2019 Guide to Investments

RegentAtlantic: What We Believe About Investment Strategies Our core belief is that value investing is the largest, most persistent investment opportunity. To implement a value strategy well, we believe that investors should be prepared to be different from the crowd, have a long time horizon in mind, incorporate quality metrics, and seek out investments from many different geographic areas around the world where values are attractive in order to stay diversified.

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Value Investing: Buying Low and Selling High Value investing, at its simplest, is buying assets on the cheap and selling them when they are expensive. If you have ever shopped around for a sale, trying to get a deal—whether it was at the grocery store or while shopping for a new car—you already understand one of the core principles of value investing. Finding a bargain is about comparing the price asked to the value received. Identifying cheap investible asset classes can be done by comparing an investment’s price to some underlying measure of its value as an investment. Some commonly used measures for evaluating stocks include earnings, sales, book value and enterprise value.

A value-investment discipline is one that identifies investments that are less expensive than their competitors. Academic research by Eugene Fama and Ken French while at the University of Chicago Booth School of Business has shown that value stocks outperform their more expensive growth counterparts by 2% annually over time. Long before such an approach was studied by academics, though, many legendary investors already followed this strategy. Adherents to a value-investing discipline have included such well-known investors as Warren Buffet, Ben Graham, and Sir John Templeton.

Be Prepared to Be Different Describing value investing in such simple terms may understate one of the primary costs of being a value investor: Appearing different from the crowd. Investment markets put millions of human minds to work trying to set prices, yet many people invest irrationally based on recent news or on short-term market movements. Many investors want to buy whatever investment has performed best recently and avoid investments that have not been able to keep up with the market. This mentality contributes to bubbles and crashes in investment markets.

The emotional cost of investing differently is not easily quantified, though it is a very real cost that investors must bear in order to earn potentially higher returns. Oftentimes, the least expensive asset classes to buy are the ones that everyone else wants to avoid; that is exactly why they are so cheap!

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Source: Bloomberg

Growth of $100

Fama-French Large Growth Fama-French Large Value

$1,000,000

$100,000

$10,000

$1,000

$100

194

919

51

195

5

195

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60

196

419

66

196

819

7019

7119

7319

7519

77

1979

1981

1982

198

419

86

198

819

90

1992

199

319

95

1997

199

9

200

320

01

200

420

06

200

820

1020

1220

1420

15

2017

195

3

1957

196

2

Maintain a Long Time Horizon Investors who have had the conviction to own portfolios filled with asset classes that are good values have reaped higher returns over the long term. Yes, there have been times when “herd behavior” among other investors has led the value strategy to return lower performance than the overall market. However, to implement a value strategy well, investors have to be prepared to look different from their investing peers—even if that means earning lower returns for some periods in the short term.

Focus on Quality Sometimes investments are cheap for a good reason, and their low price is a signal to investors that something could be amiss, such as lost profits or high debt. To manage this risk, RegentAtlantic maintains a strict focus on quality when implementing our value strategy. When we view companies or asset classes, some of the key areas on which we concentrate are profitability and debt levels. Companies that have historically made wise decisions and earned competitive returns on equity relative to their competitors are more likely to do so in the future. Maintaining reasonable debt levels within a corporate structure helps position a firm for stable long-term growth and helps provide safety in times of recession or specific disruptions to a particular industry.

Diversification is Critical Investors have many tools to identify investments that are good values, but few tools, if any, to fine-tune their investment timing. No one has perfect foreknowledge of the markets. We simply can’t predict the turning point when out-of-favor asset classes will become investor “darlings” again.

That means that to implement a value strategy well, investors should be prepared to buy low and sell high in as many different asset classes around the world as possible. This approach could help limit the risk of getting the timing wrong in any one asset class or investment. Taking a broad, global view of value investing increases the investor’s opportunity set and diversifies his/her portfolio across a range of different investments.

