CFA Society of Minnesota · 2015. 6. 26. · The contribution to risk is the same for fixed income and equities Assumptions: The portfolio consists of 8.8% MSCI USA Small Cap, 10.7%

CFA Society of MinnesotaRisk Parity Educational Forum

July 10, 2013

msci.com©2013. All rights reserved. msci.com

Efficient Portfolios and the World We Live InNeil Gilfedder, CFA

Risk Parity Educational ForumCFA Society MinnesotaJuly 10, 2013

msci.com©2013. All rights reserved.

Agenda

The Capital Asset Pricing Model and the market portfolio

Using models to understand risk

Risk Parity: A simple example

Understanding Risk Parity: Long‐term risk and macroeconomics

2


Capital Asset Pricing Model

3

Market Portfolio

Risk Free Portfolio

Risk

MeanReturn

Capital Market Line


Using Factors to Understand Risk

Insight Sources of risk, not just levels of risk

Simplicity Risk drivers are far fewer than number of assets held. Factor models simplify risk management by isolating these dimensions

Intuition Factor models explain the sources of risk and return in terms familiar to investors

Stability Factors represent stationary attributes over time, even as individual holdings and fund characteristics change

Efficiency Factor models can filter out noise in asset‐by‐asset risk estimates, and synthesize return history when data is limited

4


Decomposes volatility into fundamental sources BIM provides: The structural relationshipto estimate covarianceamong the world’s localrisk factors

A consistent framework for analyzing multi‐asset class strategies

Longer‐horizon risk forecasts (6‐12 months)

5

The Barra Integrated Model (BIM) is a Common Factor Risk Model Covering Multiple Global Asset Classes


CAPM: The Market Portfolio

Assumptions: Market portfolio consists of 60% Equity (MSCI USA IMI) and 40% Fixed Income (Citigroup US 10‐Year+ Government Bond Index). Risk calculated using the Barra Integrated Model.

6

Holdings

Equity

Fixed Income

Contribution To Risk

Weight Standalone Volatility Contribution to RiskEquity 60% 15.6 92.2%Fixed Income 40% 10.1 7.8%Portfolio 9.8


What’s Risk Parity?

The contribution to risk is the same for fixed income and equities

Assumptions: The portfolio consists of 8.8% MSCI USA Small Cap, 10.7% MSCI USA, 10.6% MSCI USA Value, 10.8% MSCI USA Growth, and 59.1 % Fixed Income (Citigroup US 10‐Year+ Government Bond Index). Risk calculated using the Barra Integrated Model (BIM).

7

Weight Standalone Volatility Contribution to RiskEquity 41% 15.6 50.0%Fixed Income 59% 10.1 50.0%Portfolio 8.5

Holdings

Equity

Fixed Income

Contribution To Risk


Why Risk Parity?

8

The Risk Parity portfolio consists of 8.8% MSCI USA Small Cap, 10.7% MSCI USA, 10.6% MSCI USA Value, 10.8% MSCI USAGrowth, and 59.1 % Fixed Income (Citigroup US 10‐Year+ Government Bond Index). The Market Portfolio consists of 60% Equity (MSCI USA IMI) and 40% Fixed Income (Citigroup US 10‐Year+ Government Bond Index). Sharpe ratios 1985‐2011.

0.84

0.61 1.04

0.82

0

200

400

600

800

1000

1200

1400

1600

1800

2000Jan‐85

Jan‐87

Jan‐89

Jan‐91

Jan‐93

Jan‐95

Jan‐97

Jan‐99

Jan‐01

Jan‐03

Jan‐05

Jan‐07

Jan‐09

Jan‐11

Portfolio

Value

(Jan

1985 = 100)

Market Portfolio

Risk Parity Portfolio

Equity Portfolio

Bond Portfolio (10Y)


Add Leverage: (Historically) More Return for the Same Risk

9

MarketPortfolio

Risk FreePortfolio

Risk(percent)

MeanReturn(percent)

Capital Market LineRisk ParityPortfolio

LeveredRisk ParityPortfolio

9.58.5

10.010.8

18.1

EquityPortfolio

11.5

15.6


What’s the Story?

10

Yield on 10y Treasuries


A Stress Test

Apply a + 2% shock to treasury rates

11

Equity Market (60/40) Risk Parity With Leverage

Uncorrelated 0 ‐10.5% ‐15.5% ‐28.4%

Correlated 26.1% 4.3% ‐4.8% ‐8.9%

Stress test moves the term structure of US government rates up 200 bps, and uses the Barra Integrated Model


Could Portfolio Choices Depend on Horizon?

Uncertainty in investment opportunities resolves over long horizons Short horizon investors cannot wait for resolution Long horizon investors can wait for uncertainty to resolve Portfolio choice now varies with horizon via uncertainty aversion Lower uncertainty aversion is a willingness to tolerate macro shocks

12


Horizon and Sources of Risk

Short‐term Long‐term

Bonds Macroeconomic:• Inflation• Real GDP

Macroeconomic:• Inflation• Real GDP

Equities Market Factors Macroeconomic:• Real GDP• Inflation

13


Portfolio Structure Changes With Uncertainty Aversion ...

14

Uncertainty Aversion Horizon Asset Allocation

Low Long Tilt on Risk Premia Portfolios

Representative Representative Market

High Short Tilt on Risk Hedging Portfolios

Exposure to Long Term Economic Risk


Inflation Stress Test

15

‐4

‐3

‐2

‐1

0

1

0 2 4 6 8 10 12 14 16 18 20

60/40 Equity Market and Bonds Equity Market Risk Parity Leveraged

Impact on Portfolio Value (Percentage)

Horizon (Years)

The chart depicts the impact of a two‐percent positive and persistent shock to inflation.


