed within the required period for filing. Thus, all baseball cards printed by Bowman before 1989 have lapsed into the public domain and are free for use.

The Paradox of Skill Decline in Standard Deviation of Excess Returns for U.S. Large Capitalization Funds 4/25/2017 Source: Michael Mauboussin and Dan Callahan, Alpha and the Paradox of Skill. Credit Suisse, July 15, 2013.

The Paradox of Skill 4/25/2017 Source: Conviction in Equity Investing. Hewitt EnnisKnupp, An AON Company, 2012.

Skating Where the Puck Was Hedge Fund Alpha HFR Global Returns Index 9% 1998–2002 4/25/2017 Source: William J Bernstein, Skating Where the Puck Was: The Correlation Game in a Flat World. 2012.

Skating Where the Puck Was Hedge Fund Alpha HFR Global Returns Index 1998–2002 2003–2007 9% –0.7% 4/25/2017 Source: William J Bernstein, Skating Where the Puck Was: The Correlation Game in a Flat World. 2012.

Skating Where the Puck Was Hedge Fund Alpha HFR Global Returns Index 1998–2002 2003–2007 2008–2012 9% –0.7% –4.5% 4/25/2017 Source: William J Bernstein, Skating Where the Puck Was: The Correlation Game in a Flat World. 2012.

Annualized Returns 2005–2014 Benchmark Index Return (%) HFRX Global Hedge Fund Index 0.7 Domestic Indexes S&P 500 7.7 MSCI US Small Cap 1750 (gross dividends) 9.0 MSCI US Prime Market Value (gross dividends) 7.2 MSCI US Small Cap Value (gross dividends) 7.9 Dow Jones Select REIT 8.1 International Indexes MSCI EAFE (net dividends) 4.4 MSCI EAFE Small Cap (net dividends) 6.0 MSCI EAFE Small Value (net dividends) 6.4 MSCI EAFE Value (net dividends) 3.9 MSCI Emerging Markets (net dividends) 8.4 Fixed Income Merrill Lynch One-Year Treasury Note 2.0 Five-Year Treasury Notes 4.5 20-Year Treasury Bonds 7.5 Source: Dimensional Fund Advisors Information from sources deemed reliable, but its accuracy cannot be guaranteed. 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. Performance is historical and does not guarantee future results.

Active Managers Provide Societal Benefits 4/25/2017 Source: Jonathan B. Berk and Jules H. van Binsbergen, Measuring Skill in the Mutual Fund Industry,. Working paper, November 2013.

Increasing Hurdles for Alpha Seekers Pool of available alpha has been shrinking Pool of victims is shrinking. Competition is getting tougher. Amounts of assets competing is growing. 4/25/2017

So What’s the Good News? 4/25/2017

Appendix

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 expected returns 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.

Simulated Portfolio Construction Simulated Strategy* — Risk Target 3 Conservative Moderate Aggressive All-Stock   Equity 40.0 60.0 80.0 100.0 Domestic 24.0 36.0 48.0 Market Equity: DFA US Core Equity-2 Portfolio 10.5 16.0 21.0 26.5 Large Value: AQR Large-Cap Multi-Style R6 3.5 5.0 7.0 8.5 Small Value: Bridgeway Omni Small-Cap Value 10.0 15.0 20.0 25.0 International 32.0 Market Equity: DFA International Core Equity Portfolio 2.5 3.7 6.2 Large-Cap Value: DFA International Value Portfolio III 4.5 9.3 11.6 Small-Cap Value: DFA International Small Cap Value Portfolio 7.3 9.7 12.2 Emerging Markets Equity: DFA Emerging Markets Core Equity Portfolio 4.0 6.0 8.0 Fixed Income 0.0 DFA Five-Year Global Fixed Income Portfolio 30.0 DFA Inflation-Protected Securities Information from sources deemed reliable, but its accuracy cannot be guaranteed. *See preceding “Important Disclosures Regarding Simulated Strategies.” Simulated Strategy — Risk Target 3/Series A (page 1 of 3). Returns shown on following pages.

