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Fixed Income Investing in the Current Environment Fixed Income Investing in the Current Environment CITYWIRE MIAMI October 16 -18, 2013

2013 08-02-presentation-fixed income investing in the current environment

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Page 1: 2013 08-02-presentation-fixed income investing in the current environment

Fixed Income Investing in theCurrent Environment

Fixed Income Investing in theCurrent Environment

CITYWIRE MIAMI

October 16 -18, 2013

Page 2: 2013 08-02-presentation-fixed income investing in the current environment

2

OverviewOverview

Founded in 1986, Clark Capital Management

Group, Inc. is an independent, mostly employee

owned investment advisory firm, managing over

$2.8* billion in client assets and based in

Philadelphia, PA.

Clark Capital is focused on both long only and

liquid alternatives — risk management strategies,

with a goal of successful capital preservation.

Clark Capital tailors its Navigator Investment

Solutions to the unique requirements of high net

worth individuals, corporations, trusts,

endowments, foundations, and retirement plans.

* As of 6/30/2013 (includes sub-advised assets)

Page 3: 2013 08-02-presentation-fixed income investing in the current environment

3

OverviewOverview

Fixed Income Challenges

� Low yield environment

� Inflation risk

� Interest rate risk

� Liquidity risk

Fixed Income Opportunities

� Opportunities in low quality debt space

� Flexible approach

� Disciplined research process

� Focus on risk management

Page 4: 2013 08-02-presentation-fixed income investing in the current environment

4

Long Term Government YieldLong Term Government Yield

Source: Morningstar Direct

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

55 60 65 70 75 80 85 90 95 00 05 10

1/1/1954 to 12/31/1982S&P 500 10.38

S&P 500 Inflation Adjusted 5.58

U.S. LongTerm Government 3.45U.S. LongTerm Government

Inflation Adjusted -1.05U.S. Inflation 4.55

1/1/1983 to 12/31/2012S&P 500 10.81

S&P 500 Inflation Adjusted 7.69

U.S. LongTerm Government 9.90U.S. LongTerm Government

Inflation Adjusted 6.81U.S. Inflation 2.89

L o n g Te r m G o v e r n m e n t Y ie ld

For illustrative purposes only. The information is not intended to be a recommendation to purchase or sell a security. Past performance is no guarantee of future

results. Returns reflect reinvestment of capital gains and dividends, if any. Indices are unmanaged and do not incur fees. It is not possible to invest in an index.

Stocks are represented by the S&P 500 Index. Bonds are represented by the Ibbotson Associates U.S. Long-Term Government Index. Inflation-adjusted returns

are based on the average Consumer Price Index (CPI) through the referenced period.

Page 5: 2013 08-02-presentation-fixed income investing in the current environment

