Sample Asset Allocation

Bryan Begane2/22/16

• Used Bloomberg Terminal to analyze multiple economic variables and derive correlations

• Compared asset to baseline S&P 500 Index to see degree of return differential

• Went to company’s fundamental ratio analytics – searched for good gross margin as well as high R&D

• These two conditions must be met in order to make recommendation

Approach

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US Equity and Various Macro Variables

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Correlati

on B/T US E

quity & Le

ading E

conomic Indica

tors Index

Correlati

on B/T US E

quity &10 ye

ar yei

ld

Correlati

on B/T US E

quity &

Governmen

t 2 ye

ar ye

ild bond

Correlati

on B/T US E

quity &US C

PI Urb

an Consu

mers

Correlati

on B/T US E

quity &

US 3 ye

ar Unem

ploymen

t Rate

Correlati

on B/T US E

quity & Sp

ot Oil P

rice

Correlati

on B/T US E

quity &

US Cap

acity

Utilization %

Correlai

ton B/T US E

quity & High

Yeild

Corporate S

preads

Correlati

on B/T US E

quity & S&

P 500 P/E Rati

o

Correlati

on B/T US E

quity & Fo

rward

Earnings

Per Sh

are

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

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Progression of Leading Economic Indicators Index

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1/1/08

4/1/08

7/1/08

10/1/08

1/1/09

4/1/09

7/1/09

10/1/09

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4/1/10

7/1/10

10/1/10

1/1/11

4/1/11

7/1/11

10/1/11

1/1/12

4/1/12

7/1/12

10/1/12

1/1/13

4/1/13

7/1/13

10/1/13

1/1/14

4/1/14

7/1/14

10/1/14

1/1/15

4/1/15

7/1/15

10/1/15

(4.00)

(3.00)

(2.00)

(1.00)

-

1.00

2.00

3.00

Appendix(please use the following slides if necessary as support to your presentation)

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10 Year Treasury Yield

Capacity Utilization

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CPI INDEX AGGREGATED

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P/E Ratio of S&P 500/ Real performance

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Detailed Portfolio Construction Method

• Started by thinking about different factors realted to environment growth, inflation, real yields, volatility, and illiquidity .

• Blended two long style premia in thinking value(buying assets that are cheap relative to fundamental value) & Defensive (buy low risk, high quality assets)

Recommendation and Summary Rationale• Macroeconomic variables point to a slow

down in growth as referenced by the Leading Economic Indicators Index.

• Latest inflation rate .7%; low inflation environment as referenced by Urban CPI Index.

• Real yields seem to be decreasing hence a low emphasis on bonds.

• Volatility is very high • Illiquidity is decreasing as referenced by the

increasing corporate yield spreads.

Supporting Point 1

Supporting Point 2 Supporting Point 3

• After figuring out the assumptions about the environmental factors I moved to the internal portfolio composition

• I referred to the Bloomberg terminal for all of my assumptions; carefully measuring every proposed asset against the S&P 500 as an Index.

• Consulted correlations between historical return of assets and valuation factors provided

Detailed Portfolio Construction Method (continued)

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• Ishares NASDAQ Biotechnology Index ETF(NASDAQ:XNBI)- Instant diversification at a low expense ratio. Holds the largest number of companies overall and focused on the larger more mature companies in the space. Includes blue chips, that have great prospective earnings.

• In building my portfolio I considered macroeconomic changes in the economy and future trends.

ETFs• Turnover ratio of 33% on 8.35 Billion worth of

assets; with 144 companies and a modest expense ratio of .48% this would offer a chance to capitalize on prospective earnings.

• Has many companies that operate in the healthcare sector which will provide a solid basis for return in the future as costs rise as baby boomers age

• Within this choice of ETF; I also am maintaining my belief that technological progress/innovation is crucial for the investment process.

Healthcare Spending Supporting Point 2

Portfolio Construction Method: Data intersection

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Construction Method Continued

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Construction Method Continued

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Why Private Equity in Portfolio?

