2-YEAR ANNIVERSARY REVIEW - Innealta Capital · 2-YEAR ANNIVERSARY REVIEW Having passed the...

COMMENTARY: FEBRUARY 1, 2012

2-YEAR ANNIVERSARY REVIEW

Having passed the two-year mark from the launch of the Innealta Capital portfolios at AFAM | Innealta

Capital, we thought it a fine opportunity to provide a since-inception performance review. Overall, we have

been pleased with the risk-adjusted performance of the rotation portfolios; the Country Rotation Portfolio

has shown particularly strong outperformance relative to its standard benchmark. Among the Risk-Based

Portfolios, absolute performance was strong, while risk-adjusted performance mostly kept pace with the

respective benchmarks.

Core to our, ‘reserving the right to get smarter…better,’ we regularly conduct these reviews to discern the

performance of our individual investments relative to their benchmarks and relative to each other. Always

finding them useful, we decided to share recent observations with you in this month’s commentary.

Even as we offer this review, though, noting in hindsight what worked and what didn’t work, along with

highlights along the lines of, ‘what we’ve learned,’ we’ll reiterate our complete confidence in the quantitative

framework. In particular during such volatile times as these, we remain certain that the risk-managed

approach to investing is the most defensible method to preserve and grow capital.

Innealta C A P I T A L

2FEBRUARY 1, 2012

CONTEXT OF THE PERFORMANCE REVIEW

Core to the intention of these strategies is the risk-relative context of the quantitative framework and the design of the

portfolios. We’ll present both the absolute performance of the portfolio—meaning the total return—and the risk-

relative return1. In fact, maximization of the latter is the focus of our work; such efforts may even come at the expense

of the former. Ideally, though, one might be able to succeed in the pursuit of both. Over the past two years, one could

argue we’ve generally succeeded in those pursuits.

In regard to the various charts shown in the following, for your convenience we’ve pulled them together in an

appendix at the back of the commentary. We also have attached our fact sheets for each product.

Benchmark Background

We invest at the asset class level and—by product design—include/exclude and overweight/underweight individual

asset classes that, as a group, roll up to a particular high-level, aggregate index. There’s generally one for the equities

and one for the fixed income. Might seem relatively straightforward, then, to divine the appropriate benchmark

against which to compare product performance.

Alas, there are several levers one adjusts when tuning a benchmark, and that process sometimes requires

compromises between various goals. In our case, given the great breadth of investment opportunities available to the

products, one might try to be sure to include adequate representation for each within the benchmark. But the result

would be utterly unwieldy and likely not very useful for performance comparisons’ sake either to the portfolio

manager or the client. On the other hand, one might take a far more simplistic route and suggest that—an example of

the extreme here—the risk-free rate is the best benchmark and leave it at that. Similarly, the resulting comparisons

would be far from useful.

The better answer lies somewhere in between, in our minds closer to the simpler end of that spectrum. In our

benchmarks, which we are fit to alter over time as we incorporate newly available asset classes (via newly launched

ETFs) into the mix, we generally seek to express the aggregate equity (e.g. U.S. markets, via the S&P 500, or global

markets via the MSCI All Country World Index) and fixed income exposures (e.g. the Barclays Capital U.S. Aggregate)

in a mix that the portfolio might expect to average over the long term. Meantime, we leave out minor potential

exposures (e.g. real estate and gold) as those investments that we purposefully make to edge out benchmark

performance, the results of which we’d specifically like to be able to discern from the performance attribution.

Even more, there’s a disclosure common to performance reports that goes something like, “One cannot invest directly

in an index.” How true. This is particularly pertinent to those indices within the fixed income realm, where

component securities often can go untraded for large periods of time and therefore may represent stale pricing, or in

emerging markets, to which non-resident investors have at best limited and convoluted access. The number of

individual investments matters greatly, too, insofar as rebalancing costs might make reconstructing the index in the

real world a uniquely costly challenge—generally overwhelmingly so. For example, according to data provided from 1 For the purposes of this review, we calculate the risk-relative return simply as the annualized total return divided by the annualized

standard deviation of daily returns over a specific time period (return per unit of risk). In an environment when the risk-free rate is

minimal, there’s no grand extra benefit to calculating the Sharpe ratio (which takes into consideration the excess return of the

portfolio over the risk-free rate). Readers should consult the end of this report for additional details about the data we used in these

analyses.

3

Barclays Capital via Bloomberg, the Barclays U.S. Aggregate Bond Index contained upwards of 7,800 issues at the end

of 2011.

Must sound more than a bit like an advertisement for exchange traded funds (ETFs). Indeed, it is for these and many

other reasons that ETFs exist. And for these reasons that the ETF industry has grown so quickly. It is also for these

reasons that, for the purposes of these analyses, which very much follow our own internal benchmarking thoughts

and methodology, we utilized benchmarks constructed of the ETFs that represent the common asset class exposures

against which we think we should compare our performance. In Figure 1, we list the ETF-based benchmarks we have

used for this study along with the indices that the various ETFs are meant to track2.

Figure 1: Benchmark Compositions

1Core and Opportunity portfolios. SOURCE: Innealta Capital

The result, we believe, is most direct, apples-to-apples comparison that one could make for the results of our work.

The analytics seek to answer the question, “Is there benefit to tactical management?” Or, better, “Is there benefit to

Innealta Capital’s tactical management?” Or, from our perspective, “How can we use this information to do better?”

With that frame of reference, onto the review…

COUNTRY ROTATION PORTFOLIO

Detailed in Figure 2, over the past two years, the Country Rotation Portfolio (CRP), on both an absolute gross-of-fee

and net-of-fee basis, as well as on a risk-adjusted basis, substantially outperformed its benchmark, which is

comprised of a quarterly-rebalanced 40%/60% mix of the Vanguard Total Bond Market ETF (BND) and the iShares

MSCI ACWI ex. U.S. Index Fund (ACWX), respectively. On a cumulative basis, which we show in Figure 2, the

portfolio handily outran the benchmark.

Immediately, one might notice a striking difference in the two return series: the benchmark (grey line) made for a

much more volatile ride over the past two years. Much of the whip-sawing about, in our view, was driven by the ill-

devised policies of our central bank, in addition to the inability of the European Union to come to terms with its

2 We have written extensively on the topic of tracking error in ETFs, including a forthcoming piece: An Empirical Analysis of

Exchange Traded Funds, Journal of Portfolio Management, Gerald W. Buetow and Brian J. Henderson.

40% Vanguard Total Bond Market (BND) Barclays Capital U.S. Aggregate Bond TR Unhedged60% iShares MSCI ACWI ex. U.S. Index (ACWX) MSCI All-Country World Index ex. U.S.

40% Vanguard Total Bond Market (BND) Barclays Capital U.S. Aggregate Bond TR Unhedged60% SPDR S&P 500 ETF Trust S&P 500

Fixed Income 100% Vanguard Total Bond Market (BND) Barclays Capital U.S. Aggregate Bond TR Unhedged

60% Vanguard Total Bond Market (BND) Barclays Capital U.S. Aggregate Bond TR Unhedged40% iShares MSCI ACWI Index Fund (ACWI) MSCI All-Country World Index



Conservative

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Rotation Portfolios

Risk-Based Portfolios1

Weights IndicesETFs

Country

Sector1

4FEBRUARY 1, 2012

members’ insolvencies. Quick to pile on, equity investors have time and again been let down as their misguided hopes

for a return to robust economic expansion have been erased by the reality of consumer timidity and sovereign fiscal

retrenchment. Meantime, while it has seen its own ups and downs, the portfolio managed a far tamer showing.

Indeed, the return per unit of risk (again, the annualized total return divided by the annualized standard deviation of

daily returns) for the benchmark was just 0.12, while that for the CRP was 1.38 on a gross-of-fee basis.

Figure 2: Country Rotation Portfolio Standard Performance

As of 12.31.11. Portfolio inception is 12.31.09. SOURCE: Innealta Capital via Morningstar

Generally speaking, income weights heavily in our analyses, primarily for its ability to provide long-term stability to

portfolios, as well as its generally strongly positive contribution to the long-term returns of most asset classes

(outside, of course, of non-income-generating asset classes, such as commodities). Generating approximately three-

fifths of the overall portfolio return over the time frame, portfolio income arose primarily from the fixed income

allocations, though several of the equity positions also offered substantial income as well.

Along with a portfolio yield that ranged between 4% and 5% since December 2009, no small portion of the capital

gains also came from the fixed income allocation, which averaged 85% of the portfolio over the past two years. The

largest single asset-class allocation, High Yield managed the greatest contribution, sourced entirely from income, as

the asset class actually turned in a slight capital loss over the period. Additionally, the Aggregate Bond and 7-10-year

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CRP (gross) Country Rotation Benchmark (ETF)

Absolute Return

1-Quarter 1-Year Inception

CRP (gross) 4.90% 9.40% 8.36%CRP (net) 4.09% 7.29% 7.08%Country Rotation Benchmark (ETF) 4.37% -4.83% 2.12%

Return/Risk

Latest 250-Day InceptionCRP (gross) 1.93 1.38CRP (net) 1.53 1.17

Country Rotation Benchmark (ETF) -0.36 0.12

5

Treasury exposures also turned in strongly positive performance. The latter, in fact, showed the largest total return

for any fixed income allocation, indicative of continued investor interest in the relative safety and stability of the U.S.

Treasury market. The sole drag on two-year performance in fixed income was the non-dollar-denominated Emerging

Market sovereign debt allocation, for which we achieved a slightly negative total return. (We’ll discuss the specific

performance of the fixed income segments in relation to the Barclays U.S. Aggregate when we review the stand-alone

Fixed Income portfolio).

A testament to the benefit of tactical management, the contributions to return were strongly positive for most all of

the 12 countries in which we invested, even as the through-period total return for the equity benchmark (MSCI ACWI

ex. U.S.) was negative. Leading contributors were Mexico, Switzerland and China, while the only equity investment

that negatively contributed to performance was Australia (NOTE: Australia, along with six other countries, was

owned by the strategy prior to the Innealta Capital portfolio inception on 12.31.09 and once again in the past two

years; both investments in Australia—in their entirety—proved additive, the first having seen a total return in excess

of 10% and the second more than 6.5%).

There was a near 9-month period from the end of August 2010 through the end of July 2011 of cumulative relative

underperformance (on an absolute basis) versus the benchmark, driven primarily by a relative lack of exposure to

equities. Reflecting this underperformance, Figure 3 shows rolling 250-day trailing returns and cumulative

over/underperformance relative to the benchmark. While the fixed income allocations in the portfolio—on average

about 85% of the portfolio, versus just under 38% of the benchmark (During this timeframe. Recall that our

benchmarks rebalance quarterly, with the positions meantime allowed to drift.)—outperformed the Barclays U.S.

Aggregate, and while the total returns of the equity positions—six individual country investments over the

timeframe—kept up with the MSCI ACWI, the fact that equities vastly outperformed fixed income (by almost a 5-to-1

margin) ultimately weighted relative performance. On the contrary, the flight to fixed income starting late in the

summer of 2011 boosted portfolio performance well above that of the benchmark, a gap maintained through the end

of the year.

Figure 3: CRP Rolling Returns and Cumulative Relative Performance

As of 12.31.11. Returns are gross of fees. SOURCE: Innealta Capital via Morningstar

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Importantly, a goal of the core philosophy of the investment approach, the portfolio at worst approximated the

benchmark on a risk-adjusted basis over rolling 250-trading-day periods. In fact, as equity volatility was back on the

rise over the second half of 2011, the portfolio maintained a relatively light level of volatility, leading to a gap upward

in relative risk-adjusted return. When we speak of volatility, we are referencing standard deviation, which we

calculate on a daily basis using total return, gross-of-fee data. In Figure 4, we show rolling 250-day standard deviation

metrics (again, as with rolling 250-day returns, 250-day rolling data are calculated every day for the prior 250 days),

in addition to rolling 250-day return-per-unit-of-risk data (essentially the rolling 250-day daily return series in Figure

3, divided by the rolling 250-day risk series in Figure 4.