5

Annual Returns for Selected Bond Sectors 10-Year

Annualize

d

Return

10-Year

Standar

d

Deviatio

n2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

High Yield

Corporates

28.97

Unhedged

Foreign

Bonds

12.06

High Yield

Municipals

8.58

High Yield

Corporates

11.85

TIPS

11.64

Treasuries

13.74

High Yield

Corporates

58.21

High Yield

Corporates

15.12

TIPS

13.56

High Yield

Municipals

18.14

High Yield

Corporates

10.62

High Yield

Corporates

10.59

Unhedged

Foreign

Bonds

18.21

High Yield

Corporates

11.13

Investment

Grade

Municipals

3.51

High Yield

Municipals

10.75

Unhedged

Foreign

Bonds

10.94

Unhedged

Foreign

Bonds

9.43

High Yield

Municipals

32.74

Investment

Grade

Corporates

9.00

Investment

Grade

Municipals

10.70

High Yield

Corporates

15.81

TIPS

6.65

Unhedged

Foreign

Bonds

8.32

TIPS

8.40

High Yield

Municipals

10.52

T-Bills

3.00

Unhedged

Foreign

Bonds

7.28

Treasuries

9.01

Mortgages

8.34

Investment

Grade

Corporates

18.68

High Yield

Municipals

7.79

Treasuries

9.81

Investment

Grade

Corporates

9.82

Unhedged

Foreign Bonds

6.44

High Yield

Municipals

7.68

Investment

Grade

Corporates

8.24

TIPS

8.46

TIPS

2.84

Mortgages

5.22

Aggregate

Bond Index

6.97

Aggregate

Bond Index

5.24

Investment

Grade

Municipals

12.91

Aggregate

Bond Index

6.54

High Yield

Municipals

9.25

TIPS

6.98

High Yield

Municipals

6.39

TIPS

6.66

High Yield

Municipals

6.13

Investment

Grade

Corporates

5.39

Treasuries

2.79

Investment

Grade

Municipals

4.84

Mortgages

6.90

T-Bills

1.80

TIPS

11.41

TIPS

6.31

Investment

Grade

Corporates

8.15

Investment

Grade

Municipals

6.78

Investment

Grade

Corporates

6.33

Investment

Grade

Corporates

6.25

Investment

Grade

Municipals

5.31

Mortgages

4.70

High Yield

Corporates

2.74

T-Bills

4.76

T-Bills

4.74

TIPS

–2.35

Aggregate

Bond Index

5.93

Unhedged

Foreign

Bonds

6.12

Aggregate

Bond Index

7.84

Aggregate

Bond Index

4.21

Aggregate

Bond Index

5.18

Treasuries

4.71

Aggregate

Bond Index

4.10

Investment

Grade

Municipals

4.48

Mortgages

2.61

Aggregate

Bond Index

4.33

Investment

Grade

Corporates

4.56

Investment

Grade

Municipals

–2.47

Mortgages

5.89

Treasuries

5.87

Mortgages

6.23

Mortgages

2.59

Investment

Grade

Municipals

5.10

Investment

Grade

Municipals

4.53

Mortgages

3.07

Aggregate

Bond Index

4.34

Aggregate

Bond Index

2.43

Investment

Grade

Corporates

4.30

Investment

Grade

Municipals

3.36

Investment

Grade

Corporates

–4.94

Unhedged

Foreign

Bonds

4.35

Mortgages

5.37

Unhedged

Foreign

Bonds

5.24

Treasuries

1.99

Mortgages

5.08

Aggregate

Bond Index

3.55

Treasuries

2.24

Treasuries

3.54

Investment

Grade

Corporates

1.68

Treasuries

3.08

High Yield

Corporates

1.87

High Yield

Corporates

–26.16

T-Bills

0.16

Investment

Grade

Municipals

2.38

High Yield

Corporates

4.98

Unhedged

Foreign

Bonds

1.77

Treasuries

4.75

Mortgages

2.62

T-Bills

1.07

T-Bills

1.24

Unhedged

Foreign

Bonds

–8.79

TIPS

0.41

High Yield

Municipals

–2.28

High Yield

Municipals

–27.01

Treasuries

–3.57

T-Bills

0.13

T-Bills

0.08

T-Bills

0.07

T-Bills

1.69

T-Bills

0.51

1.9% 3.3% 3.4% 2.5% 4.1% 0.1% 2.7% 1.5% 3.0% 1.7%

Sources: U.S. Bureau of Labor Statistics;

Federal Reserve;

Barclays; Morningstar; Russell Investments1.00% 2.25% 4.25% 5.25% 4.25% 0.00-0.25% 0.00-0.25% 0.00-0.25% 0.00-0.25% 0.00-0.25%

BEST

PERFORMANCE

WORST

PERFORMANCE

HIGHESTVOLATILITY

LOWESTVOLATILITY

Annual

Inflation Rate

Year-End Fed

Funds Rate

Periodic Table of Sector Rotation — BondsPeriodic Table of Sector Rotation — Bonds

Source: Morningstar Direct. Past performance not indicative of future results. Please see attached disclosures.

Page 6: 2013 08-02-presentation-fixed income investing in the current environment

6Source: The Armstrong Advisory Group

Type of BondEconomy Does Well Economy Stagnates

Economy DoesPoorly

Treasury Bills Poorly Mediocre Well (Nominally)

Treasury Bonds Poorly Mediocre Well (Nominally)

Investment GradeCorporate Short Duration

Mediocre Mediocre Mediocre

Investment GradeCorporate Long Duration

Poorly Poorly Poorly

High Yield Well Poorly Poorly

Floating Rate Well Mediocre Poorly

Interest Rate Rise — How Each Type of Bond Could Perform Based on Historical DataInterest Rate Rise — How Each Type of Bond Could Perform Based on Historical Data

Page 7: 2013 08-02-presentation-fixed income investing in the current environment

7Source: Morningstar Direct. Past performance not indicative of future results. Please see attached disclosures.

10-Year Treasury Yields10-Year Treasury Yields

Page 8: 2013 08-02-presentation-fixed income investing in the current environment

8

Rising Rate PeriodsRising Rate Periods

Source: Morningstar Direct. Past performance not indicative of future results. Please see attached disclosures.