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New Money Investment

• Solar City Corp(NASDAQ:SCTY)- Energy is extremely cheap right now; Solar City has an innovative business model in which they use PPA(Power Purchase Agreement plans) that allow the consumer different ways to pay by using roof space to offset electric bill. Once OPEC countries stop flooding the market with oil due to It’s devaluation energy prices will skyrocket thus increasing Solar City’s stock price greatly.

• Solar City owns it’s market(share is equal to next 14 competitors combined) .

Recommendation and Summary Rationale• Benefits of the innovative system-”Full pre-pay plan”-

pay for the amount of power your system will produce up front. Often save greatly by paying a greatly reduced price than what electric company charges.

• “Pay as you go Plan”- Requires no money down while cutting costs of energy simultaneously.

• $9,000 Federal Tax Credit almost paying for the entire system.

• Hybrid payment plans are innovative step in the market allowing more consumers than ever to access alternative sources of energy.

Supporting Point 1

• Consultants come directly to house; use new software to show satellite image of house which then can be used to virtually place panels on roof.

• Innovate technology will displace traditional competitors in the market, the “A” which stands for technological progress in the Solow model eliminates the static nature of the market and produces better returns.

• Expand product lines to industrial and commercial uses?

Supporting Point 2 Supporting Point 3

Erosion of oil as a resource

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Solid core principles R&D/ Profit Margin

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This is what we like to see

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International Equity

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Proposed Portfolio

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• Defensive-fundamentalist strategy- Mitigate risk exposures in the event of another looming recession on the horizon, including diversification

• Solid Fundamentals- Primarily search for companies with high R&D

• Innovation- Companies that strive for creative solutions to problems; companies that are capitalizing on new trends, alternative energy. Technology oriented.

• Hedging Risk Via ETFs- Mitigate risk to idiosyncratic exposures to particular industries by incorporating various ETF’s.

• We don’t just want to buy commodities; we want commodities that will have a positive relation with industries that we are diversified across

• Market symmetries should be maximized however, asymmetries should be contained by an aggressive diversification strategy.

Description of Construction Methodology

35%

25%5%

10%

5%

20%

Mid-Large Cap Stocks

ETF's

International Equity

Commodities

Government Bonds

Private Equity

Proposed Portfolio Allocation

Recommended Investment Idea (new money)• Retreat from all Oil positions and switch to

alternative energy sources (Solar City)• Increase presence in commercial space

industry (attain shares of spaceX)• Capitalize on the consumption of the newly

forming Chinese/Indian middle classes

• US GOV’T Bonds: -21.70 %• High Yield Corporate Bonds: 29.90%• International Equity: 33.53%• Commodities: 22.59%• Real Estate: 29.58%

Other Asset Classes correlation to Leading Economic Indicators Index

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Risks and Considerations

• China’s looming risk of economic slowdown: although captured in many investor’s sentiments the true risk associated with an economic contraction could be very harmful.

• Aversion to bonds at this point: my construction stems from rumors in the marketplace that the Fed is considering implementing negative interest rates; after the economic uncertainty imposed by the last rate hike I think it viable.

• International equity market: Have to be careful in the international sector; with uncertain economic data stemming from China’s industrial environment should focus more on consumer staples that the emerging middle class can utilize.

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Conclusion/Recommendation

• As referenced before my analyzing the leading economic indicators index; I believe that another recession may be on the horizon.

• In light of this bear market; positions should be taken to mitigate risk by attempting to access other markets such as private equity.

• Using tools that have the inherent property of diversification (ETFs) can be a viable strategy to minimize idiosyncratic risk exposures.

• Systematic risk will have to be measured carefully; it may be possible to alleviate decreasing equity values by offsetting them with more weight in 10 year govt bonds .

• Opportunities in the form of equities that represent innovate market strategies should be pursued.

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Back-up

Solow Model and It’s consideration in economic analysis

• Y=Kα(AL)1-α

• Labor grows with population growth • Capital accumulates with savings • Technology=A= is usually a static measure

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