F U N D E V A L U A T I O N G R O U P,
LLC
FLATTENING YOUR INVESTMENT PORTFOLIO
January 15, 2013
Michael J. Oyster, CFA
Managing Principal / Portfolio Strategist
MANAGED OPPORTUNITIES
FEG Managed Portfolios
Benefits
Moderate Growth Portfolio (70/30)
Balanced Growth Portfolio (60/40)
• Combination of ETF and
mutual fund holdings
Balanced Portfolio (50/50)
• Dynamic asset allocation
Income and Growth Portfolio (40/60)
• Low portfolio costs
Capital Preservation Portfolio (20/80)
• 10 year performance track
record
Equity Portfolio
• Minimum account generally
$50,000
Fixed Income Portfolio
Real Assets Portfolio1
Diversifying Strategies Portfolio1
1
Subject to availability
©2012 Fund Evaluation Group, LLC
1
Confidential Not For Redistribution
FUND EVALUATION GROUP, LLC PROFILE
History
• Over 24 years of client service since
1988
• Approximately $33 billion* in client
assets under advisement
• Employee owned, with broad equity
ownership
• Monetary compensation derived
solely from clients
*As of June 30, 2012
©2012 Fund Evaluation Group, LLC
2
Confidential Not For Redistribution
FEG CLIENTS AND SERVICES
©2012 Fund Evaluation Group, LLC
Institutional Clients
Financial Advisors
Consulting Services
Managed Portfolios
Outsourced CIO
Alternative Investment
Strategies
Research Services
Endowment Alliance
Program
3
Confidential Not For Redistribution
INVESTMENT PHILOSOPHY
FEG’s Investment Philosophy
• Investment decisions should be made with a long-term
perspective
• Portfolios should be constructed to help achieve
diversification by global risk factors
• Valuation considerations should drive investment decisions
• Skillful active management has the potential to add value
©2012 Fund Evaluation Group, LLC
4
Confidential Not For Redistribution
INVESTMENT OVERVIEW
ALLOCATION
POLICY
MANAGER
SELECTION
PASSIVE
Global
Diversification
Index
Strategies
Risk Management
Low Cost
ACTIVE
FEG seeks to add value by utilizing active and passive solutions for both asset allocation
and manager selection.
Dynamic
Allocation
Active
Managers
Outperformance
©2012 Fund Evaluation Group, LLC
5
Confidential Not For Redistribution
PORTFOLIO DESIGN - GLOBAL DIVERSIFICATION
Global
Diversification
Index
Strategies
• Portfolios should be constructed to help achieve
diversification by global risk factors
Dynamic
Allocation
Active
Managers
• Broad based view of asset allocation, with investments falling
into one of four asset categories
Asset Categories
Role
Risk
Global Equity
Total Return
Stock Market
Declines
Global Fixed Income and Credit
Deflation Protection
and Total Return
Rising Rates and/or
Credit Downgrades
Real Assets
Inflation Protection
and Total Return
Deflation
Diversifying Strategies
Diversification and
Total Return
Active Management
©2012 Fund Evaluation Group, LLC
6
Confidential Not For Redistribution
CORE AND CATEGORY PORTFOLIOS
GLOBAL EQUITY
GLOBAL FIXED INCOME
AND CREDIT
REAL ASSETS*
DIVERSIFYING
STRATEGIES*
Category
Portfolios
Equity
Fixed
Income
Real
Assets
Diversifying
Strategies
Capital
Preservation
20/80
Income &
Growth
40/60
Balanced
50/50
Moderate
Growth
70/30
Core
Portfolios
*Subject to availability
©2012 Fund Evaluation Group, LLC
7
Confidential Not For Redistribution
PORTFOLIO DESIGN - INDEX STRATEGIES
Global
Diversification
Index
Strategies
Dynamic
Allocation
Active
Managers
FEG’s philosophy incorporates passive and active strategies
in different aspects of portfolio construction. We utilize
passive solutions in the broad policy allocation to help
provide low-cost global diversification while drawing upon
active strategies to dynamically allocate between asset
classes.
