Strategy Overview: The Kovitz Hedged Equity Strategy seeks to capture the majority of returns associated with U.S. equities with the goal of exposing an investor to significantly less risk than U.S. equity indices. The strategy purchases investments in U.S. based companies believed to be significantly undervalued. We seek to reduce risk through the use of listed options. Examples include selling call options or purchasing put options. With over $440 million in strategy AUM and an inception date of 1998, the strategy has successfully navigated through varied economic and financial environments including a tech bubble, a housing bubble, the financial crisis, and a commodity boom and bust.

Strategy Philosophy: Long Philosophy The strategy employs a private owner approach with a 3-5 year time horizon for long positions. This is more akin to a private equity investor’s time horizon, while utilizing the public markets for liquidity. We believe focusing on a long-term time horizon is a significant advantage as most equity investors utilize a much shorter time horizon. Additionally, the low turnover of long positions increases the tax efficiency of the strategy as the majority of the strategy’s realized gains have been long term in nature. Short Philosophy Portfolio risk is primarily managed through the use of listed options. The option overlay program uses both call and put options in various combinations to optimize the level of upside capture relative to the amount of downside risk the strategy is willing to assume.

Portfolio Construction: The investment team maintains a universe of approximately 400 businesses. To be a member of this universe, each company has passed quantitative and qualitative assessments meant to judge the sustainability of a company’s long-term competitive advantage. This universe is then ranked by current stock prices versus a conservative estimate of long term private market value. As stock prices deviate from the initial estimate of fair value, each member of the investment team conducts an independent analysis. The long portfolio is comprised of the highest conviction ideas, while maintaining diversification across sectors, industries, and shared risk factors. The short portfolio utilizes an option-overlay strategy in an attempt to mitigate the risks inherent in the long portfolio. Factors that influence the hedging structure include: company valuations, economic risks, and option market volatility.

Risk Management: Net long biased (50-100%) with option overlay program to hedge large downside risks. The option overlays can reduce net exposure to 0% to -25% in certain downward scenarios. Tail hedges are used to mitigate unforeseen risks. The portfolio has very high liquidity. The strategy has been managed with daily liquidity since Internally developed portfolio-level stress testing models. Intraday third-party risk models monitoring the portfolio at all times.

Winning Trade Example: In 2013, Kohl’s (NYSE:KSS) stock price declined sharply to the mid $40s per share from the mid $50s per share following a quarterly earnings report where same store sales were below expectations. While the short term results were unfavorable, we continued to estimate the intrinsic value of the business in the range of $70-80 per share. Weak same store sales were likely cyclical in our opinion, while the stock was trading at a free cash flow multiple implying little to no growth forever. Company management was prudently taking advantage of the depressed valuation by aggressively repurchasing shares at attractive valuations. If in fact earnings did not grow, the company was returning a total cash yield of greater than 9% annually through dividends and shares repurchases. We added aggressively to our position at $47.01and recently trimmed the position at $73.80.

Losing Trade Example: The strategy sold Coach in 2015 at $37.50 believing the valuation is fair. The strategy’s average cost was approximately $ We categorize this mistake as being caught in a value trap - valuation seemed low after the company lost share to the competition, but Coach’s challenges are proving permanent rather than cyclical. Given the increased cost structure necessary to reinforce the company’s competitive position, normalized earnings will likely be in a range meaningfully below our original estimate for the next 3-5 years. Given our change in estimated intrinsic value, we exited the position.

Company Overview: Kovitz Investment Group, LLC® (KIG), is a privately held registered investment advisor founded in With over $3 billion in assets under management, KIG provides investment management and financial planning services for institutions, financial advisors, and high net worth investors. KIG is independently owned by nine principals, whom in aggregate have greater than 90% of their liquid net worth invested in KIG strategies.

Management Bios: Mitchell A. Kovitz, CFA, CPA Founder & Principal Chief Executive Officer, Co-Chief Investment Officer & Portfolio Manager Mitch co-founded Kovitz Investment Group, LLC with his partners in Mitch is involved in all aspects of the research and investment process for the Kovitz Hedged Equity Strategy, including formulation of the investment thesis, financial modeling and portfolio construction decisions. He has more than 20 years of investment experience. Prior to founding KIG, Mitch served as Vice President in 1995, Chief Operating Officer in 2001 and President in 2002 at Rothschild Investment Corporation. Mitch graduated from the University of Illinois at Urbana-Champaign in 1986 with a Bachelor of Science degree in Accounting. He became licensed as a Certified Public Accountant in August 1986 and received a Masters in Taxation from the University of Illinois in Mitch is a CFA ® Charterholder. Jonathan A. Shapiro, MBA, CFA Founder & Principal Co-Chief Investment Officer & Portfolio Manager Jon co-founded KIG with his partners in Jon is involved in all aspects of the research and investment process for the Kovitz Hedged Equity Strategy, including formulation of the investment thesis, financial modeling and portfolio construction decisions. He has more than 14 years of investment experience and held several positions prior to founding KIG, including Analyst at Vector Securities from 1997 to 1999 and Management Consultant with KPMG and Towers Perrin from 1986 to Jon graduated from Carleton College in 1986 with a Bachelor of Arts degree in Mathematics. He later received his MBA degree from the University of Chicago Graduate School of Business with concentrations in finance and accounting. He is also a CFA ® Charterholder and a member of the CFA Society of Chicago. Joel D. Hirsh, CFA Principal, Portfolio Manager Joel focuses on equity research and portfolio management of the long/short and long-only equity strategies at KIG. Joel is involved in all aspects of the research and investment process for the Kovitz Hedged Equity Strategy, including formulation of the investment thesis, financial modeling and portfolio construction decisions. Prior to joining KIG in 2006, Joel worked as an equity research analyst for KeyBanc Capital Markets, a Division of McDonald Investments. In his previous role, Joel focused on fundamental research in an award- winning basic materials research group. He is a member of the CFA Society of Chicago's Education Advisory Group. Joel graduated from the University of Michigan with a Bachelor of Arts degree in Economics. He is a CFA ® Charterholder and member of the CFA Society of Chicago.