Conclusions

When examining Risk Parity strategies:

Use of models to understand risks

Simple stress tests can be helpful in uncertain times

Macroeconomic exposures matter and may command a premium

16

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© 2013 MSCI Inc. All rights reserved. Apr 2013

Summit Strategies Group8182 Maryland Avenue, 6th Floor

St. Louis, Missouri 63105314.727.7211

CFA Society Minnesota

Efficient Portfolios and the World We Live InMark A. Caplinger, CFA

July 10, 2013

CFA Society of MinnesotaJuly 2013

1

RISK PARITY IN PRACTICE

● Education

● Allocation

● Implementation

● Benchmarking

● Policy


2

EDUCATION

● Your constituents

— Board, Committee, Client

● High Level

— Diversifying one’s exposure to risk factors

o e.g., less public equity

— Risks

— Rewards

— Considerations


3

EDUCATION (Continued)

Risk Parity Philosophy

Traditional Capital Allocation

Stocks Bonds

Traditional Risk Allocation

Stocks Bonds

Risk Parity Allocation

Stocks Bonds Other Beta(s)

Risk Parity Large Cap Small CapLarge Cap

InternationalCore Fixed

IncomeRisk Parity 1.00Large Cap 0.37 1.00Small Cap 0.32 0.91 1.00Large Cap International 0.39 0.81 0.91 1.00Core Fixed Income 0.26 -0.12 -0.18 -0.12 1.00


4

EDUCATION (Continued)

● Risks

— Leverage

— Bull markets

— Correlation spikes

● Rewards

— Improving risk-adjusted returns

● Considerations

— Risk Parity “Style”

— Volatility target selection

o 10% = 60/40


5

ALLOCATION

● How much?

● Perfect world:

— All or nothing; you either ‘buy it’ or you ‘don’t’

● Reality:

— ‘Let’s put a toe in the water’

● So, how much?

— Avoid the ‘cocktail allocation’


6

IMPLEMENTATION

● Where does it belong in the portfolio?

● ‘Traditional Land’ – stocks/bonds/alternatives

— Stocks/Bonds for the purists

— Alternatives, most likely

● ‘Summit Land’ – growth/income/diversification

— Growth…it’s volatile, or

— Diversification…lower correlation to G and I

● Or – liquid funding source for capital calls


7

IMPLEMENTATION (Continued)

● What’s the funding source?

— Equities

o To reduce volatility

— Fixed

o To improve return

— Both

o To balance marginal return enhancement with less risk


8

IMPLEMENTATION (Continued)

● Minimum institutional investment size

— Manager A - $1 million

— Manager B - $5 million

— Manager C - $25 million

— Manager D - $100 million

● Retail mutual funds now available!

● Manager selection

— “Style”: asset beta vs. economic regime

— Tactical vs. strategic

— Risk management (de-risking) policies

— Experience


9

BENCHMARKS

● Absolute return

● HFRI

● S&P

● Barclays Aggregate

● Cash

● 60/40

● Total fund policy

● Peer sets


10

POLICY AND GUIDELINES

● Policy

— Total fund or individual asset class

— Review existing restrictions

● Guidelines

— For most…will be commingled/mutual funds

o Governed by offering documents

o Side letters may be negotiated

— For some…will be separate accounts

o Fund structures limit liability


11

● Education

— Baseline for decision makers

● Allocation

— Move the needle

● Implementation

— Where

— Who

● Benchmarks

— Blend or total fund objective

● Policy

— Take it or make itDisclaimer: Summit Strategies Group (Summit) has prepared this report for the exclusive use by its clients. The information herein was obtained from various sources, which Summit believes to be reliable, and may contain opinions developed by Summit. Summit does notguarantee the accuracy or completeness of the opinions, observations or other information contained in this report. The opinions, market commentary, portfolio holdings and characteristics are as of the date shown and are subject to change. Past performance is no guaranteeof future performance. No graph, chart, or formula can, in and of itself, be used to determine which managers or investments to buy or sell. Any forward-looking projection contained herein is based on assumptions that Summit believes may be reasonable, but are subject to awide range of risks, uncertainties and the possibility of loss. Accordingly, there is no assurance that any estimated performance figures will occur in the amounts and during the periods indicated, or at all. Actual results and performance will differ from those expressed orimplied by such forward-looking projections. Any information contained in this report is for informational purposes only and should not be construed to be an offer to buy or sell any securities, investment consulting or investment management.

FINALLY

© 2013 3M. All Rights Reserved.

Risk Parity At 3MDennis Duerst

3M Confidential.2 9 July 2013. All Rights Reserved.© 3M

3Company - Profile

Revenue $29.9 B

EBITDA $7.8 B

% 26%

Net Income $4.2 B

Dividends $1.6 B

Market Cap - Current $76 B

Credit rating Aa2/AA-

Pension- US

Pension-Intl

OPEB WW

Liability 14.8 6.4 2.2 23.4

Assets 13.8 5.2 1.3 20.3

Unfunded (1.0) (1.2) (0.9) (3.1)

% Funded

93% 81% 60% 87%

3M’s retirement plans are well funded and the plan sponsor financial condition is very strong

3Company - 2012 Retirement Plans - 2012



U.S. Pension Plan – Strategic Asset Allocation - YE 2012

Asset ClassPolicyWeight

Public Equity 32%

Private Equity 16%

Absolute Return 16%

Commodities 5%

Fixed income 31%

Liability Duration Hedge Ratio 40-50%

Growth Assets 69%Matching Assets 31%

Since end of year 3M’s policy allocation to Matching Assets has increased by 10%



Attractive risk adjusted return profile Diversification Favorable investment in asset liability framework

Why Risk Parity?



What happened ???



'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Growth of $10,00002/2002 to 05/2013

Pension Asset Return Liability Return

Return growth in pension assets and liabilities

Keeping pace with liability growth has been a tough challenge for 3M and pension plans in general



'96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Absolute Drawdowns06/1996 to 05/2013

3M Risk Parity MSCI All Country World Index - Net ReturnDow Jones Credit Suisse Hedge Fund Index FTSE NAREIT Equity REITS Total Return

Risk parity has avoided large drawdowns experienced by other asset classes



'06 '07 '08 '09 '10 '11 '12

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Absolute Drawdowns01/2007 to 05/2013

3M Risk Parity MSCI All Country World Index - Net ReturnDow Jones Credit Suisse Hedge Fund Index FTSE NAREIT Equity REITS Total Return

Risk parity held up well through the financial crisis



'06 '07 '08 '09 '10 '11 '12

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

Cumulative Relative Drawdowns01/2007 to 05/2013

3M Risk Parity MSCI All Country World Index - Net ReturnDow Jones Credit Suisse Hedge Fund Index FTSE NAREIT Equity REITS Total ReturnLiability Return

Relative to liability growth, risk parity has faired well compared to other non-fixed income asset classes



Risk Parity Statistics Compared to Other Asset ClassesOct 2008- May 2013

Return Std Dev Sharpe Beta S&PBeta

Long G/C Beta HY % Pos % Neg Max Draw

Max Draw vs Liab return

Risk Parity 8.6% 11.9% 0.70 0.30 0.59 0.53 77 23 ‐20% ‐24%

ACWI 7.2% 20.5% 0.34 0.97 0.01 1.20 57 43 ‐36% ‐40%Barclays Long Gov/Credit 11.0% 11.4% 0.95 ‐0.01 1.00 0.08 55 45 ‐8% ‐25%Dow Jones CS HF Index 5.9% 6.3% 0.92 0.26 ‐0.07 0.38 70 30 ‐10% ‐42%



Is Risk Parity A Levered Bond Bet?