Simulated Portfolio Performance Simulated Strategy* — Risk Target 3 Annualized Returns for Periods Ending 12/31/14 Gross Returns S&P 500/MSCI EAFE/ Conservative Moderate Aggressive All-Stock MSCI Emerging (40/60) (60/40) (80/20) (100/0) Markets Index** One Year 2.55% 2.25% 1.97% 1.68% 6.56% Three Years 7.54% 10.77% 14.06% 17.02% 16.15% Standard Deviation 5.68% 7.75% 9.96% 12.15% 9.52% Five Years 6.80% 8.59% 10.50% 11.83% 11.20% 7.19% 10.84% 14.50% 18.35% 14.80% Ten Years 5.53% 6.30% 6.97% 7.13% 7.11% 9.03% 13.43% 17.99% 22.51% 20.36% Fifteen Years 6.14%% 7.14% 8.02% 8.51% 4.31% 8.47% 12.90% 17.48% 22.08% 20.84% Growth of Hypothetical $1,000 Invested for Periods Ending 12/31/14 $1,025 $1,023 $1,020 $1,017 $1,066 $1,244 $1,359 $1,484 $1,603 $1,567 $1,389 $1,510 $1,647 $1,749 $1,701 $1,713 $1,843 $1,962 $1,991 $1,988 $2,445 $2,813 $3,180 $3,405 $1,883 Data supplied by Dimensional Fund Advisors. 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. Simulated strategy total return includes reinvestment of dividends and capital gains distributions. Index total return includes reinvestment of dividends. Simulated strategy allocations have evolved over time. Portfolios shown do not include tax-managed funds. Standard deviations for three- and five-year periods are annualized from quarterly standard deviations. *See preceding “Important Disclosures Regarding Simulated Strategies.” **60 percent S&P 500 Index/30 percent MSCI EAFE Index./10 percent MSCI Emerging Markets Index. The S&P 500 Index/MSCI EAFE/MSCI Emerging Markets Index portfolio does not include the deduction of investment advisory fees and returns will be reduced by investment advisory fees. Simulated Strategy — Risk Target 3 /Series A (page 2 of 3). Portfolio construction shown on previous page. Returns with fee deductions shown on following page.

Simulated Portfolio Performance Simulated Strategy* — Risk Target 3 Annualized Returns for Periods Ending 12/31/14 With 1.00% Advisory Fee S&P 500/MSCI EAFE/ Conservative Moderate Aggressive All-Stock MSCI Emerging (40/60) (60/40) (80/20) (100/0) Markets Index** One Year 1.52% 1.23% 0.95% 0.66% 6.56% Three Years 6.47% 9.66% 12.92% 15.86% 16.15% Standard Deviation 5.67% 7.73% 9.93% 12.12% 9.52% Five Years 5.73% 7.51% 9.39% 10.72% 11.20% 7.18% 10.81% 14.47% 18.30% 14.80% Ten Years 4.48% 5.24% 5.91% 6.06% 7.11% 8.94% 13.30% 17.81% 22.29% 20.36% Fifteen Years 5.08% 6.07% 6.94% 7.43% 4.31% 8.39% 12.77% 17.31% 21.86% 20.84% Growth of Hypothetical $1,000 Invested for Periods Ending 12/31/14 $1,015 $1,012 $1,010 $1,007 $1,066 $1,207 $1,319 $1,440 $1,555 $1,567 $1,322 $1,436 $1,664 $1,701 $1,549 $1,667 $1,775 $1,802 $1,988 $2,104 $2,420 $2,737 $2,930 $1,883 Data supplied by Dimensional Fund Advisors. 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. Simulated strategy total return includes reinvestment of dividends and capital gains distributions. Index total return includes reinvestment of dividends. Simulated strategy allocations have evolved over time. Portfolios shown do not include tax-managed funds. Standard deviations for three- and five-year periods are annualized from quarterly standard deviations. *See preceding “Important Disclosures Regarding Simulated Strategies.” **60 percent S&P 500 Index/30 percent MSCI EAFE Index./10 percent MSCI Emerging Markets Index. The S&P 500 Index/MSCI EAFE Index portfolio does not include the deduction of investment advisory fees and returns will be reduced by Investment advisory fees. Simulated Strategy — Risk Target 3 /Series A (page 3 of 3). Portfolio construction and returns without fee deductions shown on previous pages.