1. Tactical Asset Allocation: History, Theory & Practice Brian Schreiner Schreiner Capital Management, Inc. Exton, PA - www.scminvest.comwww.scminvest.com June 26, 2014

2. Introduction 2 Two Types of Investment Strategies: › Passive Investing or… Buy-and-Hold or… Strategic Asset Allocation › Active Investing or… Tactical Asset Allocation

3. Agenda 3 › Background - What is Tactical Asset Allocation (TAA)? - How is TAA different from Strategic Asset Allocation (SAA)? › History - TAA from the Old Testament to Today - The evolution of TAA › Theory - Why has TAA become more popular in recent decades? - What are the potential benefits and risks of TAA? › Practice - What are the different approaches, objectives and benchmarks? - Focus on trend following › Q & A

4. Background 4 › Definitions | What is TAA? “Tactical asset allocation (TAA) broadly refers to active strategies which seek to enhance performance by opportunistically shifting the asset mix of a portfolio in response to the changing patterns of reward available in the capital markets.” - Arnott & Fabozzi, Asset Allocation: A Handbook of Portfolio Policies, Strategies & Tactics, 1998 “Tactical asset allocation (TAA) actively adjusts a portfolio’s strategic asset allocation (SAA) based on short-term market forecasts [or trends]. Its objective is to systematically exploit inefficiencies or temporary imbalances in equilibrium values among different asset or sub-asset classes.” - Vanguard Research, 2010:

5. Background 5 › How is Tactical Asset Allocation (TAA) different from Strategic Asset Allocation (SAA)?

6. History 6 In the beginning…there were “Speculators” 1011 BCDiversification: King Solomon FAST FORWARD 2,645 Years… 1634-1637Market Trends: Tulip Mania in Holland 1890s Professional Money Management: The Robber Barons 1899-1902Trend Following: Charles H. Dow 1934Value Investing: Benjamin Graham “Security Analysis” 1930s, 40s, 50s…and beyond: Published works on many types of investing

7. History 7 1976Tactical Asset Allocation: William Fouse of Wells Fargo 1980The Information Age begins: Business Computers & PCs 1981US stocks decline 27% 1987Global stock markets crash 1991The Internet: A Global Network (data as we know it) 1990sGreatest bull market in US history - TAA underperforms 2000Tech Bubble peak (March 10) 2007-08Financial Crisis

8. Theory 8 › Why use TAA? 1.Return expectations from stocks and bonds are very low over next decade. - Investors are seeking more attractive returns. 2.Stock and bonds are expensive - priced near all-time highs. - Investors want to limit exposure to risky assets. 3. Volatility has been low and will likely increase. - SAA is highly volatile - investors can reduce volatility through TAA

9. Theory 9 › Who is using TAA? Everyone…- Institutions - Endowments - Pension Funds - Professionals/Family Offices - Individual Investors

10. Theory 10 2007200920112013 Strategic50%48%65%65% Tactical35%39%27%22% Other15%19%8%13% › Percentage of RIAs who describe their overall investment approach as: Source: AdvisorBenchmarking.com 2013

11. Theory 11

12. Theory: Return Expectations are Very Low 12 Expected return from a 60/40 stock/bond portfolio is 2.3% over the next decade.

13. Theory: Stocks & Bonds Near All-Time Highs 13 STOCKS BONDS

14. Theory: Stock Market Volatility May Rise 14 CBOE Volatility Index (VIX)

15. Theory: Stocks are Expensive by Historical Standards 15

16. 16 Source: CrestmontResearch.com Theory: Opportunities Exist for Active Investors

17. 17 Source: Schreiner Capital Management, Inc. & Yahoo! Finance

18. Practice 18 › Benchmark: TAA strategies are usually measured against a passive benchmark. › Objective: Better-than-benchmark returns and/or Less-than-benchmark risk › Approach: 1. Subjective 2. Quantitative 3. Combination of the two

19. Practice 19 › Commonly Used Quantitative TAA Strategies 1.The Fed Model Signals (Fundamental) Compares stock earning yields to bond yields to determine relative strength 2.Macroeconomic or Business-Cycle Signals (Fundamental) Measures variations in market risk premiums and firms’ earnings 3.Fundamental Valuation Signals (Fundamental) Bottom-up (firm-valuation based on dividend yield, book/market ratio, PE ratio) and/or Top-down (dividend discount model) valuation metrics. 4.Trend Following Signals (Technical) Technical analysis of market data (mostly price) to identify momentum 5.Sentiment (Technical) A contrarian approach that looks for signs of extremes (ie: consumer/investor confidence, margin borrowing)

20. Practice 20 › Primary Types of Trend Following: 1. Trend Line Analysis /Charting 2. Moving Average Systems 3. Relative Strength Indicators

21. Practice 21 › Trend Following Using Trend Line Analysis/Charting Support Resistance Channels Bands Flags Candlesticks Rates of Change Oscillators Clouds Heads Shoulders …it’s endless

22. Practice 22 › Trend Following Using Moving Average Systems Source: Schreiner Capital Management, Inc. For financial professional use only. This is a hypothetical example for illustration purposes only.

23. Practice 23 › Trend Following Using Relative Strength Indicators Relative Strength indicators measures the change and direction of price movements. Relative Strength =% change Industry Sector Fund ÷ % change in Benchmark

24. Practice 24 › Trend Following Using Relative Strength Indicators

25. Practice 25 › Trend Following Using Relative Strength Indicators

26. Practice 26 › Primary Considerations for Investors Investment Profile - Investment Personality - Investment Goals - Portfolio Profile - Risk Tolerance - Time Horizon Due Diligence - Investment Manager(s) - Investment Vehicle - Investment Philosophy - Investment Process Implementation - Execution Costs/Fees - Tax Implications - Opportunity Costs

27. 27 Questions? Tactical Asset Allocation: History, Theory and Practice Brian Schreiner Schreiner Capital Management, Inc. Exton, PA 610-524-7310 bschreiner@scminvest.com

28. Sources 28 Arnott, Robert and Fabozzi. Asset Allocation: A Handbook of Portfolio Policies, Strategies & Tactics. Probus Publishing Co., 1998. Faber, Mebane T. “A Quantitative Approach to Tactical Asset Allocation.” The Journal of Wealth Management. Spring 2007. Working Paper, Updated February 2009. Electronic copy available at: http://ssrn.com/abstract=962461. Ivanova, Maya. AdvisorBenchmarking Annual Research Study. AdvisorBenchmarking.com. 2008-10. Loeb, Gerald M. The Battle for Investment Survival. New York: John Wiley & Sons, Inc., 1935. MacKay, Charles LL.D. Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. Mansfield Centre, CT: Martino Publishing, 2009. (First published: 1852) Mallik, Gaurav. “Mitigating Equity Market Correlations Through Stock Selection.” SSgA Capital Insights. August, 2009. Ostgaard, Stig. “On the Nature and Origins of Trend-Following.” December, 2008. www.lastatlantis.com. Stockton, Kimberly A. and Shtekham, Anatoly. “A Primer on Tactical Asset Allocation Strategy Evaluation.” Vanguard Research. 2010. Shiller, Robert J. Irrational Exuberance. Second Edition. Princeton University Press: 2005. www.irrationalexuberance.com Wai, Lee. “Advanced Theory and Methodology of Tactical Asset Allocation.” Duke University. January 2000.