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HKFS Investment Advisory Committee Panel Discussion

HKFS Investment Advisory Committee Panel Discussion. From this time last year…. EAFE. S&P 500. Bonds. Fourth Quarter 2012. Third Quarter 2012. First Quarter 2013. Second Quarter 2012. Second Quarter 2013. Model Changes This Year.

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HKFS Investment Advisory Committee Panel Discussion

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  1. HKFS Investment Advisory CommitteePanel Discussion

  2. From this time last year… EAFE S&P 500 Bonds Fourth Quarter 2012 Third Quarter 2012 First Quarter 2013 Second Quarter 2012 Second Quarter 2013

  3. Model Changes This Year • July: Removed Global Natural Resources on the Growth Model; increased Global Real Estate and Large Value Dividend • August: Replaced Sentinel Small Growth with Janus Venture • January: Stopped dividend reinvestment in all accounts • March: • Replaced the Columbia Dividend Fund with the Schwab U.S. Dividend ETF in both growth models • added Energy via MLP; reduced large value dividend, global real estate and emerging markets • Replaced 5 ETFs with Schwab One-Source ETFs (mid growth, mid value, small growth, small value, global real estate) • April: replaced JP Morgan Mid Value Fund with Victory Established Value Fund in new households

  4. HKFS Growth Model Portfolios Growth Model Allocation Equity Income Growth Model Allocation

  5. HKFS Growth Model Returns As of April 30, 2013

  6. Global Equity Markets: Returns and Composition Source: MSCI, IMF, FactSet, J.P. Morgan Asset Management. Share of global market capitalization is based on float adjusted MSCI data. Share of global GDP based on purchasing power parity (PPP) as calculated by the IMF for 2013. Definition of emerging markets is based on MSCI and IMF data sources. Percentages may not sum to 100% due to rounding. Data as of 3/31/13.

  7. Interest Rates and Inflation Source: Federal Reserve, BLS, J.P. Morgan Asset Management. Real 10-year Treasury yields are calculated as the daily Treasury yield less year-over-year core inflation for that month except for March 2013, where real yields are calculated by subtracting out February 2013 year-over-year core inflation. All returns above reflect annualized total returns, which include reinvestment of dividends. Corporate bond returns are based on a composite index of investment grade bond performance. Data are as of 3/31/13.

  8. HKFS Taxable Income Fund Model Portfolios Income Model Allocation SHO Model Allocation

  9. Taxable Income Model Returns As of April 30, 2013

  10. HKFS 60/40 Model Portfolio Returns as of April 30, 2013

  11. NEW HKFS SMALL ACCOUNT OPTION • SEI Trust • $50,000 to $200,000 Households • HKFS Fee: 70 bps • Choose from 8 asset allocation models • Serviced by HKFS CSU Team

  12. 8 SEI Small Account Models Growth-Focused Growth-Focused Portfolios seek long-term growth in line with the broad equity and fixed-income markets. Stability-Focused Stability-Focused Portfolios seek growth within a risk budgeting framework to manage the risk of loss. Equity Aggressive Market Growth Core Market Return Expectation Moderate Conservative Defensive Short Term Risk Expectation

  13. SEI Market Growth Strategy 24% Large Cap 20% Multi-Asset Accumulation 11% International Equity 10% Multi-Asset Inflation Managed 9% U.S. Fixed Income 7% High Yield Bond 7% Emerging Markets Debt 4% Small Cap 4% Emerging Markets Equity 3% Multi Strategy Alternative 1% Prime Obligation Money Market

  14. In the Long-Run, Balanced Investing Almost Always Beats Cash Cash 1.8% Cash 0.1% Cash 0.0% Cash 4.8% Cash 4.8% Cash 0.1% Cash 3.0% Cash 0.1% Cash 0.1% Cash 1.2% Cash 18.2% Cash 1.7% Cash 1.0% Source: Russell, MSCI, Dow Jones, Standard & Poor’s, Credit Suisse, Barclays Capital, NAREIT, FactSet, J.P. Morgan Asset Management. The “Asset Allocation” portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EMI, 25% in the Barclays Capital Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the CS/Tremont Equity Market Neutral Index, 5% in the DJ UBS Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data represents total return for stated period. Past performance is not indicative of future returns. Data are as of 3/31/13, except for the CS/Tremont Equity Market Neutral Index, which reflects data through 2/28/13. “10-yrs” returns represent period of 1/1/03 – 12/31/12 showing both cumulative (Cum.) and annualized (Ann.) over the period. Data as of 3/31/13.

