1. Macro Value Investing What to Expect in Sideways Markets
Presented by:
Kim Shannon, CFA, MBA President & Co-CIO
Sionna Investment Managers

2. Economic Growth Only Explains 17% of Stock Market Returns
No Clear Correlation Between Long-Term GDP Growth and Equity Returns ( )
“We continue to ignore political and economic forecasts which are an expensive distraction.” – Warren Buffett
Source: The Bank Credit Analyst as at November Provided for illustrative purposes only. Past performance is not indicative of future results

3. Short-Term vs. Long-Term Historical Perspective
Dow Jones Industrial Average
Source: Provided for illustrative purposes only. Past performance is not indicative of future results

4. Additional Value Tool Micro Value Investing Macro Value Investing
Traditional
Stock level analysis
Capital gains primary
Valuation level
Stocks have life cycle
Takes advantage of emotional mispricing
Macro Value Investing
New tool
Market level analysis
Dividend yield primary
Bull or range bound phase
Markets increase over long run
Examines trend behaviours

5. First Financial Buddhist Invisible Hand – Benefits of Trade
Reconciles Fundamentals with Emotions
“By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.”
Adam Smith, The Wealth of Nations (1776)

6. Range-Bound Markets are Frequent
U.S. Stock Market
16 Years 10 9
Returns (log normal scale)
As of 2016:
Markets have been range-bound 107 of the last 143 years
Secular bull runs are a rarity, not the norm
After major bull markets, markets have historically trended sideways for a minimum of 15 years 8 8 7
15 Years 7 6 5
20 Years 4
25 Years 3
30 Years 2 1
Source: Wells Capital Management. For illustrative purposes only. The above returns do not represent the performance of any product or security managed by Sionna or Bridgehouse and are provided for illustrative purposes only. The performance presented represents historical performance of an unmanaged index. Returns would have been lower if they were subject to management fees and trading expenses. Past performance is not an indicator of future results. The indices are unmanaged and have no fees. One cannot invest directly in an Index.

7. Market Returns Tend to be Bi-Modal
Number of Observations
Percent
Source: Robert J. Shiller, S&P 500 Price Returns, average annual returns since 1872 is 5.9%.

8. Last Full Sideways Market (1965-1982)
Sideways markets typically end with single digit P/Es
Source: Rathbones’ Investment Strategy, February CRB: Commodity Research Bureau. P/E: Price/Earnings ratio
*As at December 31, The above returns do not represent the performance of any product or security managed by Sionna and are provided for illustrative purposes only. The performance presented represents historical performance of an unmanaged index. Returns would have been lower if they were subject to management fees and trading expenses. Past performance is not an indicator of future results. The indices are unmanaged and have no fees. One cannot invest directly in an Index.

9. Learn to Love 6% Expected Return of Sideways Market
Earnings Growth + Change in P/E Multiple + Dividend Yield
Bear Market
1929–1932
Range-Bound Markets*
Average
Bull Markets†
Earnings Growth
-28.1
5.6
+/- P/E Growth
-12.5
-4.6
7.0
= Stock Return
-37.1
0.7
13.0
+ Dividend
7.1
5.3
3.7
Total Return
-32.6
5.9
17.1
Inflation/Deflation
-8.4
4.9
2.5
Total Real Return
-26.4
1.0
14.2
Jan – Dec. 2016
Annualized Return (CAD)**
S&P/TSX Composite
6.1%
S&P 500
4.1%
MSCI World
3.2%
MSCI Canada
MSCI Global (US)
3.8%
Top Table
*Range-Bound Markets: 1906–1924, 1937–1950, 1966–1982
†Bull Markets: 1950–1966, 1982–2000
Dividends are 90% of total returns in range-bound markets. Values in chart shown in percent
Source: Vitaliy N. Katsenelson “Active Value Investing – Making Money in Range Bound Markets”, 2007.
Bottom Table
**Gross Total Returns
Source: Bloomberg
For illustrative purposes only. Indices are unmanaged and cannot be directly invested into.

10. The Price of Entry Contributes to Returns
Subsequent 10-Year Returns Based on S&P 500 P/E Ratios from
S&P Forward Earnings
S&P 500 Trailing Earnings
Cheapest valuations
Most expensive valuations
Buy low, increase chances of good returns. Buy high, increase chances of low returns.
Source: Plexus Asset Management (based on data from Prof Robert Shiller and I-Net Bridge). As at September 30, The above returns do not represent the performance of any product or security managed by Sionna and are provided for illustrative purposes only. The performance presented represents historical performance of an unmanaged index. Returns would have been lower if they were subject to management fees and trading expenses. Past performance is not an indicator of future results. The indices are unmanaged and have no fees. One cannot invest directly in an Index.