When U.S. 10 Year Treasury Rates RISE

Risk Parity S & P 500

Avg mo return -0.6% 1.3%

# of months 96 96

% positive 49% 70%

When U.S.Spreads WIDEN


Avg mo return -0.1% -2.0%

# of months 84 84

% positive 60% 34%

When U.S.spreads TIGHTEN


Avg mo return 1.2% 2,4%

# of months 104 104

% positive 72% 83%

When U.S. 10 Year Treasury Rates FALL


Avg mo return 2.0% -0.02%

# of months 105 105

% positive 86% 57%



What’s next ?


Risk Parity – Moving To A Better Place

July 10, 2013

Tim McCusker, FSA, CFA, CAIA, Partner

Page• What is Risk Parity 1

• Risk Parity & Market Cycles 2

• Risk Parity & Low Interest Rates 3

• Risk Parity Outlook and Recent Performance 4

Contents

2

• Risk Parity is a balanced, liquid asset allocation approach– Relies on an understanding of risk contribution from each asset class, balancing risk

contribution across globally diversified asset classes

• Risk Parity strategies differ significantly from traditional portfolio allocations (i.e. 60% stocks, 40% bonds)

– Lower equity allocations– Higher fixed income and inflation-sensitive allocations

What is Risk Parity?

3

• Similar return expectations to a traditional portfolio with less volatility and less exposure to market drawdowns

• Risk Parity decouples portfolio return from equity risk and economic growth

– Balanced risk exposures to asset classes with sensitivity to different market environments• Inflation (commodities, TIPS)• Declining Growth (sovereign bonds)• Rising Growth (equities, credit)

• Risk Parity strategies take on more notional exposure than invested capital

– Leverage through synthetic exposure to liquid markets– No explicit borrowing required

What is Risk Parity? – Return Expectations and Leverage

4

• Risk Parity leverages lower volatility assets (e.g. bonds, credit) to improve Portfolio risk balance

– Creates a risk balanced exposure to economic regimes or assets sensitive to different market environments

• Use of liquid derivatives contracts in deep markets allows for efficient leverage

– Global equity markets– Global sovereign bond markets– Global commodity markets

• Using derivatives markets to gain leverage has several advantages– Cost effective – essentially borrowing at LIBOR– Liquid– Minimal counterparty risk

• Risk Parity Portfolios target annualized volatility levels of ~10% to 12%

What is Risk Parity? – Implementation

5

0%

20%

40%

60%

80%

100%

60/40 Asset Allocation 60/40 Risk Allocation

InternationalEquities – 31%

U.S. Equities –40%

InternationalEquities – 20%

U.S. Equities –59%

Credit– 15%

Treasury– 15%

Treasury & Credit– 10%

Typical 60/40 Asset & Risk Allocation

6

0%

20%

40%

60%

80%

100%

120%

140%

160%

Risk Parity Asset Allocation Risk Parity Risk Allocation

Credit– 36%

Global Interest Rates– 47%

Equity– 19%

Inflation-Linked Bonds– 35%

Commodities– 22%

Credit– 20%

Global Interest Rates– 20%

Equity– 20%

Inflation-Linked Bonds– 20%

Commodities– 20%

Sample Risk Parity Asset Allocation

7

• Risk Parity is designed to be a core portfolio allocation– Intended to perform reasonably well in most economic environments

• Inflation, declining growth, rising growth environment

• Risk Parity has outperformed a 60/40 portfolio over the last 40+ years (since 1970)

– Outperformed a 60/40 portfolio in the 1970s while interest rates rose significantly– Risk Parity not designed to outperform in equity dominant market environments– Risk Parity provides a degree of resiliency and is constructed to limit potential

drawdown risk

How has Risk Parity Performed?

8

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0Cumulative Return as of 1970 – Log Scale

Risk Parity

60/40

How has Risk Parity Performed?

Risk Parity 60/40

Return 10.9% 8.6%

St. Dev. 9.1% 9.8%

Sharpe Ratio 0.56 0.29

9

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

-0.3

0.0

0.3

0.5

0.8

1.0

1.3 Cumulative Return 1972 to 1982 – Log Scale

Risk Parity

60/40

10-Yr Treasury Yield (RHS)

How has Risk Parity Performed in A Rising Rate Environment?

Risk Parity 60/40Return 10.4% 7.6%St. Dev. 10.7% 10.1%

Sharpe Ratio 0.19 -.08

10

• A return to the original investment thesis may address concerns regarding Risk Parity and rising interest rates

• Critics of Risk Parity focus on the strategy’s levered bond exposure and prospect of higher future interest rates

– Often ignore the philosophical underpinnings of risk parity– Encourage investors to shed risk-balanced interest rate exposure for more

concentrated sources of risk (e.g. 60/40 portfolio)

• Risk Parity investment thesis grounded in three key tenets– Diversification– Efficiency– Resiliency

• Is the original investment thesis for Risk Parity still valid?

Risk Parity & Low Interest Rates

11

• Risk Parity seeks to deliver a diversified mix of asset class exposures– Moderates the outsized risk allocation to equities found in many investors portfolios

• Risk Parity is a strategic asset allocation concept– Portfolio construction based on forward-looking assumptions of asset class volatilities

and correlations– Maintain consistent exposures to underlying asset classes over time

• Implementation of Risk Parity is often “active”– Manager over or underweighting asset classes relative to a defined strategic point– Active Risk Parity strategies with a view of rich bond valuations are underweighting

bond exposure

• Critics rarely challenge Risk Parity’s diversification benefits– Risk Parity remains an effective tool to diversify portfolio risk allocations– Provides a balanced risk allocation to multiple underlying asset classes

Risk Parity - Diversification

12

• Risk Parity provides a more efficient risk-return profile relative to a traditional portfolio allocation

– Historically delivered a more efficient return and higher Sharpe Ratio than a traditional 60/40 portfolio

• Forward looking analysis of the efficiency of Risk Parity provides insight to performance expectations in a potential rising rate environment

Risk Parity - Efficiency

Jan 1970 - Dec 2011Risk Parity 60/40 Difference

Return 10.9% 8.6% 2.2%Std Deviation 9.1% 9.8% -0.7%Sharpe Ratio 0.56 0.29 0.27

13

• Risk Parity does not boast the portfolio efficiency demonstrated in the past

• Adjusting for continued low borrowing costs does produce an efficiency advantage for Risk Parity