Figure 4: CRP Risk and Return/Risk


As trustees of client monies, we are constantly reviewing the portfolio for its suitability for the global macroeconomic

investing environment that our investment framework seeks to quantify and qualify (as investible or avoidable).

There were times during the past two years when the chorus suggested we were in the wrong markets. Such is the

life… But readers should trust that at all times we are pondering our allocations for their fit in the portfolio. That

inspection comes not with a sense of paranoia, but rather with humility in the understanding that few features of

investible markets ever can be ‘known’, with curiosity in the never-ending ability of these markets to surprise and

create opportunity and with the composure that comes from the belief that we’re approaching the effort with the best

intentions and best information in mind.

In the case of the CRP, there were times when, in hindsight, we might like to have added more equity exposure to the

portfolio. When the additional risk was more than sufficiently accompanied by increased return. Still, during those

times, and even in hindsight, the addition of such exposures would have run counter to our belief that a more

defensive approach in volatile times—‘winning by not losing’—is the best manner of stewardship, and certainly was

for the CRP over the past two years. Said more simply, we trust our quantitative framework.

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SECTOR ROTATION PORTFOLIOS

Differently than for the CRP, the past two years offered a bit more challenged a reference point for the Sector Rotation

Portfolio (SRP), as the latter is compared against an equity market with performance that greatly exceeded that of its

global counterparts. Still, detailed in Figure 5, the SRP Core portfolio3 maintained strong outperformance on a risk-

adjusted basis, even as absolute return failed to keep pace with the benchmark, which is comprised of a 40%/60% mix

of the Vanguard Total Bond Market ETF (BND) and the SPDR S&P 500 ETF Trust (SPY).

Figure 5: Sector Rotation Core Portfolio Standard Performance


A mirror of that within the CRP, the fixed income portfolio saw the same strength in High Yield, U.S. Treasuries and

the broader fixed income market allocation (itself comprised heavily of Treasuries), while finding little love in the

emerging market sovereign debt investment.

3 The Core portfolio utilizes sector ETFs that seek to match the performance on a one-for-one basis of their respective indices. The

Sector Opportunity portfolio, discussed in a bit, utilizes leveraged ETFs, which on each day seek to return twice that day’s

performance of their respective indices.

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SRP Core (gross) Sector Rotation Benchmark (ETF)

Absolute Return


SRP Core (gross) 4.32% 9.17% 7.46%SRP Core (net) 3.92% 7.46% 6.62%Sector Rotation Benchmark (ETF) 7.41% 4.82% 8.36%

Return/Risk

Latest 250-Day InceptionSRP Core (gross) 1.87 1.23SRP Core (net) 1.56 1.08

Sector Rotation Benchmark (ETF) 0.24 0.62

8FEBRUARY 1, 2012

Within equities, despite the fact that a fifth of the portfolio was invested in equities, on average, over the last two

years, and despite a relative total return to equities in the SRP—a function of tactical shifts—that was much better

than the performance of the S&P 500, a large relative underweight to the equity space, which outpaced the

performance of the broader fixed income market, pressured relative performance. More simply, our timing and our

picks were good, but we were too light on the overall allocation to equities to bridge the gap to the benchmark

performance.

Not surprisingly—equity markets have tended to be relatively highly correlated over the past two years—we see the

same rockiness in the SRP benchmark return series that we did in that of the CRP. Expressed in Figure 6, there have

been three bouts of this benchmark outperformance, the first two having proved ephemeral. We’re in the midst of the

third round, and given our interpretation of the investment framework and the global macroeconomic situation, we

remain patiently—and in our minds very appropriately—invested on the defensive end of the risk spectrum. Here is

an example of where the framework will suggest a stance that might be sacrificing total return in favor of a more

defensible emphasis on risk-adjusted return.

About those picks…over the course of the two years, we at various times and in the case of some sectors on multiple

occasions, invested in eight of the ten sectors. The Consumer Staples space took up the longest residence, while also

turning in the highest overall contribution to total return. The short investment in the Energy sector last October

proved the second-best investment among equities on a total return basis. On the losing end was one investment,

between April and October 2010, within the Consumer Discretionary space; the total return from that sector was very

slightly negative.

Figure 6: SRP Core Rolling Returns and Cumulative Relative Performance


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Figure 7: SRP Core Risk and Return/Risk


From a risk-adjusted standpoint, however, the story is a different, more positive one. Looking at Figure 7, as was the

case in the CRP, but to a lesser extent, the benchmark proved far more volatile than the portfolio (those ‘bouts’ we

mentioned earlier). And as a result, the SRP’s risk-adjusted returns (on a rolling 250-day basis) kept up with those of

the benchmark through the summer of 2011, and have outrun them since. In fact, cumulative absolute performance of

the SRP equaled that of the bench just before the year-end rally in the S&P.

Comparing the benchmark-relative performance of the SRP Core, one wonders whether we could have done better.

It’s a clearer yes on an absolute basis, and perhaps even a yes on a risk-adjusted basis; for example, the first half of

2011, in hindsight looks like it might have presented more opportunity than we took. We weren’t without equity

exposure back then, but we were far from heavy with it. Still, one must be very careful judging investments with such

hindsight. Again, our efforts were guided by a quantitative framework that emphasized the relatively greater income

and security of fixed income over the potential gains presented by equities. To be sure, we continue to wholly trust

that framework for its ability to identify opportunities for risk-relative reward.

Sector Opportunity Portfolio

As we focused on keeping the allocations to the leveraged ETFs tightly bound to the tactical weights, contributions to

return from the sector investments closely tracked those within the Sector Rotation Core Portfolio. With the freed-up

collateral, however, we were able to boost income by maintaining an additional 10% of the portfolio, on average,

allocated to fixed income, specifically High Yield. Looking at Figure 9, that additional income was sufficient to bring

total cumulative returns closer in line with the benchmark, with only a moderate increase in overall portfolio

volatility. As seen in Figure 8, the resulting absolute return profile surpasses that of the SRP Core, and makes for a

better such comparison against the benchmark. Return/risk in the SRP Opportunity portfolio, which we display in

Figure 10, remained about the same as with the SRP Core, a function of our small equity exposures.

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Figure 8: Sector Rotation Opportunity Portfolio Standard Performance


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SRP Opportunity (gross) Sector Rotation Benchmark (ETF)

Absolute Return


SRP Opportunity (gross) 4.81% 10.44% 9.16%SRP Opportunity (net) 4.07% 8.47% 8.18%Sector Rotation Benchmark (ETF) 7.41% 4.82% 8.36%

Return/Risk

Latest 250-Day InceptionSRP Opportunity (gross) 1.89 1.25SRP Opportunity (net) 1.53 1.12


11

Figure 9: SRP Opportunity Portfolio Rolling Returns and Cumulative Relative Performance


Figure 10: SRP Opportunity Portfolio Risk and Return/Risk


Via the attribution we confirmed that—through the careful rebalance to intended exposure of leveraged equity

positions—we can maintain a specific exposure to an equity class and achieve near the same level of total return, while

freeing up additional collateral to boost portfolio yield. The net result was a gain in absolute performance, even with

the relatively limited additional exposure. However, the source of the additional income—high yield—came with some

volatility, so risk-relative returns were in line with the SRP Core. Nonetheless, as we’ll discuss later with the Risk-

Based Opportunity Portfolios, we continue to believe the portfolio’s design should allow for risk-relative

outperformance over time.

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RISK-BASED PORTFOLIOS

The Risk-Based Portfolios are similarly constructed; their obvious differences being their relative allocations to fixed

income and equity. Because of the larger number of individual investments on the fixed income side, however, the

portfolios are differentiated in their exposures to the fixed income markets. Still, there are some key aspects of all of

the portfolios that led to their strong outperformance relative to their benchmarks over the past two years. For the

purposes of this section, we’ll chart only the Risk-Based Moderate portfolio, for which we provide standard and

cumulative performance in Figure 11. Again, similar charts for all portfolios are offered in the appendix at the end of

the commentary.

Figure 11: Risk-Based Core Moderate Portfolio Standard Performance


Though the total return of the MSCI All-Country World Index (ACWI) was positive for the period, it was meager…just

2.2% on an annualized basis. By secular design (readers may recall that we discussed this design process in last

month’s commentary), we allocated the portfolio more heavily to the U.S. and emerging markets and less heavily to

developed non-U.S. markets than the exposures represented by the index. And through the 2-year period, we were at

the minimum exposure to equities in all classes with the exception of the short-term overweight in emerging markets

last October. Our equity allocations, on a position-level total return basis, therefore, outperformed that of the

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RB_M Core (gross) Risk-Based Moderate Benchmark (ETF)

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RB_M Core (gross) 8.77% 1.47% 7.98%RB_M Core (net) 8.03% -0.36% 7.00%Risk-Based Moderate Benchmark (ETF) 5.87% -1.02% 4.74%

Return/Risk

Latest 250-Day InceptionRB_M Core (gross) -0.01 0.43RB_M Core (net) -0.10 0.38

Risk-Based Moderate Benchmark (ETF) -0.15 0.30

13

benchmark’s equity exposure. The ETF benchmark here is defined as a 40%/60% mix of the Vanguard Total Bond

Market ETF (BND) and the iShares MSCI ACWI Index Fund (ACWI)4. However, only in the Moderate and Growth

portfolios were the equity allocations large enough to sufficiently take advantage of the better performance in order to

achieve a larger contribution to portfolio return from the equity space than that for the benchmark. Importantly, then,

the equity slices within the Moderate and Growth portfolios, taken together, were able to outperform the equity

component of the benchmark (based on the MSCI ACWI Index), even while underweight relative to our secular

targets, and with the portfolio managing a better risk/return profile.

Within fixed income, though the allocations were different for each of the portfolios, the aggregate total returns for

fixed income were similar. Therefore, contribution to returns differed in the portfolios mostly by the relative weight of

the fixed income allocation in each portfolio. By virtue of all that simple math, only the equity allocation within the

RB-Core Conservative portfolio underperformed the benchmark allocation; even then, it was only by a small amount.

Otherwise, aggregate asset-class-level (e.g. Equity and Fixed Income) bested those for the benchmarks through the

two-year period, and even during most all 250-day periods, a feature we show in Figure 12 and Figure 13.

Figure 12: RB Core Moderate Portfolio Rolling Returns and Cumulative Relative Performance


In regard to specific investments, within fixed income the Intermediate Treasury slice led the total return and

contribution rankings, followed by TIPS and High Yield. All fixed income positions augment portfolio total return.

Within equities, all of the U.S. markets were up for the 2-year period, led by the mid-caps. On the contrary, developed

market non-U.S. equities proved the heaviest weight on performance.

An allocation not represented in the index, Real Estate proved a fine compliment to the other two asset classes in all

portfolios, providing a substantial portion of overall total return. However, that return did come with volatility more

in line with the equity classes (though we think of the asset class as quite different than equities, it is, after all, a

composite of U.S. REIT stocks) than the fixed income segments. Clearly, there is some small component of the ACWI 4 The RB Conservative and RB Growth benchmarks in the study use the same ETFs, but in a 60%/40% and a 20%/80% mix,

respectively.

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that is represented by the U.S. REITs. But, with the U.S., according to the folks at MSCI, accounting for 46% of the

index at the end of 2011, and with a quick review of the Russell 3000 index suggesting about 3.3% of the U.S. market

is comprised of REITs, we clearly made a large overweight in the space in our secular targets (again, readers might

revisit last month’s commentary for a discussion of the secular target construction methodology). And we did so

expecting the asset class to outperform broader equity markets. That it did, and by a large margin. We continue to

believe in the income-driven stability and diversification potential of the allocation. During this latest revisit to our

secular targets, however, we lightened the load in the Conservative and Moderate portfolios and left it out of the

Growth portfolio heading into 2012.