11. Price and Earnings levels of the S&P TSX Composite Index
Are We There Yet?
If earnings growth continues at same pace as history, P/E will fall to 9x sometime between 2020 and 2022
Price and Earnings levels of the S&P TSX Composite Index
Average earnings growth of 6.1% since bull peak suggests 2020
Historical range-bound markets earnings growth of 5.6% suggests 2022 (Katsenelson’s Active Value Investing)
Source: Bloomberg

12. Bond Yield Trends Tend to Last Approximately 20 Years and Symmetrical
10-Year Treasury Rate
(percent)
Max % (Sep 1981)
Min. 1.95% (Jan 1941)
Recent Min. 1.36% (July 2016)
Suggests rates may bottom 2021
Source: US Treasury, January 20, 2017

13. Interest Rate Changes Will Historically Signal Equity Bull Market
Asset Classes & Secular Trends
Monthly Data to (Log Scale); Source: Ned Davis Research Group, December Indices are unmanaged and cannot be directly invested into.

14. U.S. Weak Recovery Follows Path of “Big 5 Modern Financial Crises”
The Slow Pace of the U.S. Recovery
Suggests that economy and bond yields can stay subdued for some time
Source: C.D. Howe Institute, Commentary No. 413, July 2014; U.S. Bureau of Economic Analysis, Organisation for Economic Co-operation and Development, and Bank of Canada. This chart updates one which originally appeared as Chart 7 in Bank of Canada, Money Policy Report, July 2012.

15. Excessive Debt Historically Leads to Extended Periods of Low Interest Rates
Average number of years to lowest level of interest rate after panic: 18.6
After excessive debt panic years:
Reduces GDP Growth, slows inflation and lowers long term interest rates
Suggests low in bond yield could be ( )
Source: Federal Reserve Board, Homer & Sylla. Bank of Japan. U.S. line through 2012

16. Macro Value Investing Suggests Yields Bottom and Equities Enter Bull Around 2018-2021
Current earnings growth trend suggests single digit P/E of 9 by 2022
Two standard deviation event symmetry suggests after an 18-year bull market, will get an 18-year sideways market; thus sideways should end 2018
Bond market symmetry suggests 40 years: = 2021
Reinhart and Rogoff – after major financial crises it takes 10 or more years for economy to recover and return to normal
On average, rates bottom years after major financial crisis with an average of 18.6 years, suggesting 2026
Expect modest returns in next decade in both equities and bonds, but equities with better yields should do better

17. Lessons From Sideways Markets
Lows in rates probably not seen yet
Equity returns volatile and below long-term averages in sideways (disappointment in equities is cyclical, not secular)
After rates bottom, equities will historically enter a long-term secular bull
Expect modest returns in next decade in both equities and bonds, but equity returns will exceed bond returns
Time to begin bringing equity allocations back to more normal levels

18. Benefits From Adding Macro Value Investing
Deeper understanding of markets
Clearer indications of expected returns
Long-term market return ~ 9.5%
Sideways return ~ 6.0%
Bull return ~ 17%
Sense of when and how paradigm pricing shifts may occur
Supportive of asset mix decisions

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20. Disclaimers
Any information contained in this presentation is provided as a general source of information and should not be considered personal investment advice. Every effort has been made to ensure that the material contained herein is accurate at the time of publication. However, Sionna Investment Managers cannot guarantee its accuracy or completeness and accepts no responsibility for any loss arising from any use of or reliance on the information contained herein.
Certain statements in this presentation are forward-looking. Forward-looking statements are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the forward-looking statements. The forward-looking statements are by their nature based on numerous assumptions. Although the forward looking statements contained herein are based upon what Sionna Investment Managers believe to be reasonable assumptions, Sionna Investment Managers cannot assure that actual results will be consistent with these forward-looking statements. Forward-looking statements are not guarantees of future performance. Any number of factors could contribute to differing results including, among other things, general economic, political and market factors, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings and catastrophic events. This list of factors is not exhaustive. Investors should not place undue reliance on forward-looking information.