Risk Parity - Efficiency

NEPC 2012 5-7 Year Sharpe RatioAdjusted Sharpe Ratio for Current LIBOR rates

-

0.10

0.20

0.30

0.40

0.50

FPL Blend 60/40

Expected Portfolio Sharpe Ratio

14

• Risk Parity is a compilation of a balanced set of risk premiums– Mitigates exposure to one dominant risk exposure and limits potential drawdown risk– Less reliant on equities or strong economic growth

• Risk Parity consists of a series of complementary asset classes– Relationships are intended to provide risk balance across market environments– Resiliency limits drawdowns and underperformance in adverse market environment

• Common view of Risk Parity is it provides only a balanced exposure to equities and nominal bonds

– Key differentiator is exposure to inflation sensitive assets (commodities, TIPS)• Neither stocks or bonds are likely to benefit from rising inflation• Inflation-sensitive assets are critical to Risk Parity’s resiliency

Risk Parity – Resiliency – Exposure to Drawdowns Are More Limited

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

Dra

wd

ow

n f

rom

Peak

60/40 Risk Parity

15

• Strong Global Growth:– Growth sensitive assets such as equities, credit, commodities likely to perform well– Risk Parity likely to underperform a 60/40 in this scenario, underperformance is

mitigated by Risk Parity’s exposure to growth sensitive assets• Return impact from rising interest rates depends on level of the increase and forward curve

expectations

• Rising Inflation:– Likely a challenging environment for stocks and bonds– Risk Parity likely to outperform a 60/40 portfolio due to its exposure to inflation

sensitive assets and risk balance• Risk Parity’s exposure to inflation-linked bonds and commodities would be beneficial

• Surprise Fed Funds Increase:– Likely a result of both strong global growth and rising inflation– Surprise increase in Fed Funds Rate increases attractiveness of cash

• A challenging environment for all portfolios including Risk Parity

– These periods led to higher yields, better valuations and positioned markets for stronger performance going forward

Risk Parity – Resiliency – Expectations in a Rising Rate Environment

Starting Fed Funds

Ending Fed Funds Risk Parity 60/40

7/1980-6/1981 9.1% 19.0% -13.4% 4.9%3 years following 11.4% 10.5%1/1994-12/1994 3.0% 5.5% -5.0% 1.1%3 years following 13.9% 14.0%

16

Risk Parity Recent Performance & Outlook

• Global government real yields increased dramatically in the 2nd quarter of 2013

• Negative returns were most acutely felt in the inflation-linked bond market which suffered a 2 standard deviation downside event

• The real yield of 10-year US TIPS increased more than 100 basis points– Real yields are a common factor impacting prices across global capital markets– Rapid increases in real yields lead to a re-pricing of risk across all global asset classes

• As a result of re-pricing of risk, all major asset classes (including global equities, global bonds, emerging markets, and commodities) posted negative returns in the quarter

• Catalyst for the increase in real yields can be attributed to speculation the Federal Reserve would begin to “taper” bond purchases associated with their Quantitative Easing program

– Tapering speculation represents a form of monetary policy tightening that is a similar impact as a surprise increase in the Fed Funds Rate

• Risk Parity is not immune to broad re-pricings of market risk – All known Risk Parity strategies posted negative returns for the quarter– Spectrum of negative returns attributed to amount of real yield duration in various

strategies

Second Quarter Performance Review

18

• Major asset classes delivering strong risk-adjusted performance

• Risk Parity participated in strong performance through risk balanced allocation

Market Performance – Three Years Ending June 30, 2013

19

‐

0.30

0.60

0.90

1.20

0%

6%

12%

18%

24%

S&P 500 DJ‐UBS Comm. Barclays USTreasuries

Barclays 1‐10 USTIPS

3 Yr Annualized Return (LHS)3 Yr Annualized Sharpe Ratio (RHS)

• Rising real yields (as market reacted to future Fed tightening) cause a re-pricing of risk across asset classes

• Risk Parity attempts to capture risk balanced exposure to many risk premia – when all risk premia are re-pricing (turning negative), Risk Parity will underperform

Market Performance – May 22, 2013 (Bernanke Announcement) to June 30, 2013

(0.90)

(0.60)

(0.30)

‐

‐6%

‐4%

‐2%

0%

S&P 500 DJ‐UBS Comm. Barclays USTreasuries

Barclays 1‐10 USTIPS

Return Since May 22nd (LHS) Sharpe Ratio Since May 22 (RHS)

20

Market Reaction To Less Stimulative Monetary Policy Caused A Dramatic Increase In Real Yields

‐1.5

‐1.0

‐0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Jul‐12 Oct‐12 Jan‐13 Apr‐13

10y Nominal 10y Real Yield 10y BEI

21

0

0.5

1

1.5

2

2.5

3

3.5

4

Spot 1 Yr Fwd 2 Yr Fwd 3 Yr Fwd 4 Yr Fwd 5 Yr Fwd

10 Yr Treasury Yields

3/31/20136/30/2013

• The market is pricing in a 1.07% percentage point increase over the next 5 years; a lower projected increase than at the end of Q1 but at a much higher starting point (2.49% vs. 1.85%)

• Rates must increase more than this expectation in order to erode bond prices

Market Expectations – Then and Now

Source: Bloomberg

22

US vs. Japan 10 Year Yields – It Could Be A Long Journey Still…

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24Year

US 10 Yr Treasury Yields (2000‐Present)

10 Yr Japanese Bond Yields (1990‐Present)

Source: Bloomberg as of 6/30

23

• Market movements in the second quarter , particularly rising rates,caused Risk Parity to generally underperform

• Risk Parity’s underperformance in a transitional period to tighter, or less stimulative, monetary policy is expected

• While disappointing, this underperformance is consistent with the overall investment thesis for Risk Parity

• We believe that Risk Parity is well positioned to deliver diversified, risk-balanced exposure to markets going forward

• With rates higher and equity markets down, future expected returns for Risk Parity are now higher

Risk Parity Outlook

24

AQR Capital Management, LLC | Two Greenwich Plaza, Third Floor | Greenwich, CT 06830 | T: 203.742.3600 | F: 203.742.3100 | www.aqr.com

PRIVATE AND CONFIDENTIAL

AQR Capital Management, LLC | Two Greenwich Plaza, Third Floor | Greenwich, CT 06830 | T: 203.742.3600 | F: 203.742.3100 | www.aqr.com

The information set forth herein has been obtained or derived from sources believed by AQR Capital Management, LLC (“AQR”) to be reliable. However, AQR does not make any representation or warranty,

express or implied, as to the information’s accuracy or completeness, nor does AQR recommend that the attached information serve as the basis of any investment decision. This document has been provided to

you solely for information purposes and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be

construed as such. This document is intended exclusively for the use of the person to whom it has been delivered by AQR Capital Management, LLC, and it is not to be reproduced or redistributed to any other

person. This document is subject to further review and revision. Please refer to the Fund’s PPM for more information on general terms, risks and fees. For one-on-one presentation use only.