Figure 13: RB Core Moderate Portfolio Risk and Return/Risk


Though the portfolios were relatively underweight equities, the Real Estate addition boosted volatility, despite the

income advantage, and still lifted the variability of daily portfolio returns, as did the relatively large position in High

Yield (at least in comparison to the broad fixed income market…but not, as we discussed two months ago, in

comparison to the equity markets). For all the RB portfolios, rolling 250-day volatility was higher than for their

respective benchmarks. But, the additional return we generated from the investment choices we made more than

compensated for the additional risk, meaning risk-relative performance for each of the RB Core portfolios was better

than the ETF-based benchmark. The gap, however, as we see in Figure 13, was narrow.

By most expectations, such a narrow lead might be expected. That’s because, as much flexibility as there is in the

portfolio, it’s a bit more difficult than with the rotation portfolios to perform too differently than the benchmark,

because we cannot turn off specific exposures all together. We’ve in part sought to address some of those limitations

in the secular tactical asset allocation by increasing the number of individual portfolio constituents, thereby

enhancing the potential benefit from tactical allocation over time. As clearly, we were far less active in our RB

portfolios than we were in our Rotation portfolios, having overweight only one equity slice during the two years. Were

there additional opportunities to take advantage of an equity run? Perhaps. But at what cost in terms of added risk?.

Key to our ongoing work will be the exploration of how we augment benchmark-relative performance without

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15

maintaining benchmark-exceeding risk. Or, at the very least, expand the benchmark-relative return per unit of risk

the portfolio delivers.

Risk-Based Opportunity Portfolios

As was the case in the SRP-Opportunity portfolio, the additional collateral freed up from using leveraged ETFs was

put to good use in providing additional portfolio income and capital gain. And, because we were able to use triple-

levered ETFs and because the equity positions are ‘always on’ even though we may be underweight, the effect was

even stronger. Standard and cumulative returns for the RB Opportunity Moderate portfolio are shown in Figure 14.

Figure 14: Risk-Based Opportunity Moderate Portfolio Standard Performance


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RB_M Opportunity (gross) 8.84% 3.31% 10.34%RB_M Opportunity (net) 8.12% 1.43% 9.33%Risk-Based Moderate Benchmark (ETF) 5.87% -1.02% 4.74%

Return/Risk

Latest 250-Day InceptionRB_M Opportunity (gross) 0.10 0.53RB_M Opportunity (net) 0.02 0.48


16FEBRUARY 1, 2012

Figure 15: RB Opportunity Moderate Portfolio Rolling Returns and Cumulative Relative

Performance


Not only did the portfolios gain from the additional high-yield-debt (twice the Core allocation) and total-bond-market

exposures, an investment in gold proved fortuitous. Only the addition of the emerging market debt within the

Moderate and Growth portfolios weakened performance, though only by a small amount as the allocation was light.

The additional income helped support a higher level of return, while increasing risk by a lesser amount, resulting in—

like the SRP-Opportunity—a better return-risk comparison against the benchmarks. Details are in Figure 16. Again,

this outperformance was a result not only of our tactical shifts, but also the secular tactical asset allocations against

which we made those tactical shifts.

Figure 16: RB Opportunity Moderate Portfolio Risk and Return/Risk


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17

Of great interest to the team as we examined these results was the fact that we were able to expand portfolio risk-

adjusted performance relative to the benchmark and relative to the RB Core portfolios. Even more, as was the case

with the SRP Core, via the attribution we learned that careful equity weight targeting can allow us to maintain a

specific exposure to an equity class and achieve near the same level of total return, while freeing up additional

collateral to boost portfolio yield. The net effect is that the Opportunity portfolios address some of the limitations that

we raised in the review of the Core strategies.

Might we consider them better? Perhaps not. The leveraged ETF space remains uncomfortable to many folks, while

the investments we make with the freed up capital might not always result in a gain in risk-relative return—or a gain

at all. Still, we were pleased to see the concept prove itself in the real world and look forward to finding additional

ways to allocate the freed collateral as the ETF marketplace continues to expand.

FIXED INCOME PORTFOLIO

Though various additional influences drove the underperformance (detailed in Figure 17) of the stand-alone Fixed

Income portfolio relative to the Vanguard Total Bond Market ETF (BND), which tracks the Barclays U.S. Aggregate

Bond Index, the primary driver of the gaps above and below the reference has been the 25% of the portfolio allocated

to the High-Yield market. The entire corporate exposure in the Aggregate is less than 20%, so the portfolio was clearly

more heavily exposed to corporates, a weighting that increased when we swapped the long end of the Treasury market

for the long end of the corporate market. Too, though the average weight in the portfolio was relatively small, the

emerging market debt allocation, which tuned in a negative total return, also proved detrimental to the relative

performance comparison.

18FEBRUARY 1, 2012

Figure 17: Fixed Income Portfolio Standard Performance


Otherwise, our overall Treasury exposure approximated that within the Aggregate (to varying degrees over the course

of the two years), while our lack of exposure—in part due to lack of ETF representation—to the heavy weight of

agency, mortgage-backed- and collateralized mortgage-backed securities seemed not to harm the portfolio, as the

performance of that group (in no small part due to the more than 40% weight in the benchmark), approximated that

of the benchmark.

Within Treasuries, we were relatively more exposed to the longer end of the duration spectrum. Seen in Figure 18,

that tilt very much helped the portfolio in May and June of 2010, as interest in the high-yield market waned, while it

hurt the portfolio during the subsequent eight months until the long-bond rally that started in February of last year

and peaked in early October, a bit before which time we made the Treasury-for-corporates swap.

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FI (gross) 2.93% 7.36% 6.94%FI (net) 2.78% 6.90% 6.66%Vanguard Total Bond Market ETF (BND) 1.04% 7.71% 7.10%

Return/Risk

Latest 250-Day InceptionFI (gross) 1.72 1.45FI (net) 1.61 1.39

Vanguard Total Bond Market ETF (BND) 1.86 1.51

19

Figure 18: Fixed Income Portfolio Rolling Returns and Cumulative Relative Performance


In hindsight, we could have been more tactical in managing the various fixed-income segment exposures within the

portfolio. Even then, though, we have to be comfortable both with the relatively longer-duration and relatively higher

yield…read: higher risk…stance of the portfolio, as we believe that, over the longer-term, our patience with the various

exposures will be more generously rewarded on a risk-relative return basis. Key to the portfolio’s success going

forward, we believe, will be a focus on tapping newer alternatives within the ETF space that can add duration-

weighted yield, while offering additional diversification potential to the portfolio.

Figure 19: Fixed Income Portfolio Risk and Return/Risk


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20FEBRUARY 1, 2012

LOOKING TO 2012

As we’ve oft stated on these pages in recent months—resisting the urge to copy/paste—the state of the global investing

environment is challenged to say the least. While the U.S. has shown some manner of stability and even on more than

a few occasions has engendered some level of optimism, its relative strength easily could be sapped by the mess that is

Europe. Meantime, the emerging world is strained by desires to keep growth robust, while at the same time

addressing sources of economic, political and social stress. And various other regions of instability, including the

Middle East and the Korean peninsula, urge caution. We thus remain convinced that the mostly defensive positioning

of the portfolios will provide a sound foundation from which to take advantage of the many tactical opportunities we

believe will present themselves as the year progresses.

We continue to have complete confidence in our quantitative framework. While we have learned over the past two

years to more actively manage when necessary (such as we did in October 2011), we also confirmed that our

framework is to be trusted absolutely. It has proved its ability to enforce a discipline into our process that seeks to

optimally balance risk/return opportunities. It also continues to evolve as we get smarter from experience. We

believe, now more than ever, markets require this type of discipline and risk management. We look forward to 2012

and beyond as we continue to pursue our hybrid investment objective of growth and preservation.

21

APPENDIX 1: SUPPLEMENTAL PERFORMANCE PROFILES

Figure 20: Country Rotation Portfolio

Figure 21: Sector Rotation Core Portfolio

Figure 22: Sector Rotation Opportunity Portfolio

Figure 23: Risk-Based Core Conservative Portfolio

Figure 24: Risk-Based Core Moderate Portfolio

Figure 25: Risk-Based Core Growth Portfolio

Figure 26: Risk-Based Opportunity Conservative Portfolio

Figure 27: Risk-Based Opportunity Moderate Portfolio

Figure 28: Risk-Based Opportunity Growth Portfolio

Figure 29: Fixed Income Rotation Portfolio

Country Rotation Portfolio (gross-of-fees)

Country Rotation Benchmark

(40% Barclays U.S. Aggregate Bond; 60% MSCI ACWI ex. U.S.)

Performance Metrics Cumulative Return (gross-of-fees)

Absolute Return


CRP (gross) 4.90% 9.40% 8.36%

CRP (net) 4.09% 7.29% 7.08%

Country Rotation Benchmark (ETF) 4.37% -4.83% 2.12%

Return/Risk

Latest 250-Day Inception

CRP (gross) 1.93 1.38

CRP (net) 1.53 1.17

Country Rotation Benchmark (ETF) -0.36 0.12

250-Day Rolling Returns (gross-of-fees) Benchmark-Relative Cumulative Total Return (gross-of-fees)

green = outperforming, red = underperforming

Rolling 250-Day Daily Standard Deviation Rolling 250-Day Return/Risk (gross-of-fees)

As of 12.31.11. Inception is 12.31.09. SOURCE: Innealta Capital via Morningstar

FIGURE 20:

COUNTRY ROTATION PORTFOLIO

Data on this page are derived from compopsites of portfolios managed

directly by Innealta Capital and are, unless otherwise stated, gross-of-fees.

Performance data of those portfolios managed and/or otherwise traded by

partners of Innealta Capital may differ greatly from these data.

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Sector Rotation Portfolio (gross-of-fees)

Sector Rotation Benchmark

(40% Barclays U.S. Aggregate Bond; 60% S&P 500)


Absolute Return


SRP Core (gross) 4.32% 9.17% 7.46%

SRP Core (net) 3.92% 7.46% 6.62%

Sector Rotation Benchmark (ETF) 7.41% 4.82% 8.36%

Return/Risk


SRP Core (gross) 1.87 1.23

SRP Core (net) 1.56 1.08



green = ourperforming, red = underperforming



FIGURE 21:

SECTOR ROTATION PORTFOLIO





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Sector Rotation Opportunity Portfolio (gross-of-fees)


(40% Barclays U.S. Aggregate Bond; 60% S&P 500)


Absolute Return


SRP Opportunity (gross) 4.81% 10.44% 9.16%

SRP Opportunity (net) 4.07% 8.47% 8.18%

Sector Rotation Benchmark (ETF) 7.41% 4.82% 8.36%

Return/Risk


SRP Opportunity (gross) 1.89 1.25

SRP Opportunity (net) 1.53 1.12






FIGURE 22:

SECTOR ROTATION OPPORTUNITY PORTFOLIO





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Risk-Based Core Conservative Portfolio (gross-of-fees)

Risk-Based Conservative Benchmark

(60% Barclays U.S. Aggregate Bond; 40% MSCI ACWI)


Absolute Return


RB_C Core (gross) 6.99% 5.87% 9.27%

RB_C Core (net) 6.26% 4.04% 8.31%

Risk-Based Conservative Benchmark (ETF) 4.32% 2.14% 5.76%

Return/Risk


RB_C Core (gross) 0.40 0.77

RB_C Core (net) 0.27 0.69

Risk-Based Conservative Benchmark (ETF) 0.14 0.57





FIGURE 23:

RISK-BASED CORE CONSERVATIVE PORTFOLIO





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Risk-Based Core Moderate Portfolio (gross-of-fees)

Risk-Based Moderate Benchmark



Absolute Return


RB_M Core (gross) 8.77% 1.47% 7.98%

RB_M Core (net) 8.03% -0.36% 7.00%

Risk-Based Moderate Benchmark (ETF) 5.87% -1.02% 4.74%

Return/Risk


RB_M Core (gross) -0.01 0.43

RB_M Core (net) -0.10 0.38






FIGURE 24:

RISK-BASED CORE MODERATE PORTFOLIO





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Risk-Based Core Growth Portfolio (gross-of-fees)