Building a Diversified Portfolio Investors always have to accept some degree of risk to earn a higher potential financial return. The goal of building a diversified portfolio is not to guarantee against all risk of loss. Instead, it’s to make investments that represent different economic sectors, geographies and styles. By preventing an investment portfolio from over-concentrating in any one segment, diversification limits the risk that just one or two asset classes could lead the portfolio to a very unfavorable outcome.

The benefits of diversification are intuitive. Let’s say an investor puts his/her entire portfolio into stocks of energy companies. That could be a risky bet on the direction of oil prices. One way to limit that risk is to include companies that represent other economic sectors, such as healthcare and technology, in the portfolio mix. That’s an example of diversification at the sector level.

Even more important than sector diversification is diversification among asset classes. Would a portfolio of 1,000 different stocks be well diversified? It would certainly not have a concentration in just one company, and may even have a broad range of sectors represented. If all the companies have something in common—for example, if all of them are U.S.-based large companies—the portfolio could benefit from looking further afield geographically.

Asset classes can be important building blocks for a diversified portfolio because year-by-year returns among different asset classes can be quite different, and for good reason. Each asset class is distinct from others either

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by the size of the companies it represents, its geographic focus, or the way the investments derive their returns. These differences allow asset classes to complement each other, and help a diversified portfolio avoid extreme returns in any one year.

The table on the preceding page illustrates how the asset classes RegentAtlantic tracks have performed since 2006. You can see that every asset class has spent time being one of the highest or one of the lowest performers at some point. However, a diversified portfolio plotted a steady course through the middle. This is why the most important part of building a diversified portfolio is to start with the asset classes and consider including them as diversifiers.

Asset Classes: The Building Blocks of Diversification We diversify our portfolios across a broad spectrum of different asset classes in an effort to reduce overall portfolio volatility. RegentAtlantic’s Investment Committee evaluates the relative risk and return potential of 14 separate asset classes on an ongoing basis. The objective is to select the appropriate mix of asset classes, and within each asset class to carefully select the investments that comprise that allocation. Overall, RegentAtlantic has identified three fixed-income asset classes that may make a good contribution to a portfolio, and nine growth asset classes that may provide the potential for higher returns.

Fixed-Income InvestmentsFixed-income investments, or bonds, can provide a portfolio with steady—albeit low—income and limit the investor’s risk of loss. When we include bonds in our investment portfolios, we consider the following three fixed-income asset classes:

Short-Term Investment Grade BondsBond investors face two primary risks: The risk of rising interest rates and the risk of default or non-payment. Short-term investment grade bonds are a solid response to both risks. Short-term bonds are less sensitive to interest-rate changes than bonds that do not mature for many years, so they have less to lose in a rising interest-rate environment. “Investment-grade” refers to credit ratings, which measure the creditworthiness of borrowers. By limiting investments to bond issuers with higher ratings, an investor can limit the risk of default.

Inflation-Protected BondsInvestors lock in a fixed rate of return for a set period of time when they buy bonds. A risk they still face is that inflation may be higher than their returns for an extended period. Inflation-protected bonds offer a way to respond to this risk, by adjusting their returns higher with inflation when it exceeds investor expectations.

Opportunistic BondsWhen interest rates are low, investors bear two risks. One is that they may face losses when interest rates rise, and the second is that they may earn lower returns in the interim. Opportunistic bond managers seek value across different segments of the bond market, rather than limiting themselves to buying from one distinct geographic area or market segment. This approach widens the opportunity set and gives managers a larger toolset to seek higher returns.

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Success in traditional bond strategies may depend on movements in interest rates, regardless of where interest rates go. However, the success of opportunistic bond managers is largely driven by their ability to select investments that are good values.

Growth Assets: Stock InvestmentsWhile bonds may provide a portfolio with lower risk of loss at the cost of lower returns, growth investments are likely to be the biggest driver of a portfolio’s long-term performance. When incorporating growth asset classes into a portfolio, it is important to study what makes them tick. In other words, how do they earn their returns? How can we blend different asset classes with different characteristics to best diversify a portfolio? RegentAtlantic tracks nine different growth asset classes for inclusion in our portfolios.

