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HOW THE ALPHASECTOR® PORTFOLIOS WORK
PROTECT.
PARTICIPATE.
REPEAT.
The AlphaSector portfolios are designed to protect investor assets in persistent negative markets and provide upside participation in rising markets. The primary goal is
aligned with that of typical investors: asset protection. F-Squared has developed a
suite of proprietary analytic tools and algorithms that drive the portfolios toward this
objective.
IMPORTANT INFORMATION
“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.
F-Squared provides various index products (the “Index Provider Services”) and, separately, provides investment advisory services relating to those index products
(the “Advisory Services”).
Index Provider Services
An affiliate of F-Squared, has created and licensed a series of specialty indexes (the “AlphaSector Indexes”) covering a range of asset classes. The AlphaSector Indexes are
based on sector rotation strategies that use quantitative models programmed to measure the volatility and price movements of exchange-traded funds (“ETFs”) as criteria for
inclusion and weighting in the Indexes. There are numerous AlphaSector Indexes (including both standard and customized versions). F-Squared sub-licenses the right to use
the AlphaSector Indexes to unaffiliated third parties but has no discretion over the assets that are to be managed by the third-party manager pursuant to the Index.
F-Squared receives compensation in connection with licensing rights to the AlphaSector Indexes 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.
Advisory Services
F-Squared also provides investment advisory services on a discretionary basis to SMAs.
F-Squared seeks to replicate one or more of the AlphaSector Indexes (such replication being a “Strategy”) on behalf of its SMA clients. F-Squared’s Advisory Services are
generally limited to replication of a particular AlphaSector Index in the SMA client’s portfolio, and F-Squared does not tailor its Advisory Services to the individual needs of a
client. However, F-Squared may offer Advisory Services based on a customized AlphaSector Index to institutional investors upon request. For example, a potential Advisory
Services client may request a Strategy based on an existing Index that offers a greater or lesser allocation to a particular asset class. For its Advisory Services, F-Squared
generally does not allow clients to impose restrictions on investing in certain securities or types of securities.
The following is a summary of the core AlphaSector Strategies:
The AlphaSector U.S. Equity Strategies (AlphaSector Rotation Strategy and AlphaSector Premium Strategy) seek to replicate the applicable index ETFs representing the
nine sectors of the U.S. economy or short-term Treasuries.
The AlphaSector Global Strategy is a blend of two index strategies, the AlphaSector U.S. Equity Strategy and the AlphaSector International Strategy.
The AlphaSector International Strategy includes five ETFs reflecting the key world economic regions outside the U.S. as well as an Alternative ETF.
The following information addresses one of the questions clients frequently ask:
“How does it work?” It explains the general methodology of how portfolios are
constructed and flexibly shift with market conditions to pursue an overall better client
experience. The illustration of the AlphaSector U.S. Equity model provides insight into
how these strategies bring their goal—Protect. Participate. Repeat.—to life.
Contact us to learn more about the AlphaSector suite of solutions and how they may
help pursue investors’ goals.
AlphaSector INFInity Strategy is a diversified multi-sector, inflation neutral fixed income offering which includes ETFs tracking six bond sectors and one Alternative ETF.
AlphaSector Allocator Strategy is a diversified portfolio of the U.S. Equity, International and Fixed Income Strategies adding in ETFs tracking “alternative” asset classes
such as gold and REITs.
Default “position” within each AlphaSector Index is typically to have all available ETFs (other than an Alternative ETF) invested and equally weighted within that index
or sleeve at the time of rebalancing. Decisions to remove a sector or asset class from the portfolio at any time are based on a probability-based determination that that
sector or asset class is viewed as likely to lose money on a forward-looking basis.
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 portfolios, may not be sponsored by F-Squared. F-Squared serves as the
model provider to various investment advisers.
CONSTRUCTING
PORTFOLIOS
FOR THE FULL
MARKET CYCLE
F-Squared Investment Management, LLC or one of its subsidiaries is the source and the owner of all AlphaSector information.
RETHINK INVESTING®
*The portfolio construction process depicted here is representative of how U.S. Equity,
International Equity, and Fixed Income strategies within the AlphaSector series of solutions work.
However, the specific sectors represented in the illustration apply to the U.S. Equity Strategies as
described further in the Important Information section.
AlphaSector portfolios are designed to pursue client goals throughout the full
market cycle, providing downside protection and upside participation.
