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© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
Expert investing advice. World-class investment research. FOR MORE INFORMATION PLEASE VISIT - WWW.INDEXSTRATEGYADVISORS.COM
CALL 1-800-984-0268 TO SPEAK WITH AN INVESTMENT ADVISOR
Slide 1 of 29
Investment Methodology
ISA portfolios are designed to help investors navigate
significant and unstable movements in financial
markets to obtain potentially increased returns.
Portfolio results are achieved through disciplined risk
management, situational awareness, global
diversification and dynamic asset allocation.
ISA is leading investors toward new avenues of risk management and portfolio growth.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
Expert investing advice. World-class investment research. FOR MORE INFORMATION PLEASE VISIT - WWW.INDEXSTRATEGYADVISORS.COM
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Slide 2 of 29
1. Capital Preservation
Diversification through asset allocation works, but It needs to be more dynamic.
As witnessed during the Credit Crisis of
2008-2009, the benefits of
diversification may not always
perform to expectations. One way to
maintain an equity allocation favorable
for growth while introducing a level of
downside risk management is dynamic
asset allocation.
ISA Portfolios apply dynamic asset
allocation strategies through overlay
risk management to minimize fees,
maximize the capture of a rising
market, and facilitate an efficient
flight to safety when markets
turn for the worse.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
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Slide 3 of 29
1. Capital Preservation
Diversification through asset allocation works, but It needs to be more dynamic.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
Expert investing advice. World-class investment research. FOR MORE INFORMATION PLEASE VISIT - WWW.INDEXSTRATEGYADVISORS.COM
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Slide 4 of 29
1. Capital Preservation
For periods of one to five years since 1926, most portfolio blends delivered positive real or after-inflation returns.
For periods of one-to-five years since 1926*, most portfolio blends delivered positive real or after-inflation
returns. In longer holding periods, larger equity exposures generally raised the frequency of positive real
returns.
*Average portfolio performance between December 30, 1926 through December 30, 2010. Source: Standard & Poors
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
Expert investing advice. World-class investment research. FOR MORE INFORMATION PLEASE VISIT - WWW.INDEXSTRATEGYADVISORS.COM
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Slide 5 of 29
1. Capital Preservation
Volatility limits performance.
Because volatility is time varying,
“annualizing” performance cannot
provide a complete or transparent
measure of a risk management
approach. Through dynamic asset
allocation, and overlay risk
management, risk adjusted
performance can be more readily
achieved and measured. This
experience emphasizes the need to
incorporate shorter-term emphasis into
risk management practices that
typically are built with historic long-
term returns in mind.
ANNUAL MARKET RETURNS 1927-2008
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
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Slide 6 of 29
1. Capital Preservation
On a long term basis and throughout all of history, stock returns are more highly correlated during volatile market downturns than during market upturns, exacerbating the risk consideration for equity investors.
U.S. EQUITY MARKET TOTAL RETURNS, BY STYLE*
*From market peak to bottom(October 2007 through end March 2009)
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Slide 7 of 29
1. Capital Preservation
Normally, investors can count on bonds or alternative investments to help cushion the impact of volatile equity market downturns.
However, this was not true in 2008 for corporate
bonds, which sold off alongside equities. While the
Lehman (now Barclays) Aggregate Index generated a
positive return, this mainly reflected a rally in
treasuries. Nonetheless, because fixed income
managers typically do not have large treasury
holdings, returns for the vast majority of bond
managers were considerably below their benchmark.
Finally, alternative investments failed to offer any
downside protection. Thus, 2008 returns were negative
for every category. Consequently, with the exception of
cash and treasuries, portfolio construction made little
difference to investment returns.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
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Slide 8 of 29
1. Capital Preservation
Making matters worse, unprecedented correlation levels have been steadily rising in the U.S. since 1995 and world-wide since 2003.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
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Slide 9 of 29
1. Capital Preservation
In equities, the case for dynamic asset allocation vs. traditional diversification is perhaps best punctuated by the new reality that growth stocks are priced the same as value stocks.
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Slide 10 of 29
2. ISA's Multifactor Risk Management
Simple Classification
Risk is assessed from
the interactions
between three
groupings of factors:
Behavioral, Catalyst,
and Technical.