GLOBAL LARGE-CAP STOCKS. Shares in large global companies represent the largest segment of the investible universe. These large companies represent an array of different sectors and industries. Examples include Microsoft (information technology), Astra Zeneca (health care), Exxon Mobil (energy), and Toyota Motors (consumer discretionary). Thanks to their scale, large global companies compete on a global playing field and it makes sense to treat them as a single asset class. Toyota, for example, sells more cars in the United States than it does in its home market of Japan. Investors should consider its relative merits as an investment versus its U.S.-based and European competitors, rather than as a part of its home market.

U.S. SMALL-CAP STOCKS. This asset class is made up of smaller firms that trade and operate in the United States. Their businesses and growth prospects tend to be more tied to their home countries, so investors should make an effort to distinguish small, U.S.-based firms from ones that call other developed markets their homes. Historically, small-cap stocks have achieved significantly higher returns than stocks with larger market caps. We believe that one reason for this additional return is a small company’s potential to grow at higher rates than a mature, established business. At the same time, because small companies can be more risky than investments in large company stocks, we take care to limit our allocation of this asset class in a well-diversified portfolio.

Small-Cap Return Premium - Annualized Total Return Return 12/29/2000 to 12/31/2018

6 Source: Bloomberg

U.S. Large Companies

9.00%

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%U.S. Small Companies Int’l Large Companies Int’l Small Companies

INTERNATIONAL SMALL-CAP STOCKS. Like their U.S.-based peers, small companies based in other developed countries tend to trade and operate in their home economies and are less global. Also like their U.S.-based peers, small international companies have delivered higher long-term returns for investors than the stocks of large businesses based in the same countries. International small companies span the globe, including companies based in Europe, Asia, and the Far East. The biggest country weightings for this group of stocks are Japan (24%), United Kingdom (17%), France (11%), Germany (9%), and Switzerland (3%).

EMERGING-MARKET STOCKS. The developing world is home to some of the fastest growing economies and some of the youngest populations in the world. It is also home to a set of stock markets that carry both high potential risks, as well as the opportunity for significant investment returns. Over the past few decades, companies in the emerging markets have capitalized on cheap labor and abundant natural resources to become exporting powerhouses. South Korea’s Samsung is an example of this trend.

More recently, emerging-market companies have capitalized on positive demographic trends in their home markets to develop a base for profit growth. China Mobile, for example, may benefit from serving the world’s largest population of cell phone customers. An investment in emerging-market stocks would include companies based in 23 separate countries spread across five continents. The largest country weightings for emerging-market investors are China (31%), South Korea (14%), Taiwan (12%), India (9%), and Brazil (7%),

Growth Assets: AlternativesINFRASTRUCTURE, ENERGY PIPELINES. This is an asset class composed of companies that focus on building and operating a network of energy-infrastructure assets in North America. These firms transport, store, process, and distribute energy products. The bulk of their business is in transporting natural gas from areas where it is produced to areas where it is consumed. Energy-infrastructure companies offer an excellent source of income and the potential for capital appreciation. This asset class offers diversification benefits because its month-to-month returns have tended to be very different from bonds, stock-price movements, and the returns of other alternative asset classes.

HEDGING STRATEGIES. Managers that have the ability to buy investments they expect to rise, while selling short assets they expect to fall, may also offer benefits to a diversified portfolio. This strategy may generate returns with less market risk than funds that do not have the ability to sell assets short. Over full market cycles, hedge funds and hedging-strategy mutual funds have exhibited less risk than stocks overall. Historically, an investment in hedging strategies has yielded a reduction in overall risk. However, when stock returns are strong, it can be difficult for funds in this category to keep up due to the costs inherent to their strategies.