Risk-Based Growth Benchmark



Absolute Return


RB_G Core (gross) 9.50% -1.81% 6.46%

RB_G Core (net) 8.54% -3.87% 5.34%

Risk-Based Growth Benchmark (ETF) 7.41% -4.35% 3.48%

Return/Risk


RB_G Core (gross) -0.17 0.29

RB_G Core (net) -0.25 0.24

Risk-Based Growth Benchmark (ETF) -0.29 0.16





FIGURE 25:

RISK-BASED CORE GROWTH PORTFOLIO





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Risk-Based Opportunity Conservative Portfolio (gross-of-fees)




Absolute Return


RB_C Opportunity (gross) 7.69% 7.53% 11.32%

RB_C Opportunity (net) 6.93% 5.53% 10.28%

Risk-Based Conservative Benchmark (ETF) 4.32% 2.14% 5.76%

Return/Risk


RB_C Opportunity (gross) 0.50 0.85

RB_C Opportunity (net) 0.37 0.77

Risk-Based Conservative Benchmark (ETF) 0.14 0.57





FIGURE 26:

RISK-BASED OPPORTUNITY CONSERVATIVE PORTFOLIO





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Absolute Return


RB_M Opportunity (gross) 8.84% 3.31% 10.34%

RB_M Opportunity (net) 8.12% 1.43% 9.33%

Risk-Based Moderate Benchmark (ETF) 5.87% -1.02% 4.74%

Return/Risk


RB_M Opportunity (gross) 0.10 0.53

RB_M Opportunity (net) 0.02 0.48






FIGURE 27:

RISK-BASED OPPORTUNITY MODERATE PORTFOLIO





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Absolute Return


RB_G Opportunity (gross) 9.52% 0.18% 9.27%

RB_G Opportunity (net) 8.81% -1.46% 8.37%

Risk-Based Growth Benchmark (ETF) 7.41% -4.35% 3.48%

Return/Risk


RB_G Opportunity (gross) -0.07 0.39

RB_G Opportunity (net) -0.13 0.36

Risk-Based Growth Benchmark (ETF) -0.29 0.16





FIGURE 28:

RISK-BASED OPPORTUNITY GROWTH PORTFOLIO





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Fixed Income Rotation Portfolio (gross-of-fees)

Fixed Income Benchmark

(100% Barclays U.S. Aggregate Bond)


Absolute Return


FI (gross) 2.93% 7.36% 6.94%

FI (net) 2.78% 6.90% 6.66%

Vanguard Total Bond Market ETF 1.04% 7.71% 7.10%

Return/Risk


FI (gross) 1.72 1.45

FI (net) 1.61 1.39

Vanguard Total Bond Market ETF 1.86 1.51





FIGURE 29:

FIXED INCOME ROTATION PORTFOLIO





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32

APPENDIX 2: INNEALTA CAPITAL FACT SHEETS

Figure 30: Country Rotation Portfolio

Figure 31: Sector Rotation Core Portfolio

Figure 32: Sector Rotation Opportunity Portfolio

Figure 33: Risk-Based Core Portfolios

Figure 34: Risk-Based Opportunity Portfolios

Growth of Hypothetical $10,000 Investment

Time Period: 12/31/2009 to 12/31/2011

3/2010 6/2010 9/2010 12/2010 3/2011 6/2011 9/2011 12/20119,325.0

9,550.0

9,775.0

10,000.0

10,225.0

10,450.0

10,675.0

10,900.0

11,125.0

11,350.0

11,575.011,800.0

Innealta Tac ETF Country Rotation Country Rotation Benchmark

Risk/Reward vs. Benchmark*

Time Period: 1/1/2010 to 12/31/2011

Portfolio BenchmarkReturnAlphaBetaStd DevR2Tracking ErrorDown Capture RatioUp Capture RatioSharpe RatioInformation Ratio

7.07

5.11

1.35

5.940.33

60.818.742.85

42.47

0.55

2.280.001.00

12.12100.00

0.00100.00100.00

0.24

Yield to Maturity

Average Coupon

Average Duration

4.06

5.53

5.44

Investment Strategy

The Country Rotation Portfolio potentially invests in a series of 20 international countries, including emerging markets, from a growing list of 28 countries. The portfolio aims to generate high total return with strict risk controls by consistently investing in the countries with strong risk-adjusted performance potential. The strategy uses an econometric multifactor model based on economic, fundamental, risk and technical analyses that evaluate the risk/reward potential of investing in equity (a country’s equity market) versus fixed income on a daily basis.

The strategy is binary: the portfolio is either entirely in or out of a country at any given time. Each country is modeled independently and its risk/reward profile is compared to an equal investment in fixed income. If the expected return per unit of risk of a country is more favorable than that of a fixed income alternative, the portfolio will invest in the country. If the expected return per unit of risk of a country is less favorable than that of a fixed income alternative, the potential allocation (5%) filters to the actively managed fixed income portion of the portfolio. Countries are equally weighted.

The fixed income component within the Country Rotation Portfolio is an actively managed portfolio of fixed income ETFs. The portfolio aims to generate above average yield with strict risk controls by consistently investing in those fixed income sectors that have strong risk-adjusted performance potential and eligible exchange traded fund representation. The portfolio is operated within a quantitative framework that seeks to objectively control the portfolio’s level yield, modified duration, and volatility.

Innealta Tactical ETF Portfolio SeriesCountry Rotation Portfolio FOURTH QUARTER 2011

Investment Highlights

Objective Long-term capital appreciation and income

Benchmark60% MSCI ACWI ex USA NR / 40% Barclays Capital Aggregate Bond

Portfolio Holdings*

Portfolio Date: 12/31/2011

Weighting %

SPDR Barclays Capital High Yield Bond

Vanguard Total Bond Market ETF

iShares Barclays 7-10 Year Treasury

iShares Barclays Intermediate Credit Bd

iShares Barclays 1-3 Year Credit Bond

iShares 10+ Year Credit Bond

Vanguard Long-Term Corp Bond Idx ETF

iShares Barclays 1-3 Year Treasury Bond

Market Vectors EM Local Curr Bond ETF

iShares iBoxx $ High Yield Corporate Bd

24.47

19.88

13.19

9.90

9.88

5.08

5.05

4.95

4.76

0.18

Current Asset Allocation*


%

Equity 0.0

Fixed Income 94.4

Cash 5.4

Other 0.3

Total 100.0

Asset Allocation*

Time Period: 9/1/2010 to 12/31/2011

0.0

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25.0

37.5

50.0

62.5

75.0

87.5

100.0

9/2010 12/2010 3/2011 6/2011 9/2011 12/2011

Equity Fixed Income Cash

*Data shown as supplemental information to the Composite.

QTD YTD 1 Year

SinceInception

Annualized(12.31.09)

Innealta Tactical ETF Country Rotation

Country Rotation Benchmark

4.09 7.27 7.27 7.07

2.68 -4.87 -4.87 2.28

Performance (net of fees)

Retu

rn

QTD YTD 1 Year Since Inception-6.0

-4.0

-2.0

0.0

2.0

4.0

6.08.0

Innealta Tac ETF Country Rotation Country Rotation Benchmark

Overview

The Innealta Country Rotation strategy is based on a quantitatively driven, tactical asset allocation approach that potentially invests in twenty countries based on the specific risk/reward characteristics of each. Dollars not allocated to equities are invested in an actively managed portfolio of fixed income ETFs. The strategy seeks to outperform its benchmarks on a risk-adjusted basis through global diversification, active management, style integrity, minimized security selection risk and cost efficiency.

Country Rotation Portfolio FOURTH QUARTER 2011

Disclosures

Al Frank Asset Management (AFAM) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS ® standards. AFAM has been independently verified by Ashland Partners & Company, LLP from for the periods Jan. 1, 1996, through Sept. 30, 2011. A copy of the verification report is available upon request. 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. Verification does not ensure the accuracy of any specific composite presentation.

Innealta Capital is a division of Al Frank Asset Management, Inc (AFAM). AFAM is an independent, registered investment advisor, wholly owned by AF Holdings, Inc. The firm maintains a complete list and description of composites, which is available upon request. The firm had total assets under management of $476 million as of Dec. 31, 2011. The Tactical ETF Country Rotation Composite was created December 31, 2009. Minimum account size for inclusion in the composite is $20,000.

The Tactical ETF Country Rotation Composite includes discretionary portfolios using the tactical country rotation strategy, which is based on a quantitatively driven, tactical asset allocation approach that apportions portfolio assets to 20 potential countries (from among a growing list of potential investments that currently number 28) based on the specific risk/reward characteristics of each. Dollars not allocated to country ETFs are invested in an actively managed portfolio of fixed-income ETFs.

Composite policy requires the temporary removal of any portfolio incurring an aggregate net cash flow of at least 25% of portfolio assets for any given month. Such a temporary removal of an account occurs at the beginning of the month in which the significant cash flow occurs and the account re-enters the composite at the beginning of the month after a net cash outflow and the beginning of the next quarter after a net cash inflow. Additional information regarding the treatment of significant cash flows is available upon request. Past performance is not indicative of future results.

The U.S. Dollar is the currency used to express performance. The composite includes portfolios charged bundled or wrap fees and portfolios charged transaction fees or trading costs. Bundled fee portfolios pay a fee based on a percentage of assets under management in place of a transaction fee. In most cases, this fee also includes investment management and portfolio monitoring. As a percentage of assets, the composite is comprised of 66.45% bundled fee paying accounts as of Dec. 31, 2011. Portfolios eligible for this composite must follow the stated strategy. Live returns are presented net of management fees and include the effects of trading costs and reinvestment of all income. Net of fee performance was calculated using actual management fees charged to the client. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. A non-fee paying seed account is included in the portfolio and represented less than 1% in 2010 and 2011. Actual investment management fees will vary, beginning at 1.5% per annum. Our full management fee schedule is described in more detail in Form ADV Part 2A.

Any investment is subject to risk. Exchange traded funds (ETFs) are subject to risks similar to those of stocks, such as market risk, and investors who have their funds invested in accordance with the portfolios may experience losses. Additionally, fixed income (bond) ETFs are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Investments in foreign investments may incur greater risks than domestic investments. For more information on the risks associated with investment in ETFs, please refer to AFAM’s Form ADV Part 2A. Diversification does not protect against loss in declining markets.

Effective Dec. 31, 2011, the Country Rotation benchmark changed to a blend of 60% MSCI ACWI ex USA NR and 40% Barclays Capital Aggregate Bond TR. Prior to that, the benchmark consisted of 60% MSCI EAFE GR and 40% Barclays Capital Aggregate Bond TR. The Advisor believes the revised benchmark more fully reflects the breadth of the investment opportunity set. The benchmark is calculated daily and rebalanced quarterly. The iShares MSCI ACWI ex US Index Fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the MSCI All Country World Index ex USA. The Barclays Capital Aggregate Bond Index covers the U.S. dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. A person cannot invest directly in an index.

Alpha is a measure of the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by beta. Beta is a measure of volatility, or systematic risk, of a portfolio in comparison to a benchmark. A beta greater than one indicates more volatility, while a beta less than one indicates less volatility than the relevant benchmark. Annualized Standard Deviation is a measure of the dispersion of investment returns from the mean. A higher standard deviation indicates higher volatility. Sharpe Ratio is a measurement of reward per unit of risk as calculated by the average monthly excess return divided by the monthly standard deviation of excess returns. R Squared is a measure of how close the relationship is between a portfolio and its benchmark. Tracking Error is a measure of the volatility of excess returns relative to a benchmark. Information ratio is a measure of risk-adjusted performance.

About Innealta Capital

Innealta Capital is a quantitative asset management firm specializing in the active management of Exchange Traded Fund (ETF) portfolios. Innealta is a division of Al Frank Asset Management, Inc. (AFAM), a privately held company founded in 1977, and has approximately $2 billion in Assets Under Management and Advisement.