  15. Market Paranoia Three main themes in market: • Fear • Greed • Liquidity • Are we in a bubble market?

  16. Market Paranoia How these themes influence the market: • 1999: Greed + Liquidity = Tech Bubble • 2006: Greed + Liquidity = Housing Bubble • 2008: Fear – Liquidity = Market Meltdown • Today: Fear + Greed = Market Bifurcation • What has history taught us?

  17. Source: Morningstar Direct. Bonds represented by the Barclays Aggregate Bond Index and stocks by the S&P 500 Index. The index returns presented are for illustration purposes only and do not represent or predict performance of any product. Indices are unmanaged and unavailable for direct investment.

  18. Market Paranoia What investors should do in these markets: • Keep disciplined • Avoid bad products • Look for solutions • What do we recommend?

  19. Alternatives Income Growth

  20. Alternative Products What individual investors need: L…iquidity I…nvestment size F…ees T…ransparency

  21. Alternative Products A possible solution for individual investors: Unconstrained Funds

  22. Alternative Products TRADITIONALUNCONSTRAINED long only long or short limited opportunity (defined universe) global opportunity benchmark no benchmark defined duration can have negative duration structural risks avoids structural risks

  23. Allocating to Alternatives

  24. Client Diversification via Mini-Portfolio of Alternative Investments EXAMPLE: 3 clients each with a net worth of $3,000,000. Each wants to diversify their managed portfolio with some Direct Investments. • Client #1 wants income • Client #2 wants a blended approach: income with growth potential • Client #3 wants no income with the potential for growth SOLUTION: • Commit 5% of $3,000,000, or $150,000, to Direct Investments • Commit $50,000 to each of 3 programs • Diversify client portfolio by: • Plan sponsor • Asset class • Potential liquidity date

  25. Alternatives in the Direct Investment Area Epoch Multifamily Opportunity Fund Growth Walton LP Ridgewood Resource Opportunity REIT Lightstone Value Plus II CNL Global Growth Trust Hines Azure Franklin Square Growth and Income Hines Global REIT Waveland Cole Credit Property Trust IV Atlas Inland Diversified CNL Corporate Trust Strategic Storage Trust CNL Properties Trust WP Carey CPA 17 Noble Access Fund Cole Corporate Income Trust Income Client #2 – Growth & Income Client #3 - Growth Client #1 - Income Retail Diversified/ Opportunistic Business Development Company Multifamily Healthcare Diversified Global Diversified Office/ Industrial Self-storage Raw Land Exploratory Oil & Gas Oil& Gas/ Royalties Oil & Gas Drilling

  26. Certain There Will Be Uncertainty Sources: BlackRock. InformaInvestment Solutions; SSBI 2006 Yearbook. Past performance is no guarantee of future results. It is not possible to invest directly in an index. Stocks are represented by the S&P 500 Index. Bonds are represented by SBBI’s Intermediate-Term Government Bonds (1971 to 1972) and the Barclays Capital Intermediate Government Bond Index (1973 to 2011), an unmanaged index made up of the Treasury Bond Index (all public obligations of the US Treasury, excluding flower bonds and foreign traded issues) and the Agency Bond Index (all publicly issued debt of the US government agencies and quasi-federal corporations, and corporate debt guaranteed by the US government). Cash is represented by the 90-day Treasury bill.

  27. HKFS Investment Advisory CommitteePanel Discussion

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