2. Dow Jones Industrial Average … The Last 100 Years The stock market has undergone several secular cycles over the last century. Secular bull cycles in stocks have lasted between 8 and 18 years, while secular bear (or sideways) cycles have lasted between 16 and 25 years. The stock market may very well have entered into a secular low return environment in year 2000. Generating outsized risk adjusted performance in a low return equity environment requires a unique and unconventional approach to investment management. Hence, Portable ALPHA…

3. Portfolio Management Key Objectives INCREASE EXPECTED RETURN We strive to provide outstanding absolute and risk adjusted returns, independent of the overall market environment. Our portfolios our designed to keep up with the market during bull cycles and weather the storms of bear market periods. DECREASE RISK and VOLATILITY Just as important as producing solid returns, we strive to decrease two key measures of risk: Beta and Standard Deviation. Beta is a measure of risk, while Standard Deviation is a measure of portfolio volatility. Periods of investment losses, what we term as portfolio “drawdown,” can have a detrimental impact on long-term growth of capital. Our goal is to limit worst-case scenarios by reducing both portfolio Beta and Standard Deviation. LOWER CORRELATIONS to the STOCK MARKET Our portfolios our designed to perform independently of the broad equity market. The only way to decrease the portfolio relationship to the market is to diversify into several no correlating asset classes. This produces a portfolio that has an market independent risk reward structure

4. Portfolio Management Integral Keys to Success ASSET ALLOCATION Modern Portfolio Theory (MPT) tells us that only “free lunch” in investing is diversification. We strive to allocate capital to as many no correlating asset classes with a “positive return expectancy” as possible. Our asset allocations are optimized to ensure that we are generating the most possible expected return for each unit of portfolio risk. Also, we periodically rebalance our portfolios to ensure that our allocations do not experience “drift” from their intended policy targets. INVESTMENT SELECTION Careful selection of asset classes, as well as investments within a particular asset class, is paramount to investment success. Also, the decision between passive or active management within an asset class is extremely important. Passive management within an asset class, such as Domestic and Foreign Equity, can allow us to leverage the portfolio to invest in other asset classes that are actively managed, such as Absolute Return. We strive to identify investment managers that consistently produce Alpha and incorporate them into actively managed asset classes. IMPLICIT LEVERAGE The use of leverage within a passively managed asset class allows us to free up capital to invest in Alpha producing investments and asset classes. The leverage we employ is “implied,” meaning that we never use borrowed funds to institute leverage. The use of leverage across several no correlating asset classes has the dynamic effect of increasing expected return, while decreasing risk, volatility, and correlations to the broader market.

5. Modern Portfolio Theory (MPT) Integral Keys to Success ASSET ALLOCATION Modern Portfolio Theory (MPT) tells us that only “free lunch” in investing is diversification. We strive to allocate capital to as many no correlating asset classes with a “positive return expectancy” as possible. Our asset allocations are optimized to ensure that we are generating the most possible expected return for each unit of portfolio risk. Also, we periodically rebalance our portfolios to ensure that our allocations do not experience “drift” from their intended policy targets. INVESTMENT SELECTION Careful selection of asset classes, as well as investments within a particular asset class, is paramount to investment success. Also, the decision between passive or active management within an asset class is extremely important. Passive management within an asset class, such as Domestic and Foreign Equity, can allow us to leverage the portfolio to invest in other asset classes that are actively managed, such as Absolute Return. We strive to identify investment managers that consistently produce Alpha and incorporate them into actively managed asset classes. IMPLICIT LEVERAGE The use of leverage within a passively managed asset class allows us to free up capital to invest in Alpha producing investments and asset classes. The leverage we employ is “implied,” meaning that we never use borrowed funds to institute leverage. The use of leverage across several no correlating asset classes has the dynamic effect of increasing expected return, while decreasing risk, volatility, and correlations to the broader market.

6. Modern Portfolio Theory (MPT) Evaluating and Optimizing the Portfolio Modern Portfolio Theory is a useful tool for constructing and optimizing the portfolio asset allocation. In short, we implement this theory to ensure that we are generating the maximum level of return for a given level of risk. We then utilize MPT software to evaluate our portfolio over past time periods. MPT Evaluation Metrics … BETA A statistical measure of systematic risk and volatility in comparison to the market as a whole. For example, a portfolio with a beta of 1.0 indicates that the value of the portfolio will move with the market, both up and down. A portfolio with a beta of 0.5 has half the inherent risk and volatility found in the market.. ALPHA A measure of excess return over what a portfolio pricing model (such as CAPM) would suggest. For example, if CAPM suggests that portfolio should return 10% (based on assumptions of the risk free rate, a market return, and a portfolio beta), but the portfolio returns 15%, an Alpha of 5% has been created. RSQUARD A statistical measure to portray the movements in a portfolio that are explained by the market as a whole. For example, if the RSquared is 90%, that means that 90% of the returns of the portfolio are as a result of movements in the broader market. By way of comparison, a portfolio with a low RSquared does not rely on movements in the market to determine its rate of return.