Index strategies are used where:
• It can be difficult for active management to outperform over long
periods of time
• There is a significant cost savings to gaining beta exposure
• ETFs or index funds can help provide targeted asset classes/ styles
©2012 Fund Evaluation Group, LLC
8
Confidential Not For Redistribution
PORTFOLIO DESIGN - ACTIVE MANAGERS
Global
Diversification
Dynamic
Allocation
Index
Strategies
Active
Managers
FEG seeks to identify managers with:
• Experienced personnel
• Sound investment philosophy
• Demonstrated ability to outperform
Six-Tenet Manager Review Process
Conviction
strong belief in the investment philosophy; willing to put investment decisions ahead of
business decisions; invests alongside of clients, aligning interests
Consistency
stability of organizational structure, composition of the investment professionals, and the
investment philosophy and process
Pragmatism
understand core strengths and have the ability to capitalize and sustain their competitive
edge
Investment Culture
strong ethical foundation, passionate about investing; proper organizational and
compensation structure; culture pervades across organization
Risk Control
not blind risk takers, but risk conscious; acknowledge mistakes; robust and effective risk
mitigation
Active Return
ability to identify and profit from investment opportunities; successful track record
©2012 Fund Evaluation Group, LLC
9
Confidential Not For Redistribution
PORTFOLIO DESIGN - DYNAMIC ALLOCATION
Global
Diversification
Index
Strategies
Dynamic
Allocation
Active
Managers
FEG Portfolio Team seeks to add alpha through
dynamic asset allocation decisions that overweight
asset classes with an opportunity to out-perform in
the mid to long-term time frame.
Key Considerations
• Valuation – main criteria we focus on when making a portfolio change.
• Sentiment – measures the pulse of market participants; their level of fear
and greed. It comprises the stories that investors tell themselves.
• Fundamentals – Fundamentals are what is happening now, which we then
compare to the past and use to speculate about the future.
©2012 Fund Evaluation Group, LLC
10
Confidential Not For Redistribution
FLATTENING THE PORTFOLIO
• The low return environment
• The impact of interest rates and inflation on financial assets
• Our recommendation to “flatten” portfolio allocations (i.e., reduce financial assets,
equities and bonds, in favor of real assets and diversifying strategies)
• can help improve return potential
• can help to diversify risk
FLAT
70%
70%
60%
60%
Percentage of Portfolio
Percentage of Portfolio
STEEP
50%
40%
30%
20%
10%
0%
50%
40%
30%
20%
10%
0%
Equities
Fixed
Income/Credit
Real Assets
Diversifying
Strategies
Equities
Source: FEG Data
©2012 Fund Evaluation Group, LLC
Fixed
Income/Credit
Real Assets
Diversifying
Strategies
Source: FEG Data
11
Confidential Not For Redistribution
DURATION TAILWIND
From 1981 through 1999, equities returned an unprecedented annualized return of 18.5%
while bonds returned 10% annualized
• Performance was supported by the decline of interest rates (i.e., bond yields), which resulted
in an expansion of credit and supported a secular bull market in equities that drove
price/earnings multiples higher
16%
50
14%
45
40
Bond Yield
12%
35
10%
30
8%
25
6%
20
15
4%
10
Bond Yield
2011
2009
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
0
1985
0%
1983
5
1981
2%
Price/Earnings Multiple
INTERMEDIATE GOVERNMENT BOND YIELD AND
PRICE/EARNINGS MULTIPLE EXPANSION (1981-2011)
P/E Normalized
Sources: Ibbotson Associates and Robert Shiller
©2012 Fund Evaluation Group, LLC
12
Confidential Not For Redistribution
DURATION TAILWIND