F-Squared Investments is an asset manager that provides investment indexes and strategies based
on its AlphaSector® and Portfolio Replication Technology capabilities. The firm delivers investment
solutions to help meet investors’ expectations and serves clients in the advisor, institutional, retail
and retirement markets. As of December 31, 2014, F-Squared affiliated entities had over $24 billion
in fee-generating assets.
WWW.F-SQUAREDINVESTMENTS.COM
10024-0215-00 ASCONS cc1084
HOW AN ALPHASECTOR PORTFOLIO IS CONSTRUCTED
PORTFOLIO HOLDINGS
INVESTMENT DECISION MAKING
PORTFOLIO CONSTRUCTION RULES
As an example, the AlphaSector U.S. Equity portfolio
is composed of nine exchange-traded funds (ETFs)
reflecting the primary sectors of the U.S. economy...
A sophisticated quantitative model is used to examine each sector independently and simultaneously. The model evaluates
signals related to volatility, price momentum and other factors to determine whether to include or exclude a sector from the portfolio
on a weekly and/or monthly basis depending on a particular AlphaSector portfolio.
In one example, the AlphaSector U.S. Equity portfolio, the nine sectors are weighted equally with a maximum allocation of
25% in any individual sector. As sectors are allocated in or out of the portfolio, the sector weighting is proportionally
redistributed. As fewer sectors remain allocated, their portfolio weighting increases.
CONSUMER
DISCRETIONARY
FINANCIAL
MATERIALS
CONSUMER
STAPLES
HEALTHCARE
TECHNOLOGY
ALPHASECTOR MODEL
ENERGY
IN
IN
INDUSTRIALS
Volatility
UTILITIES
...and a cash alternative.
SECTOR DATA
Price
Momentum
OUT
SIGNALS
IN
IN
OUT
IN
IN
OUT
SECTOR INVESTMENT DECISION
Include or Exclude
SECTOR 1
The proportional
distribution of
assets changes
based on the
AlphaSector U.S. Equity
portfolio's allocation
to the nine sectors and
a cash alternative
SECTOR 2
9
8
7
6
11.1%
12.5%
14.3%
16.7%
11.1%
SECTOR 3
11.1
SECTOR 4
11.1
BUILT WITH THE ABILITY TO DYNAMICALLY ADJUST
ANY
SECTOR
OTHER SECTORS
OR A CASH
ALTERNATIVE
Our portfolios use ETFs as underlying
investments for many reasons, including their
relative liquidity, broad availability, and costefficiency. They are an ideal companion to our
flexible investment approach.
A MODEL FOR MULTIPLE
ASSET CLASSES
The AlphaSector methodology described here
is used to manage risk and opportunity across
the following asset classes: U.S. equities,
international equities and fixed income.
The various strategies each follow the binary,
“on” and “off” approach to investing and the
flexibility to allocate to cash alternative
positions for downside risk protection.
FIXED INCOME
BOND SECTOR
ONE
BOND SECTOR
TWO
INTERNATIONAL EQUITIES
REGION
ONE
SECTOR 7
BOND SECTOR
FOUR
REGION
THREE
BOND SECTOR
SIX
CASH
ALTERNATIVE
25%
REGION
FIVE
REGION
SIX
REGION
SEVEN
CASH
ALTERNATIVE
12.5%
LOWER RISK MARKETS
75%
25%
100%
16.7%
12.5%
11.1%
0
20%
25%
25%
25%
25%
25%
25%
20%
14.3
16.7%
REGION
FOUR
SECTOR 9
BOND SECTOR
FIVE
11.1
25%
1
16.7%
%
SECTOR 8
BOND SECTOR
THREE
25%
2
20%
%
12.5%
3
50%
14.3%
REGION
TWO
4
16.7%
14.3%
11.1%
%
20%
14.3%
%
11.1%
11.1
5
12.5%
12.5%
SECTOR 6
While no investment is risk-free, cash and
cash alternatives are generally considered
safer investments during market downturns.
14.3%
%
CASH
ALTERNATIVE
There are times when market volatility is such
that even more conservative sectors pose a risk
to investors’ assets. This is why our AlphaSector
strategy includes the ability to move up to 100%
of assets into a cash alternative.
12.5%
12.5%
SECTOR 5
CASH ALTERNATIVE
When fewer than four sectors are “on,” the strategy incorporates a cash alternative.
14.3%
16.7
%
20
%
25%
HIGHER RISK MARKETS