Page 9: 2013 08-02-presentation-fixed income investing in the current environment

9

Rising Rate PeriodsRising Rate Periods

Source: Morningstar Direct. Past performance not indicative of future results. Please see attached disclosures.

Page 10: 2013 08-02-presentation-fixed income investing in the current environment

10Source: Ned Davis Research

(10 years ended December 31, 2012)

1.00

0.80

0.60

0.40

0.20

0.00

–0.20

–0.40

–0.60

0.88

0.68

0.52

0.41

0.09 0.07

–0.18–0.23

–0.40

Co

rre

latio

n

Barclays Capit al

U.S. Aggregat e

Index

BofA Mer r ill

Lynch U.S.

Inflat ion-Linked

Treasury Index

BofA Mer r illLynch U.S.

�Corporat e

Index

BofA Mer r illLynch

Municipal

Mast er Index

JP MorganGovernment

Bond Index

Emerging

Market s Global

Diversified

BofA Mer r illLynch All U.S.

�Conver t ibles

Index

BofA Mer r illLynch Fixed

R �at e Prefer red

Secur it ies Index

Credit SuisseLeverage Loan

Index

BofA Mer r illLynch U.S.

�High Yield

Mast er II Index

Finding Securities with a Negative Correlation with U.S. Treasuries — Fixed-Income Sectors to 7-10 Year TreasuriesFinding Securities with a Negative Correlation with U.S. Treasuries — Fixed-Income Sectors to 7-10 Year Treasuries

Page 11: 2013 08-02-presentation-fixed income investing in the current environment

11

High Yield SpreadsHigh Yield Spreads

Source: Ned Davis Research. Past performance not indicative of future results. Please see attached disclosures.

Page 12: 2013 08-02-presentation-fixed income investing in the current environment

12Source: Barclays Capital, J.P. Morgan

Bank loans OAS

14

12

10

8

6

4

2

0

2,000

1 ,800

1 ,600

1 ,400

1 ,200

1 ,000

800

600

400

200

098 99 00 01 02 03 04 05 06 07 08 09 10 11

High yield bonds

Pa

r-w

eig

hte

d d

efa

ult

ra

te

s (

%)

Op

tio

n a

dju

ste

d s

pre

ad

(O

AS

) (b

ps

)

Historical High Yield Spreads and Default RatesHistorical High Yield Spreads and Default Rates

Page 13: 2013 08-02-presentation-fixed income investing in the current environment

13

Credit Defaults Appear Likely to Remain Low Credit Defaults Appear Likely to Remain Low

The U.S. high-yield bond default rate has, historically, tracked

the federal funds rate closely, with a lag of approximately two

years.

Given the Federal Reserve’s efforts to maintain a low interest

rate environment for an extended period of time, high-yield

default rates should remain depressed, which is supportive of

credit spreads.

Source: Credit Suisse, Bloomberg, Guggenheim Investments. Data as of 1/31/2013

Page 14: 2013 08-02-presentation-fixed income investing in the current environment

14

How Does Clark Capital Manage Fixed Income?

How Does Clark Capital Manage Fixed Income?

Page 15: 2013 08-02-presentation-fixed income investing in the current environment

15

Overview: Navigator® Fixed Income Total ReturnOverview: Navigator® Fixed Income Total Return

Goals:

Total return, current income, beta management,

risk/reward analysis

We believe…

Flexibility is the key to alpha and that a disciplined

quantitative research process may lead to consistent long-

term performance

Proper risk management takes into consideration both the

strengths and weaknesses of diversification

Our prudent, flexible and highly adaptable approach

enables us to constantly balance risk while pursuing alpha

Page 16: 2013 08-02-presentation-fixed income investing in the current environment

16

Portfolio Characteristics & Allocation History as of 6/30/2013 Portfolio Characteristics & Allocation History as of 6/30/2013

Portfolio Characteristics*

Total Holdings Exposure 3028

Estimated 12 Month Yield 3.05%

Average Maturity 3.19

Average Duration 2.03

Average Credit Quality B

* Source: Morningstar Direct

This is not a recommendation to buy or sell a particular security. There is no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report.