Uniquely strong returns in the 1980s and 1990s allowed a simple equity/bond
portfolio to meet investors’ goals
RETURNS VS. OBJECTIVE
Two easy decades - but not the norm
60/40 Equity/Bond Portfolio, 10-year Rolling Return
18%
Rolling 10-year Return
16%
8% Return Objective
14%
Return
12%
10%
8%
6%
4%
2%
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
0%
Source: Ibbotson Associates and Barclays Capital
Return objectives vary, we use 8% for illustration
©2012 Fund Evaluation Group, LLC
13
Confidential Not For Redistribution
EMPHASIS ON VALUE
• Russell data since 1979 reiterates conclusion from Fama and French
• The “value premium” has been more pronounced in Small Cap than Large Cap
• The recent outperformance of Small Cap Growth over Small Cap Value is rare
Small Cap Value vs. Small Cap Growth
Large Cap Value vs. Large Cap Growth
5 Year Excess Return
5 Year Excess Return
Large Cap Growth has outperformed Large Cap
Value in 60% of historical 5-year periods
Dec-11
Dec-09
Dec-07
Dec-05
Dec-03
Dec-01
Dec-99
Dec-83
Dec-11
Dec-09
Dec-07
Dec-05
Dec-03
Dec-01
Dec-99
Dec-97
Dec-95
Dec-93
Dec-91
Dec-89
Dec-87
Dec-85
Dec-83
-15
Dec-97
-10
Dec-95
-5
Dec-93
0
Dec-91
5
Dec-89
10
Dec-87
15
Dec-85
30
25
20
15
10
5
0
-5
-10
-15
20
Small Cap Value has outperformed Small Cap
Growth in 83% of historical 5-year periods
Source: FEG Data
©2012 Fund Evaluation Group, LLC
14
Confidential Not For Redistribution
EMPHASIS ON VALUE
• Relative valuations are near historical norms suggesting the tactical
posture return to “strategic equilibrium”, specifically a bias toward Value
RELATIVE VALUATIONS: SMALL CAP GROWTH VS. VALUE P/E
Large Cap Value Attractive
3x
+2 standard deviations
+1 standard deviation
1.5x
1.2x
-2 standard deviations
6x
Small Cap Value Attractive
+2 standard deviations
4x
+1 standard deviation
2x
0x
-2 standard deviations
Small Cap Growth Attractive
Large Cap Growth Attractive
03/12
03/10
03/08
03/06
03/04
03/02
03/00
03/92
03/90
Source: Rimes
RELATIVE VALUATIONS: SMALL CAP GROWTH VS. VALUE P/B
RELATIVE VALUATIONS: LARGE CAP GROWTH VS. VALUE P/B
5x
Russell 2000 Growth / Russell 2000 Value P/B
5.0x
Large Cap Value Attractive
4.5x
4.0x
3.5x
+2 standard deviations
3.0x
+1 standard deviation
2.7x
2.5x
2.4x
2.0x
-1 standard deviation
1.5x
-2 standard deviations
1.0x
Large Cap Growth Attractive
0.5x
Small Cap Value Attractive
4x
+2 standard deviations
+1 standard deviation
3x
2.4x
2.4x
2x
-1 standard deviation
-2 standard deviations
1x
Small Cap Growth Attractive
Source: Rimes
©2012 Fund Evaluation Group, LLC
Source: Rimes
15
03/12
03/10
03/08
03/06
03/04
03/02
03/00
03/98
03/96
03/94
03/92
03/90
03/12
03/10
03/08
03/06
03/04
03/02
03/00
03/98
03/96
03/94
03/92
03/90
03/88
03/86
03/84
0.0x
03/88
03/84
0x
03/86
Russell 1000 Growth / Russell 1000 Value P/B
03/88
03/84
Source: Rimes
03/86
-2x
03/12
03/10
03/08
03/06
03/04
03/02
03/00
03/98
03/96
03/94
03/92
03/90
03/88
03/86
03/84
0x
1.7x
1.3x
-1 standard deviation
03/98
-1 standard deviation
1x
8x
03/96
2x
10x
03/94
4x
Russell 2000 Growth / Russell 2000 Value P/E
Russell 1000 Growth / Russell 1000 Value P/E
RELATIVE VALUATIONS: LARGE CAP GROWTH VS. VALUE P/E
Source: Rimes
Confidential Not For Redistribution
OVERWEIGHT EMERGING MARKETS
Emerging markets are attractive for 4 primary reasons:
• Valuations
• Expected economic growth
• Demographic trends
• Low debt-to-GDP
©2012 Fund Evaluation Group, LLC
16
Confidential Not For Redistribution
OVERWEIGHT EMERGING MARKETS
Valuations
HISTORICAL VALUATIONS: INTERNATIONAL PRICE/5-YEAR
NORMALIZED EARNINGS
HISTORICAL VALUATIONS: EMERGING MARKETS P/E
45x
MSCI EMERGING MARKETS, 2000 - PRESENT
40x
Price / Earnings (Trailing 12 Mo.)