HIGH-YIELD BONDS. These bonds are debt obligations issued by companies with lower credit ratings. Bonds on the lower end of the rating scale come with higher risks for investors, in the form of potential for default. However, they also pay accordingly higher yields than their investment-grade counterparts. We do not believe high-yield bonds should be viewed as a full-time allocation for a diversified portfolio. Over full market cycles, they may not produce enough extra return to justify the higher risks. There may be times when their values are attractive enough, though, that investors should consider them in moderation.

REAL ESTATE. Investors can gain access to the commercial real estate market by investing in Real Estate Investment Trusts (REITs). REITs trade on exchanges like stocks, but are in the business of owning and running commercial properties. REITs can own a range of different properties, such as shopping malls, apartment buildings and offices, and can provide geographic diversification at the same time. REITs own properties throughout the United States, and the REIT structure exists in many foreign markets as well. As an asset class, they have generally been able to provide high income over time, averaging a dividend yield of 5.5%. We generally do not believe REITS are a good investment when their yields fall below 4%.

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COMMODITIES. An investment in commodities can be a useful addition to a diversified portfolio because commodity returns have moved in different directions than stocks and bonds. When considering this asset class, however, investors must be mindful of technical aspects. Investors cannot purchase most commodities directly. Clearly, the storage costs of owning barrels of oil and spools of copper make direct investment impractical. Instead, investors access commodities by investing in the futures market, which removes the complications of storage and transportation. However, commodity futures do not always trade at the same price as their underlying commodities. When investors have to pay a premium to own futures, commodities may not be a great investment.

Value Investing: What is Value?We believe portfolios built around value and quality styles can outperform other portfolios over time. Just as stocks that exhibit cheaper valuations exhibit higher returns than their more expensive peers, we believe that asset classes can be cheap or expensive at any given time. Investors who respond to valuations by selling expensive investments to pursue opportunities in cheaper asset classes, we believe, will generally be rewarded in the long term.

This is apparent in the history of U.S. stock returns, as measured by the S&P 500 Index. In any given year, returns could have been anywhere within a very broad range. However, over longer time periods, the valuation as measured by a price-to-earnings ratio made a big difference in the range of outcomes. Buying in at cheaper valuations would have helped investors avoid losses over longer time periods and earn higher returns on average.

Valuing Asset ClassesTo decide if an asset class is cheap or expensive, we need to first decide how to value it. Different asset classes have different factors that make them function, so it does not make sense to use a one-size-fits-all approach. For stock asset classes, we understand that we are investing in an underlying set of companies. So what makes each company valuable?

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S&P 500 Range of Total Returns by Starting Valuation, 1945 to 2015

60%

50%

40%

30%

20%

10%

0%

-10%

-20%

-30%

-40%

1 Year 3 Years 10 Years

Cheap (Below 13 P/E)

Average (13-17 P/E)

Expensive (Above 20 P/E)

Average Return

Ave.18% Ave.

14% Ave.7%

Ave.16%

Ave. 15%

Ave. 7%

Ave. 7%

Ave. 11%Ave.

13%

S&P 500 Range of Total Returns by Starting Valuation, 1945 to 2018

Source: Shiller, for the period 12/31/1945 to 12/31/2018

We value stock asset classes based on the market value of the companies relative to fundamental measures of their worth. Some of the fundamental measures we consider include earnings, book value, revenues and enterprise value to EBITDA (earnings before interest, tax, depreciation, and amortization), which is a measure of cash flow. When asset classes like global large-cap stocks, U.S. small-cap stocks, international small-cap stocks, or emerging markets become inexpensive based on these measures, we consider buying more of them.

These measures are not applicable to all asset classes. For alternative asset classes, yield can be a good measure of value. We prefer to value REITs based on the underlying value of their properties rather than on their dividend yields, because they must pay out 90% of the earnings every year. Energy-infrastructure firms pay out most of their income as well, making yield a key consideration. Finally, because their long term returns are capped by their income, we focus on yield when we value high-yield corporate bonds.