Innealta’s competitive advantage is its quantitative investment strategy driven by a proprietary econometric model, which was created by the company’s founder and Chief Investment Officer, Dr. Jeff Buetow. The investment management team's focus is to capitalize on attractive market environments for ETFs, tactical strategies, and low cost portfolio alternatives.

Composite Performance

NA - Data is not statistically meaningful due to an insufficient number of portfolios in the composite for the entire year.

Manager Biography

Dr. Jeff Buetow is the founder and Chief Investment Officer of Innealta Capital. His previous experience includes: former CIO of XTF GAM, LLC and Director of Research and Product Development at Atlantic Asset Management, LLC. Dr. Buetow was Vice President of Curriculum Development for the Association for Investment Management and Research (AIMR), now known as the CFA Institute, and was the Wheat First Professor of Finance and Director of the Quantitative Finance program at James Madison University. He was also lead quantitative researcher for Prudential Investment's Quantitative Investment Management Group and served as a nuclear engineer for the U.S. Navy.

Investment Team

Jeff Buetow, PhD, CFA Bernd Hanke, PhD, CFAChief Investment Officer Senior Research Analyst

Mark Mowrey, CFA Brian Henderson, PhD, CFASVP, Investment Strategy Senior Research Analyst

Contact Information

AFAM | Innealta Capital85 Argonaut, Suite 220Aliso Viejo, CA 92656P: 949.499.3215 / 888.994.6837 F: [email protected] | innealtacapital.com

Portfolio Attributes

> Discipline > Diversification

> International Exposure > Quantitative

> Risk Management > Transparency


Time Period: 12/31/2009 to 12/31/2011

3/2010 6/2010 9/2010 12/2010 3/2011 6/2011 9/2011 12/20119,550.0

9,775.0

10,000.0

10,225.0

10,450.0

10,675.0

10,900.0

11,125.0

11,350.0

11,575.0

11,800.012,025.0

Innealta Tac ETF Sector Rotation Core Sector Rotation Benchmark


Time Period: 1/1/2010 to 12/31/2011


6.60

5.27

1.22

8.520.001.009.90

100.000.00

100.00100.00

0.87

2.630.44

69.706.21

31.8552.52

-0.31

Yield to MaturityAverage CouponAverage Duration

4.085.545.44

Investment Strategy

The Sector Rotation Core Portfolio potentially invests in a series of ten sectors as defined by theS&P 500 Global Industry Classification Structure (GICS). The portfolio aims to generate high total return with strict risk controls by consistently investing in the sectors with strong risk-adjusted performance potential. The strategy uses an econometric multifactor model based on economic, fundamental, risk and technical analyses that evaluate the risk/reward potential of investing in equity (a sector) versus fixed income on a daily basis.

The strategy is binary: the portfolio is either entirely in or out of a sector at any given time. Each sector is modeled independently and its risk/reward profile is compared to an equal investment in fixed income. If the expected return per unit of risk of a sector is more favorable than that of a fixed income alternative, the portfolio will invest in the sector. If the expected return per unit of risk of a sector is less favorable than that of a fixed income alternative, the potential allocation(10%) filters to the actively managed fixed income portion of the portfolio. Sectors are equally weighted.

The fixed income component within the Sector Rotation Portfolio is an actively managed portfolio of fixed income ETFs. The portfolio aims to generate above average yield with strict risk controls by consistently investing in those fixed income sectors that have strong risk-adjusted performance potential and eligible exchange traded fund representation. The portfolio is operated within a quantitative framework that seeks to objectively control the portfolio’s level yield, modified duration, and volatility.

Innealta Tactical ETF Portfolio SeriesSector Rotation CoreFOURTH QUARTER 2011



Benchmark60% S&P 500 / 40% Barclays Capital Aggregate Bond

Portfolio Holdings*


Weighting %










24.19

19.16

12.64

9.58

9.55

4.89

4.87

4.77

4.65



%

Equity 0.0

Fixed Income 91.4

Cash 8.3

Other 0.3

Total 100.0

Asset Allocation*

Time Period: 9/1/2010 to 12/31/2011

0.0

12.5

25.0

37.5

50.0

62.5

75.0

87.5

100.0

12/2010 3/2011 6/2011 9/2011 12/2011



QTD YTD 1 Year

SinceInception


Innealta Tac ETF Sector Rotation Core


3.92

7.54

7.43

4.98

7.43

4.98

6.60

8.52


Retu

rn

QTD YTD 1 Year Since Inception0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.09.0

Innealta Tac ETF Sector Rotation Core Sector Rotation Benchmark

Overview

The Innealta Sector Rotation Core strategy is based on a quantitatively driven, tactical asset allocation approach that potentially invests in ten economic sectors based on the specific risk/reward characteristics of each. Dollars not allocated to equities are invested in an actively managed portfolio of fixed income ETFs. The strategy seeks to outperform its benchmarks on a risk-adjusted basis through diversification, active management, style integrity, minimized security selection risk and cost efficiency.

Sector Rotation Core FOURTH QUARTER 2011

Disclosures

Al Frank Asset Management (AFAM) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS ® standards. AFAM has been independently verified by Ashland Partners & Company, LLP from for the periods Jan. 1, 1996, through Sept. 30, 2011. A copy of the verification report is available upon request. 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. Verification does not ensure the accuracy of any specific composite presentation.

Innealta Capital is a division of Al Frank Asset Management, Inc (AFAM). AFAM is an independent, registered investment advisor, wholly owned by AF Holdings, Inc. The firm maintains a complete list and description of composites, which is available upon request. The firm had total assets under management of $476 million as of Dec. 31, 2011. The Tactical ETF Sector Rotation Composite was created December 31, 2009. Minimum account size for inclusion in the composite is $20,000.

The Tactical Core ETF Sector Rotation Composite includes discretionary portfolios using the tactical sector rotation strategy, which is based on a quantitatively driven, tactical asset allocation approach that apportions portfolio assets to 10 potential sectors (number may change) based on the specific risk/reward characteristics of each. Dollars not allocated to sector ETFs are invested in an actively managed portfolio of fixed-income ETFs.


The U.S. Dollar is the currency used to express performance. The composite includes portfolios charged bundled or wrap fees and portfolios charged transaction fees or trading costs. Bundled fee portfolios pay a fee based on a percentage of assets under management in place of a transaction fee. In most cases, this fee also includes investment management and portfolio monitoring. As a percentage of assets, the composite is comprised of 99.50% bundled fee paying accounts as of Dec. 31, 2011. Portfolios eligible for this composite must follow the stated strategy. Live returns are presented net of management fees and include the effects of trading costs and reinvestment of all income. Net of fee performance was calculated using actual management fees charged to the client. In 2010, the composite consisted solely of a seed account for the purpose of composite construction. No fees were applied to this account. Non-fee paying accounts represented less than 1% of the composite as of Dec. 31, 2011. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Actual investment management fees will vary, beginning at 1.5% per annum. Our full management fee schedule is described in more detail in Form ADV Part 2A.

Any investment is subject to risk. Exchange traded funds (ETFs) are subject to risks similar to those of stocks, such as market risk, and investors who have their funds invested in accordance with the portfolios may experience losses. Additionally, fixed income (bond) ETFs are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. For more information on the risks associated with investment in ETFs, please refer to AFAM’s Form ADV Part 2A. Diversification does not protect against loss in declining markets.

The Sector Rotation Benchmark is a blend of 60% S&P 500 and 40% Barclays Capital Aggregate Bond. It is calculated daily and rebalanced quarterly. The S&P 500 Index is S&P's broad-based market index representing a sample of leading companies in leading industries. The Barclays Capital Aggregate Bond Index covers the U.S. dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. A person cannot invest directly in an index.







Manager Biography


Investment Team





> Quantitative > Risk Management

> Tactical > Transparency

Contact Information



Time Period: 1/1/2010 to 12/31/2011

3/2010 6/2010 9/2010 12/2010 3/2011 6/2011 9/2011 12/20119,550.0

9,775.0

10,000.0

10,225.0

10,450.0

10,675.0

10,900.0

11,125.0

11,350.0

11,575.0

11,800.012,025.0

Innealta Tac ETF Sector Rotation Opp Sector Rotation Benchmark


Time Period: 1/1/2010 to 12/31/2011


8.520.001.009.90

100.000.00

100.00100.00

0.871.23

6.47

8.173.130.57

74.675.40

42.8366.63

-0.07

Yield to Maturity

Average Coupon

Average Duration

4.08

5.52

5.42

Investment Strategy

The Sector Rotation Opportunity Portfolio potentially invests in a series of ten sectors as defined by the S&P 500 Global Industry Classification Structure (GICS). The portfolio aims to generate high total return with strict risk controls by consistently investing in the sectors with strong risk-adjusted performance potential. The strategy uses an econometric multifactor model based on economic, fundamental, risk and technical analyses that evaluate the risk/reward potential of investing in equity (a sector) versus fixed income on a daily basis.

The strategy is binary: the portfolio is either entirely in or out of a sector at any given time. Each sector is modeled independently and its risk/reward profile is compared to an equal investment in fixed income. If the expected return per unit of risk of a sector is more favorable than that of a fixed income alternative, the portfolio will invest in the sector. If the expected return per unit of risk of a sector is less favorable than that of a fixed income alternative, the potential allocation (5%) filters to the actively managed fixed income portion of the portfolio. Sectors are equally weighted.

The Sector Rotation Opportunity Portfolio uses the same tactical model as the Core version but implements the strategy using leveraged ETFs which enables the portfolio to obtain a nearly identical equity exposure as the Core Portfolio but with half of the capital requirement: 5% to each sector (Opportunity) versus 10% (Core). The remaining capital is then used to increase the portfolio’s yield exposure and return potential by investing in return-enhancing opportunities.*

The fixed income component within the Sector Rotation Portfolio is an actively managed portfolio of fixed income ETFs. The portfolio aims to generate above average yield with strict risk controls by consistently investing in those fixed income sectors that have strong risk-adjusted performance potential and eligible exchange traded fund representation. The portfolio is operated within a quantitative framework that seeks to objectively control the portfolio’s level yield, modified duration, and volatility.

* Use of leverage increases risk. See disclosures section.

Innealta Tactical ETF Portfolio SeriesSector Rotation OpportunityFOURTH QUARTER 2011



Benchmark60% S&P 500 / 40% Barclays Capital Aggregate Bond

Portfolio Holdings*


Weighting %











19.76

13.10

12.71

12.53

9.86

9.82

5.05

5.03

4.92

4.76



%

Equity 0.0

Fixed Income 94.7

Cash 5.0

Other 0.3

Total 100.0

Asset Allocation*

Time Period: 9/1/2010 to 12/31/2011

0.0

12.5

25.0

37.5

50.0

62.5

75.0

87.5

100.0

12/2010 3/2011 6/2011 9/2011 12/2011



QTD YTD 1 Year

SinceInception


Innealta Tac ETF Sector Rotation OppSector Rotation Benchmark

4.06 8.46 8.46 8.177.54 4.98 4.98 8.52


Retu

rn


1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.09.0

Innealta Tac ETF Sector Rotation Opp Sector Rotation Benchmark

Overview

The Innealta Sector Rotation Opportunity strategy is based on a quantitatively driven, tactical asset allocation approach that potentially invests in ten economic sectors based on the specific risk/reward characteristics of each. Dollars not allocated to equities are invested in an actively managed portfolio of fixed income ETFs. The strategy seeks to outperform its benchmarks on a risk-adjusted basis through diversification, activemanagement, style integrity, minimized security selection risk and cost efficiency.

Sector Rotation Opportunity FOURTH QUARTER 2011






Disclosures

Al Frank Asset Management (AFAM) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS ® standards. AFAM has been independently verified by Ashland Partners & Company, LLP from for the periods Jan. 1, 1996, through Sept. 30, 2011. A copy of the verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite construction requirements of theGIPS® 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. Verification does not ensure the accuracy of any specific composite presentation.