25x
20x
18.6x
15x
15.0x
MSCI Emerging Markets Index
Average
35x
30x
25x
20x
15.8x
15x
10x
11.8x
10x
MSCI Emerging P/E5
Average P/E5
5x
5x
2000
2002
2004
2006
2008
03/12
03/11
03/10
03/09
03/08
03/07
03/06
03/05
03/04
03/03
03/02
03/01
0x
03/00
0x
03/99
Price / Earnings (Nominal 10-Year Normalized)
30x
2010
Source: Rimes
Source: MSCI
HISTORICAL VALUATIONS: EMERGING MARKETS P/B
Price / Book Value (Trailing 12 Mo.)
4x
MSCI Emerging Markets Index
Average
3x
2x
1.8x
1.7x
1x
03/98
09/98
03/99
09/99
03/00
09/00
03/01
09/01
03/02
09/02
03/03
09/03
03/04
09/04
03/05
09/05
03/06
09/06
03/07
09/07
03/08
09/08
03/09
09/09
03/10
09/10
03/11
09/11
03/12
0x
Source: Rimes
©2012 Fund Evaluation Group, LLC
17
Confidential Not For Redistribution
OVERWEIGHT EMERGING MARKETS
Expected Economic Growth
• Estimated GDP Compound Annual Growth Rates 2011-2015
> 7%
5% to 7%
3% to 5%
< 3%
China
India
Indonesia
Malaysia
Taiwan
Thailand
Australia
Brazil
Canada
Chile
Hong Kong
Ireland
Israel
Mexico
New Zealand
Norway
Poland
Russia
Singapore
South Africa
South Korea
Sweeden
Turkey
Ukraine
United Arab Emirates
United Kingdom
United States
Zimbabwe
Austria
Belgium
Denmark
Finland
France
Germany
Greece
Italy
Jamaica
Japan
Netherlands
Portugal
Spain
Switzerland
Emerging Markets
Developed Markets
©2012 Fund Evaluation Group, LLC
Source: IMF, Everest Capital
18
Confidential Not For Redistribution
OVERWEIGHT EMERGING MARKETS
Demographic Trends
• Developed countries have aging populations
Source: PIMCO
©2012 Fund Evaluation Group, LLC
19
Confidential Not For Redistribution
OVERWEIGHT EMERGING MARKETS
Demographic Trends
• Emerging economies will have a greater percentage in working age
Source: PIMCO
©2012 Fund Evaluation Group, LLC
20
Confidential Not For Redistribution
OVERWEIGHT EMERGING MARKETS
Debt to GDP
• Lower in emerging economies than developed economies
©2012 Fund Evaluation Group, LLC
21
Confidential Not For Redistribution
BENCHMARK WEIGHT IN REAL ASSETS
Inflation was severely depressed following the financial crisis but is trending toward a
more normal level today
Consumer Price Index (YoY)
30%
25%
20%
15%
10%
5%
3.4%
0%
2.7%
-5%
-10%
-15%
-20%
1915
1927
1939
1951
1963
1975
1987
1999
2011
Source: Bloomberg LP
©2012 Fund Evaluation Group, LLC
22
Confidential Not For Redistribution
BENCHMARK WEIGHT IN REAL ASSETS
Average Quarterly Returns
As of March 31, 2012
7%
6%
Unexpected Inflation
Remaining Inflation
5%
4%
3%
2%
1%
©2012 Fund Evaluation Group, LLC
23
Private Energy
Timber
Private Real Estate
Commodities
MLPs
Public Real Estate
High Yield Bonds
Private Real Estate - Opportunistic
Sources: Lipper, NCREIF, Ibbotson, Alerian
TIPS
Stocks
Bonds
Long Term Gov Bonds
0%
Confidential Not For Redistribution
DOUBLELINE
• DoubleLine (DBLTX) exhibits a high current yield (7.5%) and a low historical
volatility (see below)
• The management team is experienced and proven
• The supply of non-agency Mortgage Backed Securities (MBS) is shrinking
• Combining agency and non-agency MBS helps reduce expected risks
Annualized Volatility
Inception of Strategy at TCW Investment Management Company to Present
August 1993 – May 2012:
3.95%
DoubleLine-Branded Strategy to Present
April 2010 – May 2012:
2.94%
Source: Morningstar
©2012 Fund Evaluation Group, LLC
24
Confidential Not For Redistribution
CURRENT EMPHASIS
GLOBAL EQUITY
GLOBAL FIXED
INCOME & CREDIT
REAL ASSETS
DIVERSIFYING
STRATEGIES
Overweight
Emerging
Markets and
International
Small Cap
Tactical emphasis
on Residential
Mortgage Backed
Securities
Strategic weight
Absolute Return
Strategies
Emphasize a
Value tilt and
Fundamental
