THE ALPHASECTOR VALUE
PROPOSITION
SEEKING TO IMPROVE THE INVESTOR EXPERIENCE
THROUGH THE FULL MARKET CYCLE
Copyright 2015. Please see "Important Information" on final pages for disclosures that are an integral part of this presentation.
Agenda
 The U.S. equity markets-where are we now?
 What are investors doing?
 What is F-Squared doing?
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Copyright 2015. Please see "Important Information" on final pages for disclosures that are an integral part of this presentation.
The current bull market is already among the longest
and strongest since 1929
Longest U.S. equity bull markets 1929 –February 2015*
600%
1987‐2000
% change in S&P500 Closing Price
500%
400%
1949‐1956
300%
1982‐1987
2009‐Feb2015
200%
Average
1942‐1946
1935‐1937
100%
1974‐1980
1970‐1973
1957‐1961
1947‐1948
2002‐2007
1962‐1966
1966‐1968
0%
‐
12
24
36
48
60
72
84
96
108
120
132
144
156
Bull Market Duration in Months
Past performance is not indicative of future results.
F‐Squared analysis using FactSet data. * Bull market defined as 20% or more rise without a 20% correction, using the closing price of the S&P 500.
The thirteen bull markets shown exceed one year. Twelve bull markets with duration under one year are excluded from both the graph and the average.
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Valuations are nearing historic levels
Forward-Looking P/E metrics at highest levels since 1997-2000 Tech Bubble
• The chart below illustrates forward‐looking price to earnings ratio (P/E) data for the S&P 500.
• Forward P/E is a measure of how expensive stocks are on a relative basis.
S&P 500 Next twelve months (NTM)
price-to-earnings ratio (P/E)
Month/Year
The chart displays a single valuation metric of the S&P 500 index. Next twelve months (NTM) refers to any financial measure such
as revenue, earnings, or net income that is being forecasted for the immediate next twelve months from the current date depicted.
The above data is presented as of January 2015. The data is expressed as the S&P 500 index value divided by the weighted average
of next twelve months’ Earnings Per Share estimates of continuing operations as reported in the most recent S&P 500 company
disclosures.
Past performance is not indicative of future results. It is not possible to invest directly in an index.
Source: FactSet, I/B/E/S, FirstCall, and Goldman Sachs Global Investment Research.
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Copyright 2015. Please see "Important Information" on final pages for disclosures that are an integral part of this presentation.
Institutional investors are seemingly becoming more
cautious and reallocating
“US Equity strategies were another drag to the industry’s flow activity in the
quarter, with $21.4 billion exiting those investments.”
Evestment Institutional Investor Global Report, Q4 2014
“US domiciled institutional accounts redeemed $84.3 billion from US equities
in Q4 2014.”
Evestment Asset Flows Report, Fourth Quarter 2014
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Copyright 2015. Please see "Important Information" on final pages for disclosures that are an integral part of this presentation.
Are investors repeating past mistakes by “piling in” at
the top of the market?
INVESTMENT INDUSTRY FLOW DATA vs. S&P 500 INDEX RETURN
Past performance is not indicative of future results.
F-Squared analysis using Bloomberg and Morningstar data. Bull market defined as 20% or more rise in the S&P 500 closing price.
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Copyright 2015. Please see "Important Information" on final pages for disclosures that are an integral part of this presentation.
Fund investor’s timing decisions have focused on
short-term performance. Resulting returns have
lagged the market over the long term.
Average Annual Return: 20 years ending 12/31/2013
Source: DALBAR QAIB Report1
S&P 500 Index
9.22%
Average Equity Fund Investor
5.02%
0%
2%
4%
6%
8%
10%
Average Annual Return 1994‐2013 (20 years)
Past performance is not indicative of future results.
(1) Source: “Quantitative Analysis of Investor Behavior, 2014,” DALBAR, Inc.
Average equity investor performance results are calculated using data supplied to DALBAR, Inc. by the Investment Company Institute. Investor returns
are represented by the change in total mutual fund assets after excluding sales, redemptions and exchanges. This method of calculation captures realized
and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses and any other costs. After calculating investor returns in
dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is
determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions and exchanges for each period.
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A common mistake: Risking accumulated
gains to chase risky, late-stage returns
2,200
Are investors risking gains to
chase late‐bull returns?
6 years of gains
Final period = 02/28/15
1,800
1,400
1,000
600
Jan‐2005
Jan‐2006
Jan‐2007
Jan‐2008
Jan‐2009
Jan‐2010
Jan‐2011
Jan‐2012
Jan‐2013
Jan‐2014
Jan‐2015
Period: 01/01/2005 through 02/28/2015
2,200
Late-Stage Bull Market Characteristics:
•
Optimism, investor confidence and complacency about
risk
•
Too many investors chase late-stage gains
•
Sophisticated investors seek to protect long term gains by
reallocating increasingly risky exposures
Past performance is not indicative of future results.
F‐Squared analysis using Morningstar data. S&P 500 closing price
S&P 500 Closing Price
S&P 500 Closing Price
S&P 500 Closing Price
2,100
2,000
1,900
1,800
Oct‐2014 Nov‐2014 Dec‐2014 Jan‐2015 Feb‐2015
Period: 10/01/2014 through 02/28/2015
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Downside protection is valuable but there is a trade-off
ILLUSTRATION: Impact of risk management on bull and bear performance
Scenario 1
Scenario 2
Scenario 3
Market
Risk‐
Market
Risk‐
Market
Risk‐
(or Passive managed (or Passive managed (or Passive managed Investment)
investment
Investment)
investment
Investment)
investment
Starting Value
$100
$100
$100
$100
$100
$100
% Decline during bear phase*
‐50%
‐10%
‐35%
‐10%
‐25%
‐10%
$50
$90
$65
$90
$75
$90
Value @ end of bear
Market rise during bull phase
200%
200%
200%
Bull market participation rate
100%
75%
100%
75%
100%
75%
Value @ end of bull
$150
$225
$195
$225
$225
$225
* The severity of the bear market and the relative impact on the risk‐managed investment (shown in blue) are the variables that drive the difference between the scenarios.