Investors can evaluate commodities based on whether commodity prices themselves are cheap. An important consideration remains, though: Investors must be sure they are not paying too high a premium in the futures market to buy commodity investments. That situation, known as “contango,” can reduce returns and leave investors with losses even when commodity prices are rising.

Get Comfortable Not Following the CrowdAs you can see, a value investment discipline and international diversification across many asset classes makes sense over the long haul. Both strategies have demonstrated strong long-term performance and have had less extreme outcomes than a less diversified portfolio. A long-term track record does not mean either strategy will outperform in any one given year, though, and both value investing and diversified styles could lag an index of just large American companies over shorter time periods.

The chart below right plots the long-term growth of $100 invested in an index representative of U.S. large companies, and another $100 invested in an index representative of large companies based abroad. The chart shows that investor sentiment can sometimes push one category of stocks (U.S.-based or foreign) ahead of the other. That means there can be time periods when a diversified strategy that incorporates both styles will produce lower returns than just U.S. stocks.

These periods of relative performance, though, are one reason why a portfolio that includes many geographic sectors can be less risky. A portfolio that invests in both categories generally will not end up at either extreme end of returns. When one category is in favor and the other is out of favor, the combination is likely to create a smoother rate of return over time.

The biggest benefit of remaining diversif ied, in our view, is that this approach has the potential to reduce risk. Just how much in international investments should an investor own to get the greatest benefit? One method might be to simply split them 50-50, equally weighting U.S. stocks and international stocks. Another intuitive

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Total Return - Growth $100$100,000

$10,000

$1,000

$100

$10

201

5

201

7

201

3

1972

1974

1976

1978

198

0

198

2

198

4

198

6

198

8

199

0

199

2

199

4

1997

199

9

20

01

20

03

20

05

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07

20

09

196

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1

Source: Bloomberg

way might be to weight them in proportion to their market values. That happens to give us a result very close to a 50-50 split today, as well.

A more scientific way to respond to this question may be to look at historical returns and see which blends of U.S. and international stocks result in the lowest historical risk. We measure risk using standard deviation, which measures how close together or far apart are the annual returns of a portfolio. A higher standard deviation would mean returns are more scattered, and so more likely to have experienced large gains and outsized losses. A lower standard deviation is desirable, when all else is equal.

For our research, we blended U.S. stocks and international stocks in 10% increments and tested their historical risks. We found that diversified portfolios have, in fact, been less risky, but only up to a point: A portfolio that allocates 60% or more of its investments abroad has actually taken more risk than one that doesn’t diversify at all—an interesting revelation. We also found that the intuitive method of splitting allocations 50-50 has not been the best mix to limit risk. The sweet spot is in the 30-40% international range, and that’s the span we generally target when constructing our portfolios.

3.00%

2.50%

2.00%

1.50%

1.00%

0.50%

0.00%

-0.50%

-1.00%0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Percentage Invested in Foreign Stocks

Cha

nge

in V

olat

ility

Rel

ativ

e to

100

% U

.S. S

tock

s

Change in Risk, Relative to an all U.S.-Based Index (St. Dev.)

10

Source: Vanguard

Important Disclosure Information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable. Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This presentation is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

The index returns shown on the preceding pages show the total return for various investment indices and include the impact of the reinvestment of dividends. A comparison to indices may not be a meaningful comparison. Comparisons to benchmarks have limitations because benchmarks have volatility and other material characteristics that may differ from the performance of a client’s portfolio. The investments in a client’s portfolio may differ substantially from the securities that comprise each index and are not intended to track the returns of any index. One cannot invest directly in an index, nor is any index representative of any client’s portfolio. Actual client accounts will hold different securities than the ones included in each index. The index returns are gross of applicable account transaction, and custodial fees. The actual investment results would be reduced by such fees and any other expenses incurred as an investor. The index returns are net of a 1% investment management fee. The Hypothetical Diversified Portfolio shown is not intended to show the returns of achieved or that could have been achieved by any RegentAtlantic client. It is shown for illustrative purposes only. Please see below for definitions of the indexes used.