Indexing
Underweight
Treasuries
Commodities,
MLPs and hedged
REITs
Uncorrelated
Return Streams
©2012 Fund Evaluation Group, LLC
25
Confidential Not For Redistribution
QUESTIONS & ANSWERS
©2012 Fund Evaluation Group, LLC
26
Confidential Not For Redistribution
BIOGRAPHY
MICHAEL J. OYSTER, CFA
Managing Principal - Portfolio Strategist
• B.B.A. in Finance, University of Cincinnati
• Investment professional since 1994
• FEG team member since 1999
Michael J. Oyster
513.719.5120
moyster@feg.com
www.feg.com
Career Highlights:
• Author. 2005. Mission Possible, Achieving Outperformance in a
Low-Return World. Chicago: Dearborn Trade.
Prior experience:
• Schaeffer Investment Research, Inc. – Senior Quantitative Analyst
Memberships:
• CFA Society of Cincinnati
• CFA Institute
• FEG Investment Policy Committee
The CFA designation is a professional certification issued by the CFA Institute to qualified financial analysts who: (i) have a bachelor’s degree and four years of professional experience involving investment decision making
or four years of qualified work experience[full time, but not necessarily investment related]; (ii) complete a self-study program (250 hours of study for each of the three levels); (iii) successfully complete a series of three
six-hour exams; and (iv) pledge to adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct.
©2012 Fund Evaluation Group, LLC
27
Confidential Not For Redistribution
FEG ADVISOR SUPPORT TEAM
WEST
EAST
Matthew J. Mullane
Jeremiah Whiteley
mmullane@feg.com
720.975.7485
jwhiteley@feg.com
269.720.3332
INTERNAL SUPPORT
Matthew J. Boyko
mboyko@feg.com
513.719.5145
©2012 Fund Evaluation Group, LLC
28
Confidential Not For Redistribution
DISCLOSURES
This one on one report was prepared by Fund Evaluation Group, LLC (FEG), a federally registered investment adviser
under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment
advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill
or training. The oral and written communications of an adviser provide you with information about which you
determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written
request directed to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202 Attention:
Compliance Department.
The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of
such information provided by third parties. The information in this report is given as of the date indicated and
believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments
relating to it.
FEG, its affiliates, directors, officers, employees, employee benefit programs and client accounts may have a long
position in any securities of issuers discussed in this report.
Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer,
to buy or sell any securities. Past performance is not indicative of future results.
Index performance results do not represent any managed portfolio returns. An investor cannot invest directly in a
presented index, as an investment vehicle replicating an index would be required. An index does not charge
management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
This report is prepared for informational purposes only. It does not address specific investment objectives, or the
financial situation and the particular needs of any person who may receive this report.
©2012 Fund Evaluation Group, LLC
29
Confidential Not For Redistribution
FIRM CONTACT INFORMATION
201 East Fifth Street
Suite 1600
Cincinnati, OH 45202
Phone: 513.977.4400
Fax: 513.977.4430
www.feg.com
Satellite Offices: Detroit / Indianapolis
©2012 Fund Evaluation Group, LLC
30
Confidential Not For Redistribution