AQR C A P I T A L

M A N A G E M E N T

AQR Risk Parity Strategies Prepared exclusively for the Twin Cities CFA Society

July 10th, 2013

AQR C A P I T A L

M A N A G E M E N TAQR C A P I T A L

M A N A G E M E N T2

AQR’s Risk Parity Strategy Is Risk Diversified

*Charts are for illustrative purposes only. Exposures are subject to change without notice. This information is supplemental to the Global Investment Performance Standards (GIPS®) presentation compliant for

this strategy in the Appendix. Please see important risk disclosures in the Appendix.

Traditional Global Risk Premium Strategy

Global Risk Premium

Risk Allocation

Equities

Nominal Interest Rate Risk

Inflation Risk

Credit / Default Risk

Risk Allocation

GRP Takes Equal Risk Weight Across The Four Risk Premia Groups*

Equity Risk

Interest Rate Risk

Inflation Risk

Credit/Default Risk

AQR C A P I T A L


M A N A G E M E N T

0.0

0.1

0.2

0.3

0.4

0.5

Stocks Bonds Commodities Equal RiskWeight

3

AQR’s Risk Parity Strategy Is Risk Diversified

Long-Term Asset Class Performance Is Similar, So Strategic Allocations Should Be, Too

* Data from 1971 – 2012. Inflation risk historical Sharpe ratio is calculated using commodities return data as Inflation-Protected Securities were not available for the majority of the observation period. Charts are

for illustration purposes only and are based on AQR volatility and correlation estimates. Exposures are subject to change without notice. Please see important risk disclosures in the Appendix.

Shar

pe R

atio

s*

Historical Sharpe Ratios – 1971- 2012* Expected Contribution to Returns

Global Risk Premium

Risk Allocation

Equities

Nominal Interest Rate Risk

Inflation Risk

Credit / Default Risk

AQR C A P I T A L



Over Shorter Periods Returns Vary Widely, But The Equal Risk Portfolio Is More Stable

AQR’s Risk Parity Strategy Is Risk Diversified Sh

arpe

Rat

ios

1971 – 1980*

1991 – 2000*

1981 – 1990*

2001 – 2010*

* These are the realized Sharpe Ratios based on monthly returns in excess of the 3 month T-bill returns for the MSCI World Index (stocks), the Barclays US Aggregate Government Bond Index (bonds), and the

S&P GSCI Index (commodities). We begin in 1971, as that is when all three data series are available. The Simple Risk Parity Strategy is a simulated portfolio based on the MSCI World Index, the Barclays US

Aggregate Government Index, and the S&P GSCI Index, representing exposures to equities, bonds, and commodities, respectively. This simulated portfolio targets an equal amount of volatility from each asset

class every month. Please see important risk disclosures in the Appendix.

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8


1971-1980

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8


1981-1990

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8


1991-2000

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8


2001-2010

AQR C A P I T A L


M A N A G E M E N T

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

60/40 GRP 10% Vol

5

GRP’s Risk Targeting May Provide A More Consistent Level Of Realized Portfolio Volatility

AQR’s Risk Parity Strategy Is Risk Controlled

Realized Volatility of Adjusted GRP 10%* vs. a 60/40 Portfolio Rolling 60 Day Volatility Using Daily Returns

* Source: AQR. Daily returns from January 2006 through June 2013. Performance from January 2006 through January 2007 represents adjusted performance by taking only a percentage (10/25) of the 25% target

volatility master Global Risk Premium Fund actual performance and scaling it down to match the 10% target volatility as the lower volatility target feeder was not launched during this time. Please see disclosures

in the Appendix.

AQR C A P I T A L



Volatility Forecast

for Asset

Sample Asset

Volatility Target

3.9% 15%

Bond

Weight

Stock

Weight

26%

4.2% 4% 105%

Total

Portfolio

10% 259%

Position Size

as % of Strategy

Asset class weights change

as risk forecasts change

3.9% 5%

Inflation Risk

Weight

Credit

Weight

78%

4.0% 8% 50%

* For illustrative purposes only and is subject to change. Assumes no correlation between stocks and bonds. Please see important risk disclosures in the Appendix.

Risk forecasts can

change frequently

Set Asset Exposures To Achieve Risk Targets

Current Risk Forecasts Translate Risk Targets Into Appropriate Position Sizes

AQR C A P I T A L



Volatility Forecast

for Asset

Sample Asset

Volatility Target

3.9% 10%

Bond

Weight

Stock

Weight

39%

4.2% 20% 21%

Total

Portfolio

10% 126%

Position Size

as % of Strategy

3.9% 10%

Inflation Risk

Weight

Credit

Weight

39%

4.0% 15% 27%

Set Asset Exposures To Achieve Risk Targets

Exposures Can Be Materially Different Depending On The Risk Environment*

* For illustrative purposes only. The above example hypothetical.

AQR C A P I T A L


M A N A G E M E N T

Dynamic Weight Portfolio Volatility Fixed Weight Portfolio Volatility

8

Historical Equity Volatility

* Source: AQR. The above figure is based on market information and AQR models and is for illustrative purposes only. While the constant notional exposure portfolio is based on the ex-ante volatility of the full

sample period, the constant volatility portfolio is based on a shorter term methodology that looks back over 10 years, but weights the more recent volatility more heavily. Please see disclosures in the Appendix.

Rebalance As Risk Forecasts Evolve

Equity Markets

Hyp

othe

tical

Ann

ualiz

ed V

olat

ilitie

s

Volatility Target

0%

10%

20%

30%

40%

50%

60%

70%

1980 1984 1988 1992 1996 2000 2004 2008 2012

AQR C A P I T A L


M A N A G E M E N T

0%

5%

10%

15%

20%

25%

30%

1980 1984 1988 1992 1996 2000 2004 2008 2012


9

Historical Fixed Income Volatility




Fixed Income Markets

Hyp

othe

tical

Ann

ualiz

ed V

olat

ilitie

s

Volatility Target

AQR C A P I T A L


M A N A G E M E N T

0%

10%

20%

30%

40%

50%

60%

70%

1980 1984 1988 1992 1996 2000 2004 2008 2012


10

Historical Commodities Volatility




Commodities Markets

Hyp

othe

tical

Ann

ualiz

ed V

olat

ilitie

s

Volatility Target

AQR C A P I T A L


M A N A G E M E N T11 11

Under Substantial Stress, Investors Will Likely Reduce Risk – It’s Best To Have A Process To Manage This

Two Types of Risk Management in a Crisis

A drawdown control policy may not always be successful at controlling a fund’s risk or limiting portfolio losses. Source: AQR. For illustrative purposes only.