Rigorous Analysis
The causes of declining
markets are multi-faceted;
they are not influenced by a
singular factor.
ISA algorithms analyze
dimensions of 33 sub
factors, their interactions and
the extent of their
determination on market
returns.
Timely Execution
Risk factor data are used to
determine the optimal
portfolio composition for
the prevailing market
environment, while also
monitoring the current
portfolio’s susceptibility to
market risk.
By managing the exposure of the portfolio to well understood risk factors, capital can be protected from downward trending markets before it is too late.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
Expert investing advice. World-class investment research. FOR MORE INFORMATION PLEASE VISIT - WWW.INDEXSTRATEGYADVISORS.COM
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Slide 11 of 29
2. ISA's Multifactor Risk Management
For greater clarity within immensely complex inter-market dynamics, we manage risk factors within three categories:
Technical Risk Factors depict in
quantifiable detail, the trends forming
between traders across global stock
exchanges.
Behavioral Risk Factors of market participants express
whether investors are bullish (paying more for stocks) or
bearish (paying less for stocks), which establishes the
direction of a trend and helps to formulate estimations of
the duration of that trend.
Catalyst Risk Factors are tracked as event overlays to
technical and behavioral factor price data and can be
evidenced either by news and/or price trend anomaly,
whichever emerges first.
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Slide 12 of 29
2. Multifactor Risk Management
When markets turn negative, the shift in sentiment is reflected not only in the prices of stocks, but it is often preceded by shifts in the attitudes of market participants, transaction data, and world events.
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Slide 13 of 29
2. Multifactor Risk Management
Behavioral risk factors extract the details of live transactions, revealing how changes in investor sentiment impact stock prices.
Behavioral risk factors reflect the subjective buying and selling decisions of market participants.
These data
include the rolling advance/decline ratio and its rate of change. For example, if a stock market
index is rallying,
but there are more issues declining than advancing, then the rally is narrow and much of the
stock market is not
participating. This data set also incorporates bid & ask volume ratios, bid direction and size, the
moving average
of the put/call open interest level, momentum, and institution accumulation/distribution. These
data provide
ISA algorithm engineers with objective, emotionless insight into changing market dynamics.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
Expert investing advice. World-class investment research. FOR MORE INFORMATION PLEASE VISIT - WWW.INDEXSTRATEGYADVISORS.COM
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Slide 14 of 29
2. Multifactor Risk Management
Technical risk factors monitor the key price and time relationships of money flow between global institutional money managers and the investing public.
Investors respond to each others' actions while being influenced by specific expectations and
predictions of
market prices. The historical transactions help to form perceptions of overbought or oversold
levels. When live
transactions approach previous levels, common technical indicators such as moving averages,
mean reversion, and support or resistance become prominent influencers.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
Expert investing advice. World-class investment research. FOR MORE INFORMATION PLEASE VISIT - WWW.INDEXSTRATEGYADVISORS.COM
CALL 1-800-984-0268 TO SPEAK WITH AN INVESTMENT ADVISOR
Slide 15 of 29
2. Multifactor Risk Management
Catalyst risk factors fuel the momentum of buying or selling, leading to a majority sentiment, response, and subsequent trend.
Timeline example of a catalyst risk factor impact: April 16, 2010. SEC charges Goldman Sachs
with fraud in
structuring and marketing of CDOs tied to subprime mortgages.
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Slide 16 of 29
2. Multifactor Risk Management
Catalyst risk factors can be impactful beyond their original time and space.
Stock market returns April 15-May 10, 2010 following catalyst risk factor on April 16, 2010 when
the SEC charged Goldman Sachs with fraud in structuring and marketing of CDOs tied to subprime
mortgages.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
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Slide 17 of 29
2. Multifactor Risk Management
Understanding risk factor interactions is as important to decoding the conditions that lead to market turbulence as understanding the factors themselves.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
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Slide 18 of 29
3. Situational Logic
Situational logic guides the algorithmic
calculations of how changes between risk
factor interactions are transmitted to and
from financial markets. Situational logic
improves upon a "black box" only approach
by seeking contextual answers to the
questions most relevant to effectively
managing an investment portfolio based
on what is happening in the market right
now versus what happened in the past.