Innealta Capital is a division of Al Frank Asset Management, Inc (AFAM). AFAM is an independent, registered investment advisor, wholly owned by AF Holdings, Inc. The firm maintains a complete list and description of composites, which is available upon request. The firm had total assets under management of $476 million as of Dec. 31, 2011. The Tactical ETF Sector Rotation Opportunity Composite was created December 31, 2009. Minimum account size for inclusion in the composite is $20,000.

The Tactical ETF Sector Rotation Opportunity Composite includes discretionary portfolios using the tactical sector rotation strategy, which is based on a quantitatively driven, tactical asset allocation approach that apportions portfolio assets to 10 potential sectors (number may change) based on the specific risk/reward characteristics of each. Dollars not allocated to sector ETFs are invested in an actively managed portfolio of fixed-income ETFs. The Sector Opportunity portfolio uses the same tactical model as the Coreportfolio, but implements the strategy using leveraged sector ETFs.


The U.S. Dollar is the currency used to express performance. The composite includes portfolios charged bundled or wrap fees and portfolios charged transaction fees or trading costs. Bundled fee portfolios pay a fee based on a percentage of assets under management in place of a transaction fee. In most cases, this fee also includes investment management and portfolio monitoring. As a percentage of assets, the composite is comprised of 96.23% bundled fee paying accounts as of Dec. 31, 2011. Portfolios eligible for this composite must follow the stated strategy. Live returns are presented net of management fees and include the effects of trading costs and reinvestment of all income. Net of fee performance was calculated using actual management fees charged to the client. In 2010, the composite consisted solely of a seed account for the purpose of composite construction. No fees were applied to this account. Non-fee paying accounts represented approximately 4% of the composite as of Dec. 31, 2011. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Actual investment management fees will vary, beginning at 1.5% per annum. Our full management fee schedule is described in more detail in Form ADV Part 2A.

Any investment is subject to risk. Exchange traded funds (ETFs) are subject to risks similar to those of stocks, such as market risk, and investors who have their funds invested in accordance with the portfolios may experience losses. Additionally, fixed income (bond) ETFs are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. The Innealta Tactical ETF Sector Rotation Opportunity portfolio invests in ETFs that utilize leverage. The use of leverage by an exchange-traded fund increases the risk to the fund. The more a fund invests in leveraged instruments, the more the leverage will magnify gains or losses on those investments. For more information on the risks associated with investment in ETFs, please refer to AFAM’s Form ADV Part 2A. Diversification does not protect against loss in declining markets.

The Sector Rotation Benchmark is a blend of 60% S&P 500 and 40% Barclays Capital Aggregate Bond. It is calculated daily and rebalanced quarterly. Sectors are based on the Global Industry Classification Standard (GICS), which was developed by MSCI and Standard & Poor's (S&P). The S&P 500 Index is S&P's broad based market index representing a sample of leading companies in leading industries. The Barclays Capital Aggregate Bond Index covers the U.S. dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. A person cannot invest directly in an index.




> Quantitative > Risk Management

> Tactical > Transparency

Manager Biography


Investment Team



Contact Information


Overview

Innealta Capital is a quantitative asset management firm specializing in the active management of Exchange Traded Fund (ETF) portfolios. Innealta’s competitive advantage is its quantitative investment strategy driven by a proprietary econometric model, which was created by the company’s founder and chief investment officer. The investment management team's focus is to capitalize on attractive market environments for ETFs, tactical strategies, and low cost portfolio alternatives.

Strategic Asset Allocation Targets

Innealta Tactical ETF Portfolio SeriesRisk Based CoreFOURTH QUARTER 2011


Time Period: 12/31/2009 to 12/31/2011

3/2010 6/2010 9/2010 12/2010 3/2011 6/2011 9/2011 12/20119,550.0

9,775.0

10,000.0

10,225.0

10,450.0

10,675.0

10,900.0

11,125.0

11,350.0

11,575.0

11,800.012,025.0

Innealta Tac ETF Risk-Based Core Consvt Risk-Based Conservative Benchmark


Time Period: 1/1/2010 to 12/31/2011

ConservativePortfolio

ConservativeBenchmark

ReturnAlphaBetaStd DevR2Tracking ErrorDown Capture RatioUp Capture RatioSharpe RatioInformation Ratio

8.32

8.93

0.93

1.181.23

94.432.65

117.56128.79

0.95

5.820.001.007.08

100.000.00

100.00100.00

0.82

*Data is shown as supplemental information to the Composite.

Conservative Portfolio

Objective Current income and some capital appreciation

Benchmark40% MSCI ACWI NR / 60% Barclays Capital Aggregate Index


Retu

rn


1.0

2.0

3.0

4.05.0

6.0

7.0

8.09.0

Innealta Tac ETF Risk-Based Core Consvt Risk-Based Conservative Benchmark

QTD YTD 1 Year

SinceInception


Innealta Tac ETF Risk-Based Core Consvt


6.26 4.06 4.06 8.32

3.55 2.18 2.18 5.82

Current Allocation - Conservative*


%

Equity 36.8

Fixed Income 59.3

Cash 3.7

Other 0.3

Total 100.0

Portfolio Holdings - Conservative*

Weighting %


iShares Barclays TIPS Bond


Vanguard Interm-Tm Corp Bd Idx ETF

SPDR S&P 500

Vanguard Short-Term Corp Bd Idx ETF

Vanguard MSCI Emerging Markets ETF

Vanguard REIT Index ETF

iShares S&P MidCap 400 Index

iShares Russell 2000 Index

Vanguard MSCI Europe ETF

iShares MSCI Pacific ex-Japan

Vanguard MSCI Pacific ETF

14.77

14.63

11.60

11.39

8.76

7.90

6.98

5.88

3.18

3.16

3.08

3.05

3.01

Investment Strategy

The Risk Based Portfolios employ a quantitative model based on economic, fundamental, risk and technical analyses that evaluate the risk/reward potential of investing in equity asset classes relative to fixed income. Bullish or bearish signals generated by the quantitative model are used to tactically adjust equity exposure within each portfolio by +/- 20% relative to the strategic asset allocation target in order to try to capture enhanced risk-adjusted returns. During bearish market environments, equity asset class exposures are reduced and the resulting capital is proportionately distributed to the fixed income and other asset class portion of the portfolio based on the strategic asset allocation of the fixed income and other asset classes. Conversely, during bullish market environments, equity asset class exposures are increased and the allocations towards fixed income and other asset classes are proportionately reduced.

The fixed income component is an actively managed portfolio of fixed income ETFs based on strategic asset allocation targets for fixed income asset classes. The portfolio aims to generate above-average yield with strict risk controls by investing in those fixed income sectors that we believe have favorable risk-adjusted performance potential and eligible ETF representation. The Risk Based Portfolios may include asset classes other than equity and fixed income (e.g. Real Estate) for alternative sources of diversification and portfolio income, as identified by our strategic asset allocation analyses.

Tactical Asset Allocation Ranges


Time Period: 1/1/2010 to 12/31/2011

3/2010 6/2010 9/2010 12/2010 3/2011 6/2011 9/2011 12/20119,400.0

9,700.0

10,000.0

10,300.0

10,600.0

10,900.0

11,200.0

11,500.0

11,800.0

12,100.0

12,400.012,700.0

Innealta Tac ETF Risk-Based Core Mod Risk-Based Moderate Benchmark


Time Period: 1/1/2010 to 12/31/2011

ModeratePortfolio

ModerateBenchmark


7.01

13.47

0.56

1.331.20

96.183.42

115.65123.93

0.64

4.820.001.00

11.02100.00

0.00100.00100.00

0.47


Retu

rn


-4.0

-2.0

0.0

2.0

4.0

6.0

8.010.0

Innealta Tac ETF Risk-Based Core Growth Risk-Based Growth Benchmark

Portfolio Holdings - Growth*

Weighting %




SPDR S&P 500






17.87

17.37

17.02

14.35

6.36

6.34

6.18

5.72

5.69

Current Allocation - Growth*


%

Equity 61.8

Fixed Income 33.6

Cash 4.0

Other 0.5

Total 100.0


QTD YTD 1 Year

SinceInception


Innealta Tac ETF Risk-Based Core Growth


8.53 -3.89 -3.89 5.32

5.97 -4.03 -4.03 3.61

Moderate Portfolio

Objective Capital appreciation and income


Current Allocation - Moderate*


%

Equity 53.0

Fixed Income 42.7

Cash 3.9

Other 0.4

Total 100.0

Portfolio Holdings - Moderate*

Weighting %




SPDR S&P 500


Vanguard REIT Index ETF







15.77

13.41

12.40

11.14

7.79

6.78

6.58

4.76

4.73

4.62

4.57

4.54


Time Period: 12/31/2009 to 12/31/2011

3/2010 6/2010 9/2010 12/2010 3/2011 6/2011 9/2011 12/20118,950.0

9,300.0

9,650.0

10,000.0

10,350.0

10,700.0

11,050.0

11,400.0

11,750.0

12,100.0

12,450.012,800.0

Innealta Tac ETF Risk-Based Core Growth Risk-Based Growth Benchmark


Time Period: 1/1/2010 to 12/31/2011

GrowthPortfolio

GrowthBenchmark


5.32

16.40

0.39

1.521.07

97.252.94

101.72109.10

0.58

3.610.001.00

15.06100.00

0.00100.00100.00

0.30

Growth Portfolio

Objective Long-term capital appreciation


QTD YTD 1 Year

SinceInception


Innealta Tac ETF Risk-Based Core Mod


8.02 -0.36 -0.36 7.01

4.76 -0.85 -0.85 4.82


Retu

rn


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.09.0

Innealta Tac ETF Risk-Based Core Mod Risk-Based Moderate Benchmark

Risk Based Core FOURTH QUARTER 2011

Disclosures

Al Frank Asset Management (AFAM) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS ® standards. AFAM has been independently verified by Ashland Partners & Company, LLP from for the periods Jan. 1, 1996, through Sept. 30, 2011. A copy of the verification report is available upon request. 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 calculateand present performance in compliance with the GIPS® standards. Verification does not ensure the accuracy of any specific composite presentation.

Innealta Capital is a division of Al Frank Asset Management, Inc (AFAM). AFAM is an independent, registered investment advisor, wholly owned by AF Holdings, Inc. The firm maintains a complete list and description of composites, which is available upon request. The firm had total assets under management of $476 million as of Dec. 31, 2011. The composites were created December 31, 2009. Minimum account size for inclusion in a composite is $20,000.

The Risk Based Core ETF-Conservative Composite, Risk Based Core ETF – Moderate Composite, and the Risk Based Core ETF –Growth Composites include discretionary portfolios using the tactical risked-based ETF strategies that are based on a quantitatively drive, tactical asset allocation approach that apportions portfolio assets to five individual equity classes based on the specific risk/reward characteristics of each. Dollars not allocated to equities are invested in a basket of primarily fixed-income ETFs.


The U.S. Dollar is the currency used to express performance. The composites include portfolios charged bundled or wrap fees and portfolios charged transaction fees or trading costs. Bundled fee portfolios pay a fee based on a percentage of assets under management in place of a transaction fee. In most cases, this fee also includes investment management and portfolio monitoring. As a percentage of assets, the conservative composite is comprised of 90.05%, the moderate composite is comprised of 85.45%, and the growth composite is comprised of 97.09% bundled fee paying accounts as of Dec, 31, 2011. Portfolios eligible for these composites must follow the stated strategy. Live returns are presented net of management fees and include the effects of trading costs and reinvestment of all income. In 2010, the composites consisted solely of seed accounts for the purpose of composite construction. No fees were applied to these accounts. As of Dec. 31, 2011, non-fee paying accounts represented less than 10% of the conservative composite, and approximately 3% for the moderate and growth composites. As of 2011, net of fee performance was calculated using actual management fees charged to the client. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Actual investment management fees will vary, beginning at 1.5% per annum. Our full management fee schedule is described in more detail in Form ADV Part 2A.