Drawdown Control

AQR C A P I T A L



Disclosures

The information set forth herein has been obtained or derived from sources believed by AQR Capital Management, LLC (“AQR”) to be reliable. However, AQR does not

make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor does AQR recommend that the attached information serve as

the basis of any investment decision. This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer, or

any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This document is intended exclusively for the use

of the person to whom it has been delivered by AQR and it is not to be reproduced or redistributed to any other person.

There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully

consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities,

options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading

derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.

Past performance is not an indication of future performance.

The simulated portfolio performance included herein is based on publicly available index data for the indices disclosed and is not based on actual portfolios being traded. They

are presented for illustrative purposes only. No representation is being made that any fund or account will or is likely to achieve profits or losses similar to those shown herein.

In fact, there are frequently sharp differences between simulated performance results and the actual results subsequently realized by any particular trading program. There are

numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of

hypothetical or simulated results, all of which can adversely affect actual trading results.

The Barclays Capital U.S. Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market,

including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.

The Barclays Capital U.S. Government Index is comprised of the U.S. Treasury and U.S. Agency Indices. The U.S. Government Index includes Treasuries (public obligations

of the U.S. Treasury that have remaining maturities of more than one year) and U.S. agency debentures (publicly issued debt of U.S. Government agencies, quasi-federal

corporations, and corporate or foreign debt guaranteed by the U.S. Government). The U.S. Government Index is a component of the U.S. Government/Credit Index and the

U.S. Aggregate Index.

The Ibbotson U.S. Intermediate Government Bond Index is a custom index designed to measure the performance of U.S. government bonds.

The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets.

The S&P GSCI™ Total Return index measures a fully collateralized commodity futures investment that is rolled forward from the fifth to the ninth business day of each

month. The S&P GSCI™ Total Return is significantly different than the return from buying physical commodities.

For one-on-one use with institutional investors and investment professionals only. Not for public distribution.

CFA Institute

Q1 | 2013

Putnam Total Return: Active Risk Parity

Putnam Global Asset Allocation team

3For one-on-one use with institutional investors and investment professionals only. Not for public distribution.

An experienced Global Asset Allocation teamis Putnam’s competitive advantage

The senior team members have been in place at Putnam for more than a decade, managing asset allocation strategies since 1994, and managing dynamic risk strategies since 2006.

James A. Fetch Co-Head of Global Asset Allocation

Putnam since 1994

Robert J. Kea, CFACo-Head of Global Asset Allocation

Putnam since 1989

Robert J. SchoenCo-Head of Global Asset Allocation

Putnam since 1997

Jason R. Vaillancourt, CFACo-Head of Global Asset Allocation

Putnam since 2000

PutnamGAA team

Case for Dynamic risk

allocationInvestment

process Positioning

Joshua B. Kutin, CFAPortfolio Manager

Putnam since 1998

Ryan J. Beaudoin, CFAResearch Analyst

Putnam since 2001

Adrian H. Chan, CFAResearch Analyst

Putnam since 2003

Quantitative/qualitative analysis 4 investment associates

Portfolio associates John R. Murphy | Sean M. McDonough

Investment Strategies Christian J. Galipeau | Brendan T. Murray | Seamus S. Young, CFA

The case for dynamic risk allocation


Putnam Total Return: Dynamic risk allocation seeking efficient returns

Objective

• Deliver a more efficient risk/return profile than a traditionally balanced global portfolio through dynamic risk allocation and drawdown control

Philosophy

• Actively allocate risk vs. static risk parity

• Actively implement strategies

• Base investment decisions on empirical research, validated by informed judgment

No assurance can be given that the investment objective will be achieved or that an investor will receive a return of all or part of his or her investment. As with any investment, there is a potential for profit as well as the possibility of loss.

PutnamGAA team



process Positioning


Environments change — opportunities arise

• Empirical data spanning over 20 years helps support our view that active risk allocation is warranted

• Sharpe ratios of stocks, bonds, and commodities vary over time

PutnamGAA team



process Positioning

Source: Putnam. Equity represented by S&P 500 Total Return, credit by Barclays U.S. Corporate High Yield Total Return, inflation by S&P GSCI Total Return, and interest rate by Barclays Intermediate Treasury TR USD. Indexes are unmanaged and do not incur expenses. You cannot invest directly in an index. Past performance is not a guarantee of futures results.

-1

-0.5

0

0.5

1

1.5

2

2.5

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Equity Credit Interest rate Inflation

5-year rolling period Sharpe ratios, 12/31/89–12/31/12


-5

0

5

10

15

20

25

0% 2% 4% 6% 8% 10% 12% 14% 16%

Empirical data reveals valuations can create opportunities

0

5

10

15

20

Q1 Q2 Q3 Q4 Q5

S&P 500 5-year Forward Total Returns quintiled on Shiller P/E at the start of the period

Cheap Expensive

U.S. LT Gov't Bond 5-year Forward Total Return vs. LT Gov't Bond Yield at the start of the period

Ann

ualiz

ed 5

-yr

Fwd

Tota

l Ret

urn

(%)

Ave

rage

Ann

lzd

5-yr

Fw

d To

tal R

etur

n

(%)

Source: IbbotsonAnnual data from 1926-2012Note: Shiller P/E is a cyclically-adjusted P/E measure where earnings are smoothed 10 years

PutnamGAA team



process Positioning

Initial yield at start of holding period


We take more risk when conditions are favorable, and less risk when conditions are threatening

Sources: Putnam Investments, Ibbotson. U.S. Equity: S&P 500 Total Return Index. U.S. High Yield: Barclays U.S. Corporate High Yield Total Return Index. Commodities: S&P Goldman Sachs Commodity Total Return Index. For illustrative purposes only. Indexes are unmanaged and do not incur expenses. You cannot invest directly in an index. Past performance is not a guarantee of future results.