Holdings Ticker % # of

PositionsCurrent Yield*

Blackrock High Yield Bond BRHYX 10.0% 874 5.90%

Pioneer High Yield Y TYHYX 10.0% 396 4.74%

JP Morgan High Yield Bond Select OHYFX 10.0% 996 6.06%

Neuberger Berman High Income Inst'l NHILX 10.0% 308 7.19%

Eaton Vance Income Fund of Boston EIBIX 10.0% 454 6.60%

Cash Cash 50.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

01.01.2005 01.01.2006 01.01.2007 01.01.2008 01.01.2009 01.01.2010 01.01.2011 01.01.2012 01.01.2013

Low Quality Debt High Quality Debt Short Term Treasuries

Page 17: 2013 08-02-presentation-fixed income investing in the current environment

17

Fixed Income Total ReturnFixed Income Total Return

Portfolio Objective: The Fixed Income Total Return

strategy is designed to deliver excess alpha over a full

market cycle measured against Barclays Capital U.S. High

Yield Bond Index and Barclays Capital U.S. Aggregate Bond

Index. The strategy seeks total return with a secondary goal

of current income.

Fixed IncomeTotal ReturnFixed IncomeTotal Return

Short-Term Treasuries

High QualityDebt

Low Quality Debt

Page 18: 2013 08-02-presentation-fixed income investing in the current environment

18

Fixed Income Total ReturnFixed Income Total Return

Fixed IncomeTotal ReturnFixed IncomeTotal Return

Short-Term Treasuries

High QualityDebt

Low Quality Debt

Portfolio Objective: The Fixed Income Total Return

strategy is designed to deliver excess alpha over a full

market cycle measured against Barclays Capital U.S. High

Yield Bond Index and Barclays Capital U.S. Aggregate Bond

Index. The strategy seeks total return with a secondary goal

of current income.

Low Quality Debt

HYG iShares iBoxx $ High Yield Bond

JNK Barclays High Yield Bond SPDR

PHB PowerShares High Yield Corporate Bond

SJNK Barclays Capital Short-Term High Yield SPDR

PFF iShares S&P U.S. Preferred Stock

HYS PIMCO 0-5 Year High Yield Corporate Bond

HYLD Peritus High Yield

BKLN PowerShares Senior Loan Portfolio

HYD Market Vectors High Yield Muni Bond

EMHY iShares Emerging Markets High Yield Bond

GHYG iShares Global High Yield Corporate Bond

IHY Market Vectors International High Yield Bond

EMB iShares JPMorgan USD Emerging Markets Bond

EMLC Market Vectors Emerging Markets Local Currency

U.S. Short-Term Treasury

BILBarclays Capital 1-3 Month T-Bill

SPDR

SHV iShares Barclays Short Treasury

Cash Equivalents

High Quality Debt

SHY iShares Barclays 1 -3 Year Treasury

IEI iShares Barclays 3 - 7 Year Treasury

IEF iShares Barclays 7 - 10 Year Treasury

TLT iShares Barclays 20+ Year Treasury

TIP iShares Barclays TIPS Bond

MUB iShares S&P National Municipal Bond

LQDiShares iBoxx $ Investop Investment

Grade Bond

AGG iShares Barclays Aggregate Bond

IGOV iShares S&P/Citi International Treasury

Page 19: 2013 08-02-presentation-fixed income investing in the current environment

19Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information.

Page 20: 2013 08-02-presentation-fixed income investing in the current environment

20Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information.

Page 21: 2013 08-02-presentation-fixed income investing in the current environment

21Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information.

Page 22: 2013 08-02-presentation-fixed income investing in the current environment

22Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information.

Page 23: 2013 08-02-presentation-fixed income investing in the current environment

23Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information.

Page 24: 2013 08-02-presentation-fixed income investing in the current environment

24Source: Morningstar Direct. Pure gross returns do not include the deduction of transaction costs, and are shown as Supplemental Information.

The ranking shown above is not indicative of the adviser’s future performance and may not be representative of any one client’s experience because the ranking reflects an average of all, or a sample of all, the experiences of the adviser’s clients.

Peer group as of 4/15/2013.

Page 25: 2013 08-02-presentation-fixed income investing in the current environment

25

Is the High Yield Run Over?Is the High Yield Run Over?

We believe high yields remain competitive relative to other

fixed income sectors from a technical, valuation and sentiment

standpoint.

High yields may help minimize interest rate risk while

providing above average yields

Fed’s intention to maintain low interest rates until

unemployment dips below 6.5% combined with investors’

continued hunger for yield makes the lower quality debt

space attractive from an income standpoint

Hunt for yield has been an overarching theme of the last few

years; investors are looking for opportunities

Page 26: 2013 08-02-presentation-fixed income investing in the current environment

26

Page 27: 2013 08-02-presentation-fixed income investing in the current environment

27

Compliant PresentationCompliant Presentation

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. Not every client's account will have

these exact characteristics. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not

limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment.

Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics

or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security. There is

no assurance that any securities discussed herein will remain in an account's portfolio at the time you receive this report or that securities sold have not

been repurchased. The securities discussed may not represent an account's entire portfolio and in the aggregate may represent only a small percentage

of an account's portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be

profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of

the securities discussed herein.

Firm Information: Clark Capital Management Group, Inc. (Clark Capital) is an investment advisor registered with the United States Securities and

Exchange Commission under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. Clark

Capital is a closely held, mostly employee owned C Corporation with all significant owners currently employed by the firm in key management capacities.

The firm specializes in managing equity and fixed income portfolios for individuals and institutions. More information about Clark Capital’s advisory

services and fees can be found in its Form ADV which is available upon request.

Calculation Methodology: Composite returns assume reinvestment of income and other earnings, are gross of withholding taxes, if any, and are reported

in US dollars. Returns prior to 1/1/07 were calculated using the Modified Dietz method. Beginning 1/1/07 returns are calculated daily. Internal dispersion

is calculated using the equal-weighted standard deviation of annual account returns for those accounts included in the composite for the entire year.

Trade date accounting is used. Leverage is not used in the composite. The composites are comprised of all fully discretionary accounts managed in the

strategy for one full month, including those accounts no longer with the firm. Closed accounts are included through the completion of the last full month

of eligibility. A copy of the complete list and description of Clark Capital’s composites, verification and performance examination reports, and policies for

valuing portfolios, calculating performance, and preparing compliant presentations are available upon request.

Page 28: 2013 08-02-presentation-fixed income investing in the current environment

28

Compliant PresentationNavigator® Fixed Income Total Return Composite Compliant PresentationNavigator® Fixed Income Total Return Composite

Page 29: 2013 08-02-presentation-fixed income investing in the current environment

29

Compliant PresentationNavigator® Fixed Income Total Return Composite Compliant PresentationNavigator® Fixed Income Total Return Composite

Past performance does not guarantee future results. Client account values will fluctuate and may be worth more or less than the amount invested. Clients should

not rely solely on this performance or any other performance illustrations when making investment decisions.

Clark Capital claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the

GIPS standards. Clark Capital has been independently verified for the periods January 1, 2002 through December 31, 2011. Verification assesses whether (1) the

firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm’s policies and procedures are

designed to calculate and present performance in compliance with the GIPS standards. The Navigator Fixed Income Total Return composite has been examined for

the periods from 1/1/2005 through 12/31/2011. The verification and performance examination reports are available upon request.

Composite Description: The Navigator Fixed Income Total Return composite is designed to maximize total return by rotational management of a fixed income

portfolio invested in Low Quality Bonds (high-yield), High Quality Corporate and Government Bonds, and Short-term Treasuries. The strategy seeks to take

advantage of the performance differential between segments of the bond market under different market conditions. Through investment in segments of the fixed

income market believed to be the strongest performer in the near term, the portfolio may have the opportunity to outperform the broad bond market without

exposure to the risk of the equity market. Active management supported by in-depth, internally generated research seeks to pursue superior performance results

with greater consistency and lower volatility of returns. The portfolio invests in exchange-traded funds and mutual funds targeting high yield corporate,

investment grade corporate, government, government agency and treasury fixed income sectors. The strategy has an unconstrained allocation policy. The goal of

the strategy is capital preservation while outperforming an unmanaged buy and hold investment.

In a Clark Capital sponsored wrap fee program, the net-of-fee returns reflect the maximum Investment Advisory Fee (including trading and custody expenses) of

.85% and the maximum Consultant Fee of 1.25%, debited monthly for an annual total of 2.1%. If a lower Consultant Fee were reflected in the performance data,

returns would be higher. In a non-Clark Capital wrap fee program, the net-of-fee returns reflect the highest maximum annual fee of 3%, (includes trading and

custody expenses) debited monthly. Actual fees may differ from the fees used in this presentation depending upon account size, investments and agreement with

client.

Benchmark Description: The benchmark is the Barclays U.S. Corporate High-Yield Index. The Barclays U.S. Aggregate Bond Index is a supplemental benchmark. The

Barclays U.S. Corporate High-Yield Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified

as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. The Barclays U.S. Aggregate Bond Index covers the U.S. investment-grade

fixed-rate bond market, including government and credit securities, agency mortgage pass-through securities, asset-backed securities and commercial mortgage-

based securities. To qualify for inclusion, a bond or security must have at least one year to final maturity, and be rated investment grade Baa3 or better, dollar

denominated, non-convertible, fixed rate and publicly issued. The benchmarks for this composite are used because the Barclays U.S. Corporate High-Yield Index is

generally representative of U.S. high yield fixed income and the Barclays U.S. Aggregate Bond Index is generally representative of broad based U.S. fixed income.