Any investment is subject to risk. Exchange traded funds (ETFs) are subject to risks similar to those of stocks, such as market risk, and investors who have their funds invested in accordance with the portfolios may experience losses. Additionally, fixed income (bond) ETFs are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. For more information on the risks associated with investment in ETFs, please refer to AFAM’s Form ADV Part 2A. Diversification does not protect against loss in declining markets.

Effective Dec. 31, 2011, the benchmarks changed to a blend of 40% MSCI ACWI NR and 60% Barclays Capital Aggregate (Conservative), 60% MSCI ACWI NR and 40% Barclays Capital Aggregate (Moderate), and 80% MSCI ACWI NR and 20% Barclays Capital Aggregate (Growth). Prior to that, the benchmarks consisted of 26% Russell 3000, 14% MSCI EAFE, and 60% Barclays Capital Aggregate (Conservative), 41% Russell 3000, 19% MSCI EAFE, and 40% Barclays Capital Aggregate (Moderate), and 56% Russell 3000, 24% MSCI EAFE, and 20% Barclays Capital Aggregate (Growth). The Advisor believes the revised benchmarks more fully reflect the breadth of the investment opportunity set. Blended benchmarks are calculated daily and rebalanced quarterly. The Barclays Capital Aggregate Bond Index covers the U.S.-dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. Blended benchmarks are compounded daily and rebalanced quarterly.






Contact Information






Investment Team



Manager Biography


Overview

Innealta Capital is a quantitative asset management firm specializing in the active management of Exchange Traded Fund (ETF) portfolios. Innealta’s competitive advantage is its quantitative investment strategy driven by a proprietary econometric model, which was created by the company’s founder and chief investment officer. The investment management team's focus is to capitalize on attractive market environments for ETFs, tactical strategies, and low cost portfolio alternatives.

Strategic Asset Allocation Targets

Innealta Tactical ETF Portfolio SeriesRisk Based OpportunityFOURTH QUARTER 2011


Time Period: 12/31/2009 to 12/31/2011

3/2010 6/2010 9/2010 12/2010 3/2011 6/2011 9/2011 12/20119,400.0

9,700.0

10,000.0

10,300.0

10,600.0

10,900.0

11,200.0

11,500.0

11,800.0

12,100.0

12,400.0

12,700.0

Innealta Tac ETF Risk-Based Opp Consvt Risk-Based Conservative Benchmark


Time Period: 1/1/2010 to 12/31/2011

ConservativePortfolio

ConservativeBenchmark


10.28

10.38

0.99

1.961.42

94.323.89

133.12152.15

1.15

5.820.001.007.08

100.000.00

100.00100.00

0.82



Benchmark40%% MSCI ACWI NR / 60% Barclays Capital Aggregate Index

Conservative Portfolio

Investment Strategy

The Risk Based Portfolios employ a quantitative model based on economic, fundamental, risk and technical analyses that evaluate the risk/reward potential of investing in equity asset classes relative to fixed income. Bullish or bearish signals generated by the quantitative model are used to tactically adjust equity exposure within each portfolio by +/- 20% relative to the strategic asset allocation target in order to try to capture enhanced risk-adjusted returns. During bearish market environments, equity asset class exposures are reduced and the resulting capital is proportionately distributed to the fixed income and other asset class portion of the portfolio based on the strategic asset allocation of the fixed income and other asset classes. Conversely, during bullish market environments, equity asset class exposures are increased and the allocations towards fixed income and other asset classes are proportionately reduced.

The fixed income component is an actively managed portfolio of fixed income ETFs based on strategicasset allocation targets for fixed income asset classes. The portfolio aims to generate above-average yield with strict risk controls by investing in those fixed income sectors that we believe have favorable risk-adjusted performance potential and eligible ETF representation. The Risk Based Portfolios may include asset classes other than equity and fixed income (e.g. Real Estate) for alternative sources of diversification and portfolio income, as identified by our strategic asset allocation analyses.

The Risk Based Opportunity Portfolios use the same tactical model as the Core Portfolios but implement the strategy using leveraged ETFs, which enable the portfolios to obtain a nearly identical equity allocation as the Core Portfolios but with a lower equity capital requirement. The remaining capital is then used to increase the portfolios’ yield exposure and return potential by investing in return-enhancing opportunities. Use of leverage increases risk. See disclosures section.

Tactical Asset Allocation Ranges


Retu

rn

QTD YTD 1 Year Since Inception Annualized (12.31.09)0.00

2.00

4.00

6.00

8.00

10.00

12.00

6.93

5.54 5.54

10.28

3.55

2.18 2.18

5.82

Innealta Tac ETF Risk-Based Opp Consvt Risk-Based Conservative Benchmark

Portfolio Holdings - Conservative*

Weighting %







Vanguard Short-Term Corp Bd Idx ETF

iShares Gold Trust

Direxion Daily Dev Mkts Bull 3X Shrs

Direxion Daily Large Cap Bull 3X Shares

Direxion Daily Emrg Mkts Bull 3X Shares

Direxion Daily Real Estate Bull 3X Shrs

Direxion Daily Mid Cap Bull 3X Shares

Direxion Daily Small Cap Bull 3X Shares

14.54

12.59

12.44

11.45

11.33

9.42

7.87

4.99

3.28

3.04

2.43

2.15

1.11

1.09


Time Period: 12/31/2009 to 12/31/2011

3/2010 6/2010 9/2010 12/2010 3/2011 6/2011 9/2011 12/20119,300.0

9,650.0

10,000.0

10,350.0

10,700.0

11,050.0

11,400.0

11,750.0

12,100.0

12,450.0

12,800.013,150.0

Innealta Tac ETF Risk-Based Opp Mod Risk-Based Moderate Benchmark


Time Period: 1/1/2010 to 12/31/2011

ModeratePortfolio

ModerateBenchmark


9.35

14.80

0.67

3.111.31

94.734.79

117.20137.95

0.94

4.820.001.00

11.02100.00

0.00100.00100.00

0.47


Retu

rn

QTD YTD 1 Year Since Inception Annualized (12.31.09)

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

12.00

8.82

-1.45 -1.45

8.37

5.97

-4.03 -4.03

3.61

Innealta Tac ETF Risk-Based Opp Growth Risk-Based Growth Benchmark

Moderate Portfolio



Portfolio Holdings - Growth*

Weighting %





iShares Gold Trust


Direxion Daily Dev Mkts Bull 3X Shrs

Direxion Daily Emrg Mkts Bull 3X Shares

Direxion Daily Large Cap Bull 3X Shares

Direxion Daily Mid Cap Bull 3X Shares

Direxion Daily Small Cap Bull 3X Shares

17.25

15.79

12.63

12.48

9.93

7.89

6.21

6.10

4.90

2.20

2.14


Retu

rn

QTD YTD 1 Year Since Inception Annualized (12.31.09)

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

8.13

1.46 1.46

9.35

4.76

-0.85 -0.85

4.82

Innealta Tac ETF Risk-Based Opp Mod Risk-Based Moderate Benchmark


Time Period: 12/31/2009 to 12/31/2011

3/2010 6/2010 9/2010 12/2010 3/2011 6/2011 9/2011 12/20118,650.0

9,100.0

9,550.0

10,000.0

10,450.0

10,900.0

11,350.0

11,800.0

12,250.0

12,700.0

13,150.013,600.0

Innealta Tac ETF Risk-Based Opp Growth Risk-Based Growth Benchmark


Time Period: 1/1/2010 to 12/31/2011

GrowthPortfolio

GrowthBenchmark


8.37

18.06

0.53

4.211.17

95.224.70

102.50123.04

1.01

3.610.001.00

15.06100.00

0.00100.00100.00

0.30


Growth Portfolio



Portfolio Holdings - Moderate*

Weighting %Vanguard Long-Term Corp Bond Idx ETFVanguard Total Bond Market ETFiShares iBoxx $ High Yield Corporate BdSPDR Barclays Capital High Yield BondiShares Barclays TIPS BondiShares Gold TrustVanguard Interm-Tm Corp Bd Idx ETFMarket Vectors EM Local Curr Bond ETFDirexion Daily Dev Mkts Bull 3X ShrsDirexion Daily Emrg Mkts Bull 3X SharesDirexion Daily Large Cap Bull 3X SharesDirexion Daily Real Estate Bull 3X ShrsDirexion Daily Mid Cap Bull 3X SharesDirexion Daily Small Cap Bull 3X Shares

13.3112.9612.5912.44

7.767.446.565.904.854.253.822.511.641.61

Risk Based Opportunity FOURTH QUARTER 2011

Disclosures

Al Frank Asset Management (AFAM) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS ® standards. AFAM has been independently verified by Ashland Partners & Company, LLP from for the periods Jan. 1, 1996, through Sept. 30, 2011. A copy of the verification report is available upon request. Verification assesses whether (1) the firm has complied with all the composite constructionrequirements 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. Verification does not ensure the accuracy of any specific composite presentation.

Innealta Capital is a division of Al Frank Asset Management, Inc (AFAM). AFAM is an independent, registered investment advisor, wholly owned by AF Holdings, Inc. The firm maintains a complete list and description of composites, which is available upon request. The firm had total assets under management of $476 million as of Dec. 31, 2011. The composites were created December 31, 2009. Minimum account size for inclusion in a composite is $20,000.

The Risk Based Opportunity ETF-Conservative Composite, Risk Based Opportunity ETF – Moderate Composite, and the Risk Based Opportunity ETF – Growth Composites include discretionary portfolios using the tactical risked-based ETF strategies that are based on a quantitatively drive, tactical asset allocation approach that apportions portfolio assets to five individual equity classes based on the specific risk/reward characteristics of each. Dollars not allocated to equities are invested in abasket of primarily fixed-income ETFs.


The U.S. Dollar is the currency used to express performance. The composites include portfolios charged bundled or wrap fees and portfolios charged transaction fees or trading costs. Bundled fee portfolios pay a fee based on a percentage of assets under management in place of a transaction fee. In most cases, this fee also includes investment management and portfolio monitoring. As a percentage of assets, the conservative composite is comprised of 79.37%, the moderate composite is comprised of 84.35%, and the growth composite is comprised of 89.70% bundled fee paying accounts as of Dec, 31, 2011. Portfolios eligible for these composites must follow the stated strategy. Live returns are presented net of management fees and include the effects of trading costs and reinvestment of all income. In 2010, the composites consisted solely of seed accounts for the purpose of composite construction. No fees were applied to these accounts. As of Dec. 31, 2011, non-fee paying accounts represented less than 2% of the conservative composite, less than 3% for the moderate composite, and less than 5% for the growth composite. As of 2011, net of fee performance was calculated using actual management fees charged to the client. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. Actual investment management fees will vary, beginning at 1.5% per annum. Our full management fee schedule is described in more detail in Form ADV Part 2A.

Any investment is subject to risk. Exchange traded funds (ETFs) are subject to risks similar to those of stocks, such as market risk, and investors who have their funds invested in accordance with the portfolios may experience losses. Additionally, fixed income (bond) ETFs are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. The Risk Based Opportunity portfolios invest in ETFs that utilize leverage. The use of leverage by an ETF increases the risk to the fund. The more a fund invests in leveraged instruments, the more the leverage will magnify gains or losses on those investments. For more information on the risks associated with investment in ETFs, please refer to AFAM’s Form ADV Part 2A. Diversification does not protect against loss in declining markets.

Effective Dec. 31, 2011, the benchmarks changed to a blend of 40% MSCI ACWI NR and 60% Barclays Capital Aggregate (Conservative), 60% MSCI ACWI NR and 40% Barclays Capital Aggregate (Moderate), and 80% MSCI ACWI NR and 20% Barclays Capital Aggregate (Growth). Prior to that, the benchmarks consisted of 26% Russell 3000, 14% MSCI EAFE, and 60% Barclays Capital Aggregate (Conservative), 41% Russell 3000, 19% MSCI EAFE, and 40% Barclays Capital Aggregate (Moderate), and 56% Russell 3000, 24% MSCI EAFE, and 20% Barclays Capital Aggregate (Growth). The Advisor believes the revised benchmarks more fully reflect the breadth of the investment opportunity set. The Barclays Capital Aggregate Bond Index covers the U.S.-dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. Blended benchmark is compounded daily.