0.66 0.71

0.42

-0.11

0.19 0.12

-0.2

0.00.2

0.40.6

0.81.0

U.S. Equity U.S. High Yield Commodities

Low Vol Regimes

High Vol Regimes

Risk-adjusted returns higher in low volatility regimes

Shar

pe r

atio

Regime Study: 1970–2012Excess Return Annual Volatility Sharpe Ratio

All months U.S. Equity 4.78% 15.60% 0.31U.S. High Yield 4.00 9.25 0.43Commodities 4.27 19.96 0.21

Low Volatility Regimes (70% of months)

U.S. Equity 8.88% 13.41% 0.66U.S. High Yield 4.85 6.83 0.71Commodities 7.06 16.86 0.42

High Volatility Regimes (30% of months)

U.S. Equity -2.11% 19.65% -0.11U.S. High Yield 2.54 13.29 0.19Commodities 3.22 25.86 0.12

PutnamGAA team



process Positioning


Naive rules based dynamic allocation model

Sharpe Ratio when: US Equity Treasuries Inv Grade Corp High Yield Commodities

Positive Trend Regime 0.68 0.72 0.77 1.20 0.56

Negative Trend Regime -0.12 -0.05 -0.06 -0.14 -0.19

Non-inverted Yield Curve -0.63

Inverted Yield Curve 0.64

Steep Curve (>275bps) 1.19 1.55

Flat Curve (<275bps) 0.19 0.09

Wide Spreads (>125bps) 0.72 0.74

Tight Spreads (<125bps) 0.01 0.09

Positive Roll Yield 0.75

Negative Roll Yield -0.07

Source: Putnam Investments.

PutnamGAA team



process Positioning

The investment process


Inflation

Rates

Credit

Equity

Inflation

Rates

Credit

Equity

17%Inflation

17%Rates

17%Credit

50%Equity

25%Inflation

25%Rates

25%Credit

25%Equity

Putnam Total Return dynamically allocates risk

Staticrisk parity

Dynamic allocation

Putnam Total Return

Strategic policy portfolio

Active implementationActive | Passive

321

For illustrative purposes only.

PutnamGAA team



process Positioning


Global macro and asset class teams – A collaborative process

Asset class teams responsible for active allocation and implementation recommendations

Portfolio construction and risk management verify recommendations and allocate risk

PutnamGAA team



process Positioning

1

2

3

GLOBALMACRO

PORTFOLIO CONSTRUCTION

AND RISK MANAGEMENT


AND RISK MANAGEMENT


AND RISK MANAGEMENT


AND RISK MANAGEMENT

Asset class teams collaborate with the Global Macro team


Portfolio Positioning


Equity– U.S. equities– Non-U.S. equities– Emerging-market equities

Inflation– TIPS– Commodities– REITs

25%Credit

29%Inflation

40%Equity

6% Rates

17%Credit

17%Rates17%

Inflation

50%Equity

We dynamically allocate risk and seek efficiency in each asset class

149% total

1.5x leverageon average

Notional exposures over invested capital

Staticrisk parity

Strategic policy

portfolio riskCurrent

portfolio risk

Rates– U.S. government debt– International government

debt

Credit– High-yield bonds– Emerging-market bonds

33%Equity

32%Inflation

49%Rates

35%Credit

Capital allocation asset weight

For illustrative purposes only. Leverage levels may vary over time. Does not include leverage from active trading strategies.

25%Inflation

25%Rates

25%Credit

25%Equity

PutnamGAA team



process Positioning

2013 CFA Society Minnesota: Insight Series

Clifton’s Global Balanced Risk

For investment professional use only. For illustrative purposes only. Not meant for a recommendation to buy/sell any specific security. Please see general disclosures.July 10, 2013

When constructing a risk parity portfolio, not all strategies are created in the same manner:When constructing a risk parity portfolio, not all strategies are created in the same manner:all strategies are created in the same manner:all strategies are created in the same manner:

• Asset class selection

• Risk definition and targetg

• How risk is balanced

• Active vs. passive ongoing management and tilts

Our approach combines a disciplined allocation structure and passive implementation

For investment professional use only. For illustrative purposes only. Not meant for a recommendation to buy/sell any specific security. Please see general disclosures.

2013 CFA Society Minnesota: Insight Series 2

Growth Asset Class Selection

Global Equities

Exposure representing a wide spectrum of capitalizations, styles, industries and sectors in US, Developed and Emerging Markets.

Global Real Estate

Exposure representing securities of corporations which own and operate commercial Real Estate properties across a wide array of property classifications and geographies.

Global Credit Spreads

Broad based exposure to corporate and emerging market Sovereign credit instruments

Diversified

Broad based exposure to corporate and emerging market Sovereign credit instruments across a range of quality ratings.

CommoditiesExposure representing a broad opportunity set of agricultural, industrial and energy commodities.



Contraction Asset Class Selection

Gl b l N i lGlobal Nominal Bonds

Sovereign Government securities that provide exposure to global nominal interest rates.

Global Inflation Bonds

Sovereign Government fixed income securities indexed to published rates of inflation.

Precious MetalsExposure to precious metals.

Volatility HedgesVolatility HedgesHedges against elevated levels of market volatility over short and medium term time frames.



Risk Definition and Targets

f li b d i k d di ifi i b fiConstruct a portfolio based on risk and diversification benefits

RiskRisk

• Standard Deviation is the common measure of risk• Short‐term measures of risk are dependent on selecting the correct time frame p g• Long‐term measures will miss short‐term changes in risk regimes

Diversification BenefitDiversification Benefit

• Correlations are not stationary• Forecasting correlations is complex and fraught with challenges • Fundamental economic drivers as an alternative

Our risk parity strategy can be customized to target varying levels of risk. Most strategies target a 10% level of realized risk; the level historically exhibited by the traditional 60/40 portfolio.



f ; y y / p f

How Risk is Balanced

When the focus is shifted to the allocation of Risk:

Asset

Traditional Portfolio Global Balanced Risk The Result is…

A more balanced asset class risk

Credit Spreads

NominalBond

Precious Metals

Volatility Hedge

Global Equities

Global Real Estate allocation

Global Nominal

d

Equity

Global Inflation Bond

Metals Estate

Global Credit Spreads

Diversified Commodity

BondCommodity

Source: The Clifton Group



Sou ce e C to G oup

For illustrative purposes only.

Active versus Passive Ongoing Management

O h bi di i li d ll ti t t d i i l t ti

100%

Historical Notional Allocations as % of Total Exposure

Volatility Hedges

Our approach combines a disciplined allocation structure and passive implementation

70%

80%

90% Precious Metals

Volatility Hedges

Global Inflation

40%

50%

60%

Di ifi d C dit

Global Nominal

10%

20%

30%

Global Real Est.