Situational logic helps by selecting
the most relevant factors and allows
for a more thorough understanding of
the portfolio's exposure to different
variables, which impact risk factors at
different times and in different
ways, allowing for analyses that are
more precise and lead to better-
informed investment decisions.
Risk must be understood in the context of probability. This understanding can only be achieved with a firm grasp of the factors relevant to the present reality.
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Slide 19 of 29
3. Situational Logic
Causal risk factors and symptomatic risk cycle time variation is important to asset
returns. Even within short time frames, catalyst risk factors with clear historical
relationships shift in scope and complexity as the situation worsens, preventative
measures are taken, and the risk of contagion spreads. The graphic illustrates the
sovereign debt contagion’s impact and increasing pace of varying Euro zone credit crisis
risk factors through the summer of 2010.
Our risk model is not purely dependent on historical relationships, but incorporates 'real time' facts that influence causal interactions.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
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Slide 20 of 29
3. Situational Logic
Selecting the maximum risk factor levels a portfolio is exposed to requires a thorough understanding of each variables time varying relevance.
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Slide 21 of 29
3. Situational Logic
Risk factors are tightly linked when systemic risk is high and indicate a fragile market with increased potential for a collapse of prices.
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Slide 22 of 29
3. Situational Logic
Accurate assessment of portfolio risk requires asking the right contextual questions about the present situation.
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Slide 23 of 29
3. Situational Logic
Question 2: What are the longstanding impactful changes within factor interactions?
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Slide 24 of 29
3. Situational Logic
Question 2: What are the longstanding impactful changes within factor interactions?
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
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Slide 25 of 29
4. Enhanced Return
...and a quarterly rebalance can provide preemptive protection from most corrections.
In the S&P 500, from January
1926 to December 2010,
declines of 5% or more
occurred an average of 3.7
times per year. Declines of 10%
or more occurred 1.3 times per
year, while declines of 20% or
more occurred only 0.5 times
per year.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
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Slide 26 of 29
4. Enhanced Return
For the past 25 years, one or more pre-identifiable ISA risk factors have preceded market corrections over 86% of the time.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
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Slide 27 of 29
Investment advice and portfolio management for the new era
Index Strategy Advisors develops objective, thoughtful solutions to the strategic and tactical investment
challenges faced by individual investors. Our research is the foundation for our thought leadership and
advisory services for investment management clients in the areas of dynamic asset allocation
and risk management.
Our expertise is supported by algorithms built in-house for conducting strategy back-testing, scenario
planning, risk reduction, optimal asset allocation analysis, and precise trade execution in line with client-
specific investment guidelines, risk tolerance, and return requirements. In response to the
rapidly expanding supply of highly focused exchange traded funds (ETFs), our library of algorithms has
been expanded to include ETF screening analytics for assessing and proactively identifying the optimal
ETF securities for portfolio construction.
Our goal with research is to challenge ourselves to think beyond yesterday's assumptions and to seek
insights and innovative thinking that breaks new ground and newly define - or redefine - areas of
opportunity for investors.
© COPYRIGHT 2011 INDEX STRATEGY ADVISORS, INC. ALL RIGHTS RESERVED
Expert investing advice. World-class investment research. FOR MORE INFORMATION PLEASE VISIT - WWW.INDEXSTRATEGYADVISORS.COM
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Slide 28 of 29
See how we put our methodology into action
A retired entrepreneur in his mid 60s requested that ISA develop a hedging strategy that could reduce the
impact of equity market volatility on his $10M fixed income holdings, which represented approximately
65% of the overall portfolio. Included in this example is the analysis we performed and the
recommendations that were made.
http://www.indexstrategyadvisors.com/second-opinion
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Expert investing advice. World-class investment research. FOR MORE INFORMATION PLEASE VISIT - WWW.INDEXSTRATEGYADVISORS.COM
CALL 1-800-984-0268 TO SPEAK WITH AN INVESTMENT ADVISOR
Slide 29 of 29
To learn more about how our investment capabilities can help you, please make an appointment by selecting:
TALK AN ADVISOR
at
www.indexstrategyadvisors.com