Alpha is a measure of the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by beta. Beta is a measure of volatility, or systematic risk, of a portfolio in comparison to a benchmark. A betagreater than one indicates more volatility, while a beta less than one indicates less volatility than the relevant benchmark.Annualized Standard Deviation is a measure of the dispersion of investment returns from the mean. A higher standard deviation indicates higher volatility. Sharpe Ratio is a measurement of reward per unit of risk as calculated by the average monthly excess return divided by the monthly standard deviation of excess returns. R Squared is a measure of how close the relationship is between a portfolio and its benchmark. Tracking Error is a measure of the volatility of excess returns relative to a benchmark. Information ratio is a measure of risk-adjusted performance.





Contact Information






Investment Team



Manager Biography



Time Period: 1/1/2010 to 12/31/2011

Portfolio BenchmarkReturnAlphaBetaStd DevR2Sharpe RatioInformation Ratio

1.70

3.79

6.66 7.190.001.002.59

100.002.65

0.390.88

36.16

-0.18

Portfolio BenchmarkYield to MaturityAverage CouponAverage Duration

4.025.505.49

4.674.39



Time Period: 1/1/2010 to 12/31/2011

3/2010 6/2010 9/2010 12/2010 3/2011 6/2011 9/2011 12/201110,000.0

10,160.0

10,320.0

10,480.0

10,640.0

10,800.0

10,960.0

11,120.0

11,280.0

11,440.0

11,600.0

Innealta Fixed Income Barclays Capital US Aggregate

Investment Process

The portfolio is operated within a quantitative framework that seeks to objectively control the portfolio’s level yield, modified duration, and volatility. The process starts with the collection of daily information of constituent sectors. This enables the close monitoring of the fixed income universe as it is represented within the ETF space. This information is then incorporated into the quantitative framework so that we can try to algorithmically control for both risk and yield. The framework is implemented as frequently as necessary in order to help capitalize on potential investment opportunities as they arise. The frequency of the framework can be implemented daily and no less than quarterly.

Innealta Tactical ETF Portfolio SeriesFixed Income PortfolioFOURTH QUARTER 2011



BenchmarkBarclays Capital Aggregate Bond Index

Portfolio Holdings*


Weighting %










23.81

19.89

13.62

9.77

9.69

5.15

5.14

4.87

4.47

Sector Allocation*


%

US Govt Debt % 29.6

Mortgage % 6.0

US Credit % 46.9

Non-US % 17.4

Total 100.0

Asset Class Tactical Asset Allocation Range

Min Max

Short Treasury 0% 40%

Intermediate Treasury 0% 40%

Long Treasury 0% 40%

Aggregate 0% 50%

TIPS 0% 40%

High Yield 0% 25%

Short Credit 0% 20%

Intermediate Credit 0% 20%

Long Credit 0% 20%

Emerging Market Debt 0% 15%

QTD YTD 1 Year

SinceInception


Innealta Fixed Income

Barclays Capital US Aggregate

2.78

1.12

6.90 6.90

7.84 7.84

6.66

7.19


Retu

rnQTD YTD 1 Year Since Inception

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.08.0

Innealta Fixed Income Barclays Capital US Aggregate

Overview

The Innealta Fixed Income strategy is an actively managed portfolio of fixed income ETFs based on strategic asset allocation targets for fixed income asset classes. The portfolio aims to generate above-average yield with strict risk controls by investing in those fixed income sectors that we believe have favorable risk-adjusted performance potential and eligible ETF representation.

Fixed Income Portfolio FOURTH QUARTER 2011






Disclosures

Al Frank Asset Management (AFAM) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS ® standards. AFAM has been independently verified by Ashland Partners & Company, LLP from for the periods Jan. 1, 1996, through Sept. 30, 2011. A copy of the verification report is available upon request. 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. Verification does not ensure the accuracy of any specific composite presentation.

Innealta Capital is a division of Al Frank Asset Management, Inc (AFAM). AFAM is an independent, registered investment advisor, wholly owned by AF Holdings, Inc. The firm maintains a complete list and description of composites, which is available upon request. The firm had total assets under management of $476 million as of Dec. 31, 2011. The Tactical ETF Fixed Income Composite was created December 31, 2009. Minimum account size for inclusion in the composite is $20,000.

The Fixed Income ETF Composite includes discretionary portfolios using a fixed income ETF strategy that aims to generate above-average yield with strict risk controls by consistently investing in fixed-income sectors that have strong risk-adjusted performance potential and eligible ETF representation.

Results are based on fully discretionary accounts under management, including those accounts no longer with the firm. Composite policy requires the temporary removal of any portfolio incurring an aggregate net cash flow of at least 25% of portfolio assets for any given month. The temporary removal of such an account occurs at the beginning of the month in which the significant cash flow occurs and the account re-enters the composite at the beginning of the month after a net cash outflow and at the beginning of the next quarter after a net cash inflow. Additional information regarding the treatment of significant cash flows is available upon request. Past performance is not indicative of future results.

The U.S. Dollar is the currency used to express performance. The composite includes portfolios charged bundled or wrap fees and portfolios charged transaction fees or trading costs. Bundled fee portfolios pay a fee based on a percentage of assets under management in place of a transaction fee. In most cases, this fee also includes investment management and portfolio monitoring. As a percentage of assets, the composite is comprised of 3.30% bundled fee paying accounts as of Dec. 31, 2011. Portfolios eligible for this composite must follow the stated strategy. Live returns are presented net of management fees and include the effects of trading costs and reinvestment of all income. Net of fee performance was calculated using actual management fees charged to the client. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. A non-fee paying seed account is included in the portfolio. At year end 2010 this account represented 8.7% of the composite. The account represented less than 1% of the composite as of Dec. 31, 2011. Ac tual investment management fees will vary, beginning at 1.5% per annum. Our full management fee schedule is described in more detail in Form ADV Part 2A.

Any investment is subject to risk. Exchange traded funds (ETFs) are subject to risks similar to those of stocks, such as market risk, and investors who have their funds invested in accordance with the portfolios may exper ience losses. Additionally, fixed income (bond) ETFs are subject to interest rate risk which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. For more information on the risks associated with investment in ETFs, please refer to AFAM’s Form ADV Part 2A. Diversification does not protect against loss in declining markets.

The Barclays Capital Aggregate Bond Index covers the U.S. dollar-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. A person cannot invest directly in an index.

Alpha is a measure of the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by beta. Beta is a measure of volatility, or systematic risk, of a portfolio in comparison to a benchmark. A beta greater than one indicates more volatility, while a beta less than one indicates less volatility than the relevant benchmark. Annualized Standard Deviation is a measure of the dispersion of investment returns from the mean. A higher standard deviation indicates higher volatility. Sharpe Ratio is a measurement of reward per unit of risk as calculated by the average monthly excess return divided by the monthly standard deviation of excess returns. R Squared is a measure of how close the relationship is between a portfolio and its benchmark.

Manager Biography


Investment Team



Contact Information



> Active Management > Discipline

> Quantitative > Risk Mitigation

47

IMPORTANT INFORMATION

Under scenarios like ours, which involve in-house and partner-managed assets (in legal-ish speak, respectively, ‘asset under

management’ and ‘assets under advisement’), it’s generally a bit of a challenge massaging the data to gather a sense of the drivers of

performance. Not in the actual math, mind you, but rather in the choice of the source material. As we don’t have access to partner

portfolio details, we turn to our own for reference. Thus, all high-level performance data are for our own composites, the inceptions

for which are December 31, 2009.

As for position-level details, we turn to the individual accounts we used to ‘seed’ all the strategies. We do this to keep the database

and computational requirements at a minimum, and because such ‘attribution’ data are best used as indicators of performance

drivers, so the specific reference point is material to the equation only in its ability to represent the actual investments of the

strategy. On this point, we believe the seed portfolios serve these demands well. Performance results are based on these

representative accounts. The representative accounts are actual accounts that are considered representative of the majority of client

accounts with similar investment objectives. Returns for these strategies are time-weighted, total returns that reflect the

reinvestment of dividends and capital gain distributions. Net returns are calculated using a highest applicable management fee of 2%

applied quarterly. Past performance is not indicative of future results.

All that said, it’s important to note that these position-specific performance- and holdings-related attribution data are supplemental

and are meant to be indicative of, but are not likely to exactly match, Innealta Capital composite-level performance data, and may in

fact differ substantially from Innealta Capital composite level data. Furthermore, these data are derived from portfolios managed

directly by Innealta Capital. Performance data of those portfolios managed and/or otherwise traded by partners of Innealta Capital

may differ greatly from these data.

The information provided comes from independent sources believed reliable, but accuracy

is not guaranteed and has not been independently verified. The security information,

portfolio management and tactical decision process are opinions of Innealta Capital

(Innealta), a division of Al Frank Asset Management, Inc. and the performance results of

such recommendations are subject to risks and uncertainties. For more information about

Al Frank Asset Management please visit afamcapital.com. Past performance is not a

guarantee of future results.

Any investment is subject to risk. Exchange traded funds (ETFs) are subject to risks similar

to those of stocks, such as market risk, and investors that have their funds invested in

accordance with the portfolios may experience losses. Additionally, fixed income (bond)

ETFs are subject to interest rate risk which is the risk that debt securities in a portfolio will

decline in value because of increases in market interest rates. The value of an investment

and the return on invested capital will fluctuate over time and, when sold or redeemed, may

be worth less than its original cost. This material is not intended as and should not be used

to provide investment advice and is not an offer to sell a security or a solicitation or an

offer, or a recommendation, to buy a security. Investors should consult with an investment

advisor to determine the appropriate investment vehicle. Investment decisions should be

made based on the investor’s specific financial needs and objectives, goals, time horizon

and risk tolerance. All opinions and views constitute our judgments as of the date of writing

and are subject to change at any time without notice.

Sector ETFs, such as Real Estate Investment Trusts (“REITs”) are subject to industry

concentration risk, which is the chance that stocks comprising the sector ETF will decline

due to adverse developments in the respective industry.

The use of leverage (borrowed capital) by an exchange-traded fund increases the risk to the

fund. The more a fund invests in leveraged instruments, the more the leverage will magnify

gains or losses on those investments.

Country/Regional risk is the chance that world events such as political upheaval or natural

disaster will adversely affect the value of securities issued by companies in foreign countries

or regions. Country/Regional risk is especially high in emerging markets.

Emerging markets risk is that chance that stocks of companies located in emerging markets

will be substantially more volatile, and substantially less liquid, than the stocks of

companies located in more developed foreign markets.

Securities rated below investment grade, commonly referred to as “junk bonds”, may

involve greater risks than securities in higher rating categories. Junk bonds are regarded as

speculative in nature, involve greater risk of default by the issuing entity, and may be

subject to greater market fluctuations than higher rated fixed income securities.

Diversification does not protect against loss in declining markets.

49

Al Frank Asset Management, Inc. is an Investment Adviser, registered with the Securities

& Exchange Commission and notice filed in the State of California and various other

states. For more information, please visit afamcapital.com.

Innealta is an asset manager specializing in the active management of portfolios of

Exchange Traded Funds. Innealta’s competitive advantage is its quantitative investment

strategy driven by a proprietary econometric model created by Dr. Gerald Buetow,

Innealta’s Chief Investment Officer. The firm’s products include Tactical ETF Portfolios, a

U.S. Sector Rotation Portfolio and a Country Rotation Portfolio. Innealta aims to beat

appropriate benchmark performance by tactically managing portfolios utilizing a

proprietary econometric model. By harnessing the benefits of ETFs, Innealta is able to

provide investors with exposure to multiple asset classes and investment styles in highly

liquid, low cost portfolios.

For more information, contact Scott Silverman at 949.540.7307 or your financial advisor.

AFAM | Innealta Capital 85 Argonaut, Suite 220

Aliso Viejo, CA 92656 P: 949.499.3215 / 888.994.6827 F: 949.499.3218

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