7. A Primer on Asset Classes Domestic Equity … This refers to a diversified portfolio investment in domestic stocks across all market capitalizations and class (growth and value). Foreign Equity … This asset class contains equities of developed countries in Europe and Asia/Pacific, as well as Emerging Equity across the globe. Some classify Emerging Equity as a separate asset class, but we prefer to group it within Foreign Equity. Bonds … Bonds refer to fixed income investments. Generally, we only consider fixed income back by the U.S. Treasury as viable portfolio investments. Tax-exempt, corporate, high yield, and asset backed bonds generally have agency issues as well as poor risk/reward structures. TIPS … An acronym for Treasury Inflation Protected Securities. Similar to traditional bonds, but the coupon payment is determined by the rate of inflation (CPI). Serves as another layer of diversification within fixed income. Real Estate … For the purpose of our strategies, we invest in a REIT (Real Estate Investment Trust) index. REITs are pass-through securities for commercial properties. Commodities … This asset class consists of an index of actual underlying hard commodities (oil, natural gas, gold, etc.) or equity securities of commodity­related companies (oil/gas, gold/silver, etc.). Absolute Return … This asset class encompasses a wide range of investment strategies that are not correlated to the traditional equity markets, possessing independent return, risk, and volatility structures. Strategies included within this asset class include Event Driven strategies (i.e. Merger Arbitrage), Value Driven strategies (i.e. Equity Long/Short, Distressed Securities), Market Neutral strategies (i.e. Convertible Bond Arbitrage), and Dedicated Short strategies (ie: Short Selling).

8. Asset Class Correlation Matrix Domestic EquityBondsForeign Equity Emerging Equity Absolute Return Private EquityReal Estate Domestic Equity 100% Bonds 45%100% Foreign Equity 60%30%100% Emerging Equity 30%20%50%100% Absolute Return 30%35%30% 100% Private Equity 40%25% 10%25%100% Real Estate 15%25%20%10%40%15%100% Source: Yale University Investments Office

9. The Process of Creating a Portable ALPHA …

10. The “Market” Portfolio … One Asset Class STEP 1 … We invest all our capital into the S&P 500, a broad proxy for an investment in the stock market. ASSET ALLOCATION Domestic Equity………….. S&P 500 100% PORTFOLIO STATISTICS trailing 10year Annualized Return 7.63% Standard Deviation 15.28% Return/Volatility 0.50 Beta 1.00 Alpha 0.00 R-Squared 100 Best 12-Month Period + 48.00% Worst 12-Month Period -26.62% SUMMARY … Investing solely in the stock market will yield a market return, with market risk. Historically, investing in a market index yields a ½ unit of return for each unit of risk, which is a poor risk/reward structure. A market portfolio, no matter how many stocks it holds, is NOT a diversified investment portfolio, since it is contained to just one asset class.

11. Blended Equity Portfolio … Two Asset Classes STEP 2… We diversify into Foreign Equity, taking a 40% portfolio position We allocate the remaining 60% to Domestic Equity This gives us a diversified equity portfolio ASSET ALLOCATION Domestic Equity…………..S&P 500 60% Foreign Equity…………….MSCI EAFE 40% PORTFOLIO STATISTICS trailing 10-year Annualized Return 8.20% Standard Deviation 14.46% Return/Volatility 0.57 Beta 0.92 Alpha 0.80 R-Squared 94 Best 12-Month Period + 44.78% Worst 12-Month Period - 27.30% SUMMARY … Adding in another equity asset class has slightly reduced our risk, volatility, and correlation measures, while increasing our expected return. We have also created a small Alpha by simply layering in one additional asset class.

12. Diversified Stock and Bond Portfolio … Three Asset Classes STEP 3 … We add a 30% position in Bonds to the portfolio We’ll take the 60/40 split we had in Domestic and Foreign Equity and allocate it to the remaining 70% This gives us 42% in Domestic Equity, 28% in Foreign Equity, and 30% in Bonds ASSET ALLOCATION Domestic Equity…………..S&P 500 42% Foreign Equity…………….MSCI EAFE 28% Bonds………………………Lehman Aggregate Bond 30% PORTFOLIO STATISTICS trailing 10-year Annualized Return 7.83% Standard Deviation 10.00% Return/Volatility 0.78 Beta 0.63 Alpha 1.30 R-Squared 93 Best 12-Month Period + 31.65% Worst 12-Month Period - 16.46% SUMMARY … Adding bonds, which has low measured correlations to equities, has further decreased our risk, volatility, and correlation measures. One problem is that we have reduced our expected return slightly. But with regards to the risk of portfolio, we have created some more Alpha.

13. Portable ALPHA Portfolio … Five Asset Classes STEP 4 … Creating a Portable ALPHA We take our ½ of “beta” exposure (Domestic and Foreign Equity) and leverage it 2:1 This still gives us our targeted equity posture, but we only need to put up half the required capital We have just “freed up” 35% of the portfolio to diversify into other non-correlating asset classes We invest 15% in Real Estate and 20% in Absolute Return with our “freed up” capital We now have a diversified portfolio operating on 135% implicit leverage ASSET ALLOCATION Domestic Equity…………..S&P 500 42% Foreign Equity…………….MSCI EAFE 28% Bonds………………………Lehman Aggregate Bond 30% Real Estate…………………Dow Jones Real Estate 15% Absolute Return………….. Absolute Return Portfolio 20% PORTFOLIO STATISTICS trailing 10-year Annualized Return 12.16% Standard Deviation 10.44% Return/Volatility 1.01 Beta 0.78 Alpha 5.38 R-Squared 84 Best 12-Month Period + 42.42% Worst 12-Month Period - 15.40% SUMMARY … Used implicit leverage to expand the portfolio Increased absolute and risk-adjusted returns Maintained similar risk and volatility measures Decreased our correlation to the market Generated over 500 basis points of Alpha

14. Portable ALPHA Portfolio … We have freed up 35% of capital to allocate towards no correlating asset classes, in this case Real Estate and Absolute Return. This portfolio expansion increases return, while driving down risk We use 2:1 leverage within the “beta” asset class of Domestic Equity. We put up 21% of our capital to achieve 42% total hypothetical exposure We keep our 30% allocation to bonds. Passively managing our two “beta” asset classes allows us to keep our 70/30 asset allocation between Equities and Bonds intact We do the same for Foreign Equity. We put up 14% of our capital to achieve 28% total hypothetical exposure.