Index returns reflect the reinvestment of income and other earnings and are provided to represent the investment environment during the time period shown.

The volatility (beta) of the Composite may be greater or less than its respective benchmarks. It is not possible to invest in these indices.

Page 30: 2013 08-02-presentation-fixed income investing in the current environment

30

Statistic DescriptionsStatistic Descriptions

Standard Deviation: A statistical measure of dispersion about an average which depicts how

widely the returns varied over a certain period of time.

3 Year Standard Deviation: The 3 year annualized standard deviation measures the

variability of the composite and the benchmark returns over the preceding 36-month

period.

Beta: A measure of systematic risk with respect to a benchmark. Systematic risk is the

tendency of the value of the composite and the value of a benchmark to move together.

Beta measures the sensitivity of the composite’s excess return (total return minus the risk-

free return) with respect to the benchmark’s excess return that results from their systematic

co-movement. It is the ratio of what the excess return of the composite would be to the

excess return of the benchmark if there were no composite-specific sources of return. If

beta is greater than one, movements in value of the composite that are associated with

movements in the value of the benchmark tend to be amplified. If beta is one, they tend to

be the same, and if beta is less than one, they tend to be dampened. If such movements

tend to be in opposite directions, beta is negative. Beta is measured as the slope of the

regression of the excess return on the composite as the dependent variable and the excess

return on the benchmark as the independent variable.

The beta of the market is 1.00 by definition. Morningstar calculates beta by comparing a

portfolio's excess return over T-bills to the benchmark's excess return over T-bills, so a beta

of 1.10 shows that the portfolio has performed 10% better than its benchmark in up

markets and 10% worse in down markets, assuming all other factors remain constant.

Conversely, a beta of 0.85 indicates that the portfolio's excess return is expected to perform

15% worse than the benchmark’s excess return during up markets and 15% better during

down markets.

Alpha: A measure of the difference between a portfolio’s actual returns and its expected

performance, given its level of risk as measured by beta. A positive alpha figure indicates

the portfolio has performed better than its beta would predict. In contrast, a negative alpha

indicates the portfolio has underperformed, given the expectations established by beta.

Alpha is calculated by taking the excess average monthly return of the investment over the

risk free rate and subtracting beta times the excess average monthly return of the

benchmark over the risk free rate.

Sharpe Ratio: A risk-adjusted measure developed by Nobel Laureate William Sharpe. It is

calculated by using standard deviation and excess return to determine reward per unit of

risk. The higher the Sharpe Ratio, the better the composite's historical risk-adjusted

performance. The Sharpe ratio is calculated for the past 36-month period by dividing a

composite's annualized excess returns by the standard deviation of a composite's

annualized excess returns. Since this ratio uses standard deviation as its risk measure, it is

most appropriately applied when analyzing a composite that is an investor's sole holding.

The Sharpe Ratio can be used to compare two composites directly on how much risk a

composite had to bear to earn excess return over the risk-free rate.

R-Squared: Reflects the percentage of a portfolio's movements that can be explained by

movements in its benchmark.

Downside Capture Ratio: Measures a manager's performance in down markets. A down-

market is defined as those periods (months or quarters) in which market return is less than

0. In essence, it tells you what percentage of the down-market was captured by the

manager. For example, if the ratio is 110%, the manager has captured 110% of the down-

market and therefore underperformed the market on the downside.

Upside Capture Ratio: Measures a manager's performance in up markets relative to the

market (benchmark) itself. It is calculated by taking the security’s upside capture return and

dividing it by the benchmark’s upside capture return.

Bull Beta: A measure of the sensitivity of a composite’s return to positive changes in its

benchmark’s return.

Bear Beta: A measure of the sensitivity of a composite’s return to negative changes in its

benchmark’s return.

Best Month: This is the highest monthly return of the investment since its inception or for as

long as data is available.

Worst Month: This is the lowest monthly return of the investment since its inception or for

as long as data is available.

Maximum Gain: The peak to trough incline during a specific record period of an investment

or composite. It is usually quoted as the percentage between the peak to the trough.

Maximum Drawdown: The peak to trough decline during a specific record period of an

investment or composite. It is usually quoted as the percentage between the peak to the

trough.

CCM-13-06-630