Fama/French Value – Composed of US operating companies trading on the NYSE, AMEX or NASDAQ NMS and measures the performance of high book to market companies, excluding utilities. Securities included in this index are identified by a range of book to market breakpoints relative to the security’s market capitalization. The index is rebalanced annually from 1926 to 1992 and quarterly from 1993 onward.

Fama/French Growth – Composed of US operating companies trading on the NYSE, AMEX or NASDAQ NMS and measures the performance of low book to market companies, excluding utilities. Securities included in this index are identified by a range of book to market breakpoints relative to the security’s market capitalization. The index is rebalanced annually from 1926 to 1992 and quarterly from 1993 onward.

S&P 500 – The S&P 500 is an index consisting of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Each constituent in an index is weighted by its market-capitalization, as determined by multiplying its price by the number of shares outstanding after float adjustment. The price return of an index is a measure of the cap-weighted price movement of each constituent within the index.

MSCI EAFE – The MSCI Europe, Australia and Far East (EAFE) Index is a free float-adjusted market capitalization weighted that is designed to measure equity market performance in foreign developed markets. The index represents about 85% of the market capitalization of developed markets outside of North America.

Russell 1000 – An index of approximately 1,000 of the largest companies in the U.S. equity markets. The Russell 1000 (maintained by the Russell Investment Group) comprises over 90% of the total market capitalization of all listed U.S. stocks, and is considered a bellwether index for large cap investing. The Russell 1000 is a market capitalization-weighted index, meaning that the largest companies constitute the largest percentages in the index and will affect performance more than the smallest index members.

Russell 2000 – An index measuring the performance approximately 2,000 small-cap companies in the U.S. equity markets. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. The Russell 2000 is a market capitalization-weighted index, meaning that the largest companies constitute the largest percentages in the index and will affect performance more than the smallest index members.

MSCI World – The MSCI World Index captures large and mid cap representation across 23 Developed Markets countries. With 1,653 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country. MSCI USA - The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. With 633 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the US.

MSCI EAFE Small Cap – The MSCI EAFE Small Cap Index Fund targets 40% of the eligible small cap universe in each industry group of each country represented by the MSCI EAFE Index. MSCI defines the small cap universe as all listed securities that have a market capitalization in the range of $200 - $1500 million USD. In addition to this capitalization range, MSCI uses a specialized framework of foreign inclusion factors to adjust the market capitalization of securities for free float available to foreign investors.

MSCI Emerging Markets – The MSCI Emerging Markets Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey, and UAE.

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Bloomberg OE Market Neutral – The Bloomberg OE Market Neutral index is a composite of open ended mutual funds. It represents market neutral equity funds domiciled in the U.S. and is weighted to assets under management,

FTSE NAREIT Equity – FTSE NAREIT All REITs Index represents the full universe of publically traded REITs, including those companies that do not meet minimum size rule, liquidity criteria or free float adjustments. Stocks are free-float weighted to ensure that only the investable opportunity set is included within the index.

Bloomberg Commodity Index – The Bloomberg Commodity index is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. The index is composed of futures contracts on physical commodities. The index is designed to minimize concentration in any one commodity or sector. It currently includes 19 commodity futures in five groups. No one commodity can comprise less than 2% or more than 15% of the index, and no group can represent more than 33% of the index (as of the annual reweightings of the components).

Alerian MLP Index – The Alerian MLP Index (“Index”) is a market-cap weighted, float-adjusted index created to provide a comprehensive benchmark for investors to track the performance of the energy MLP sector. It is a composite of the 50 most prominent energy master limited partnerships calculated by Standard & Poor’s using a float-adjusted market capitalization methodology. The Index components are selected by Alerian Capital Management, LLC.

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RegentAtlantic

1200 Mount Kemble Avenue

Morristown, NJ 07960

973.425.8420

551 Fifth Avenue

Suite 2610

New York, NY 10176

212.202.2937

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www.regentatlantic.com