The hypothetical scenarios displayed above are for illustrative purposes only. Copyright 2015. Please see "Important Information" on final pages for disclosures that are an integral part of this presentation.
Conviction to remain defensive in volatile markets
TRUE VOLATILITY® METRIC BY SECTOR*, SEPTEMBER-FEBRUARY 2015
September
October
True Volatility analysis by week
November
December
January
February
Sector 1
Sector 2
Sector 3
Sector 4
Sector 5
Sector 6
Sector 7
Sector 8
Sector 9
LEGEND: Direction and strength of the True Volatility metric
Strong negative
Negative
Positive
Strong positive
*Represents the nine U.S. Equity sectors that are included in the AlphaSector Premium (U.S. Equity) strategy. Source: F‐Squared Investments analysis using the proprietary True Volatility ® metric. Based on the sector signals on the following U.S. equity sectors: consumer discretionary, consumer staples, energy, financials, healthcare, industrials, materials, technology, and utilities, for the AlphaSector Model as determined by the F‐Squared quantitative engine’s daily observations. The data presented above is based on the versions of the AlphaSector Premium Model which was in use during this time period. Past performance is not indicative of future results. 10
Copyright 2015. Please see "Important Information" on final pages for disclosures that are an integral part of this presentation.
Key Takeaways
• Lessons from history tell us that now is the time to consider risk protection
• F-Squared has participated in 6 years of bull market gains*
• Our AlphaSector Model detected heightened volatility in mid-October 2014 and moved
defensively to a cash alternative position
• Our TrueVolatility® measure has shown sustained elevated market volatility
– As of Feb 2015, our US Equity model continued to seek protection against elevated risk
through significant allocation to a cash alternative position
– Our model will follow our AlphaSector process and remain defensive if our
TrueVolatility® measure continues to show elevated market volatility
*F-Squared defines the inception date for the AlphaSector U.S. Equity Strategies as October 2008, and began managing advisory client assets in
February 2009.
Past performance is not indicative of future results.
Source: F-Squared Investments, Morningstar
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Copyright 2015. Please see "Important Information" on final pages for disclosures that are an integral part of this presentation.
Important information
Past performance is not indicative of future results. It is not possible to invest directly in an index. Index performance does not reflect charges and expenses, and is not based on actual advisory client assets. Index performance does include the reinvestment of dividends and other distributions. F‐Squared Investments began managing advisory client assets in February 2009.
The views expressed in the referenced materials are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. The information provided herein does not constitute investment advice and is not a solicitation to buy or sell securities.
“AlphaSector®” is a registered trademark of F‐Squared Investments, Inc. and is used with permission. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from F‐Squared Investment Management, LLC or one of its subsidiaries (collectively, “F‐Squared Investments” or “F‐ Squared”). F‐Squared reserves the right at any time and without notice to change, amend, or cease publication of the information contained herein. This material has been prepared solely for informative purposes. The information contained herein includes information that has been obtained from third‐party sources and has not been independently verified. It is made available on an "as is" basis without warranty.
AlphaSector Information
The AlphaSector U.S. Equity Strategy (“U.S. Equity”) is designed to provide exposure to the U.S. equity market, and is constructed as an “asset allocation” overlay onto exchange traded funds (“ETFs”) representing major sectors of the U.S. economy. F‐Squared defines the inception date for U.S. Equity as October 2008.
F‐Squared receives compensation in connection with licensing rights to the AlphaSector Strategies to third parties, typically through a Model Manager Agreement. All information relating to an index is impersonal and not tailored to the specific financial circumstances of any person, entity, or group of persons.
Most AlphaSector Strategies are evaluated for rebalancing on a monthly basis or evaluated for rebalancing on a weekly basis. The following is a summary of the AlphaSector strategies presented in this document.
Notes on True Volatility®
True Volatility®, a proprietary technology for measuring volatility, is a sophisticated quantitative algorithm that converts intraday market price range data into a step‐
function volatility measure. It employs a procedure borrowed from the image processing community that allows us to efficiently remove the noise from the relevant data. The procedure scans a variety of time scales and identifies statistically significant trends. True Volatility is specifically designed to capture shifts in volatility regimes, specifically sudden increases in volatility. True Volatility is a piecewise constant (step) function, which makes it more suitable for the purposes of regime forecasting than other volatility models such as rolling standard deviation, EWMA and GARCH.
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Copyright 2015. Please see "Important Information" on final pages for disclosures that are an integral part of this presentation.
Important information
References to non‐AlphaSector Indexes
Standard & Poor’s 500 Index (Total Return) (“S&P 500”) is a broad‐based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general.
Risk Disclosure
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of the AlphaSector Indexes and Strategies are disclosed in the publicly available Form ADV Part 2A. F‐Squared Investments is not offering or rendering investment or financial planning advice through this material, which is limited to the dissemination of general information about the Adviser's services. Any Investment products that may be based on any of F‐Squared’s indexes, may not be sponsored by F‐Squared. F‐Squared serves as the model provider to various investment advisers.
F‐Squared Investment Management, LLC or one of its subsidiaries is the source and the owner of all AlphaSector performance information.
Sources: Morningstar, FactSet, and F‐Squared Investments. All rights reserved.
For more information, visit our website at www.f‐squaredinvestments.com.
AS_INV2
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Copyright 2015. Please see "Important Information" on final pages for disclosures that are an integral part of this presentation.