Global Credit

Diversified Commodity

0%Jan‐00 Jan‐01 Jan‐02 Jan‐03 Jan‐04 Jan‐05 Jan‐06 Jan‐07 Jan‐08 Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jan‐13

Global Equity Global Real Est. Global Credit Div. Commodity Global Nominal Global Inflation Prec. Metals Volatility Hedges

Global Equity

For illustrative purposes only. Information is subject to change.S Th Clift G



Source: The Clifton Group*Please refer to disclosures in the Appendices.Date created: April 15, 2013

Common Criticisms

Like all investment strategies, risk parity has its critics:

Like all investment strategies, risk parity has its critics:

• Leverage

• Rising rate environment

• Derivatives

• Benchmarking

• Portfolio fit

The goal of the strategy is to allow the investor to collect the average risk premium across all asset classes over time and thus realize a superior risk adjusted return.



Benefits and Summary

Benefits of the StrategyBenefits of the Strategy

• Disciplined, risk balanced strategy that does not incorporate market timing or manual overrides

• Balanced risk allocations designed to eliminate unintended biases to risk premiums at every level of the portfolio while making no correlation assumptions

• Disciplined rebalancing which is expected to add value and control drawdowns over time

• Fully transparent – no bilateral over‐the‐counter instruments

Global balanced risk is designed to be a diversified investment strategy created by making risk the focus of the investment process



Global Balanced Risk ‐ General Supplemental Disclosure

About Parametric:

Parametric, headquartered in Seattle, WA, is a leading global asset management firm, providing investment strategies and implementation services to institutions and individual investors around the world. Parametric offers a variety of rules‐based, risk‐controlled investment strategies, including alpha‐seeking equity, alternative and options strategies, as well as implementation services, including customized equity, traditional overlay and centralized portfolio management. Parametric is a majority‐owned subsidiary of Eaton Vance and offers these capabilities through investment centers in Seattle, WA, Minneapolis, MN and Westport, CT (home to Parametric affiliate Parametric Risk Advisors, LLC, a registered investment adviser).

The Clifton Group is a division of Parametric.

Parametric Portfolio Associates, LLC, (D/B/A The Clifton Group (“Clifton”)) is a registered investment adviser under the SEC Investment Advisers Act of 1940.

Th i l d id d h i h b d f i i i l li i d h ld b f h di i d i h li l Thi i l iThe material and commentary provided herein has been prepared for an institutional one‐on‐one client presentation and should not be further disseminated without compliance approval. This material may contain confidential and/or proprietary information, composite and/or account specific portfolio holdings, and/or assumptions based on client discussions, and/or dissimilar period comparisons, and may only be relied upon for this report. Perspectives, opinions, and testing data may change without notice. Decisions and information were based on available research at the time and as data may contain hypothetical results, returns may not be realized and specific action or lack of action is not known for certainty. No securities, sectors, industries, or other information mentioned herein may be considered as an offer to purchase or sell a firm product or security. Any positive comments regarding specific data may no longer be applicable and should not be relied upon for investment purposes.

The use of derivative instruments may differ from client to client based on different investment philosophies and restrictions. The use of derivative instruments may be precluded by investment policies and restrictions.

The information provided is general information, even as it pertains to you, and does not take into account any investor’s particular investment objectives, strategies, tax status, or investment horizon.

Derivatives such as futures, swaps, and other investment strategies have certain disadvantages and risks. Futures require the posting of initial and variation margin. Therefore, a portion of risk capital must be preserved for this purpose rather than being allocated to a manager. Liquid futures may not exist for published benchmarks which may result in tracking error. Also, some intra‐period mispricing may occur. Swaps require periodic payments, which may be less liquid than futures, and have counterparty/credit risk. Some investment strategies require a cash investment equal to the desired amount of exposure.

No security, discipline or process is profitable all of the time. There is always the possibility of selling at a loss. Specific periods of returns are provided in direct response to and are not meant to imply that the portfolio would have been profitable had the client only invested in the market for this time period. Returns may be calculated gross of the management fee using the internal rate of return, reflect the reinvestment of dividends, interest, gains and other income, and brokerage commissions, but exclude account and custodial services fees, and do not take individual investor tax categories into consideration. Clients should realize that net returns would be lower and must be considered when determining absolute returns. Clients should contact Clifton for further details.

The currency used in these calculations is the USD. Currency exchange may negatively impact performance. Global market investing, (including developed, emerging and frontier markets) also carries additional risks and/or costs including but not limited to: political, economic, financial market, currency exchange, liquidity, accounting, and trading capability risks. The use of derivatives such as swaps, futures, and options, increase portfolio exposure such as short selling, collateral, leverage, and counterparty risks. Future investments may be made under different economic conditions, in different securities and using different investment strategies. Clifton’s proprietary investment process considers factors such as additional guidelines, restrictions, weightings, allocations, market conditions and other investment characteristics. Thus returns may at times materially differ from the stated benchmark and/or other disciplines and funds provided for comparison.

Charts, graphs and other visual presentations and text information were prepared for this specific presentation and derived from internal, proprietary, and/or service vendor technology sources and/or may have been extracted from other firm data bases. As a result, the tabulation of certain reports may not precisely match other published data. Data may have originated from various sources including but not limited to Bloomberg, MSCI/Barra Barclay’s Live eVestment Alliance and/or other systems and programs With regards to any materials accredited to MSCI/Barra: “Neither MSCI nor any other party involved in or related to compilingMSCI/Barra, Barclay s Live, eVestment Alliance and/or other systems and programs. With regards to any materials accredited to MSCI/Barra: Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.” Please refer to the specific service provider’s web site for complete details on all indices. Furthermore, no other index owner makes any representation or endorsement concerning the accuracy or propriety of information presented. Clifton makes no representation regarding the accuracy or propriety of the information received from any other third party.

To receive a copy of the firm’s fee schedule, ADV and/or a description of Clifton’s composites, please contact us at 3600 Minnesota Drive, Suite 325, Minneapolis, MN 55435, 1.612.870.8800 or visit our website, www thecliftongroup com



www.thecliftongroup.com.

Investments are subject to change without notice. Past performance is not indicative of future returns. All information is believed to be correct but accuracy cannot be guaranteed.

Documents

CFA Society of Minnesota · 2015. 6. 26. · The contribution to risk is the same for fixed income and equities Assumptions: The portfolio consists of 8.8% MSCI USA Small Cap, 10.7%