The Montgomery Institute

Investment Proposal

December 2013

History of Investment Policy Changes

Date Mandate % Equities

% Bonds

% Cash

June 20, 2002 Growth & Income 60% 39% 1%

Oct. 24, 2004 Tactical Equity 100% 0% 0%

July 8, 2009 Tactical Allocation 50-100% 0-70% 1-30%

October 15, 2013 All Cash 0% 0% 100%

Account History

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD (9/30)

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

Net Investment Ending Balance

Growth & Income Model.

10/24/2004Tactical Equity Model

7/9/2009Tactical

Allocation Model

10/15/2013All Cash Model

Mar-0

3

Sep-0

3

Mar-0

4

Sep-0

4

Mar-0

5

Sep-0

5

Mar-0

6

Sep-0

6

Mar-0

7

Sep-0

7

Mar-0

8

Sep-0

8

Mar-0

9

Sep-0

9

Mar-1

0

Sep-1

0

Mar-1

1

Sep-1

1

Mar-1

2

Sep-1

2

Mar-1

3

Sep-1

3

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

$2,200,000

$2,400,000

$2,600,000

TAAM

Benchmark

Month 3 Month YTD 1 YR 2 YR 3 YR 5 YR 10 Yr Cumulative AnnualizedTAAM 3.00% 3.39% 8.76% 10.37% 11.68% 7.68% 9.77% 7.78% 149.56% 9.10%Benchmark 2.21% 3.33% 10.56% 10.24% 13.38% 9.71% 7.71% 6.00% 91.49% 6.38%

For month ending 9/30/2013

Total Return Since Inception (4/1/03)

TACTICAL ASSET ALLOCATION MODEL PERFORMANCE

Annualized Total Return

Annual Returns since

inception

Fund Return since

Inception

Creating the TMI Portfolio

1. Define Objectives

2. Identify Constraints

3. Determine Allocations

4. Manage To Policy

Objectives

Constraints

Allocations

Manage

Universal Investment Objective

Maximum Return

Minimum Risk

The goal of any investment portfolio

should be to achieve the highest return for an acceptable amount of

risk.

Identifying Constraints: Personal Risk Tolerance

0% - I am not willing to accept any loss in my

investment

5%

10%

15%

20% or more

Where is Your Pain Point?

• How much loss are you willing to accept in any given 12 month period?

%

Identifying Constraints: Time Horizon

• Investment returns become less volatile over time. The longer the time horizon, the less short term risk affects the account.

• The account is an endowment which is considered “long term” however,

• Drawdown policy of 5% requires a short term focus.Source: Schwab Center for Financial

ResearchFigure 1: Range of S&P 500 returns, 1926-2011

Identifying Constraints:Liquidity Requirements

Liquid Assets Less-Liquid Assets

Money Market Accounts

Investment Real Estate

Bank CD’s Oil & Gas properties

Listed stocks Corporate and some Government Bonds

Mutual Funds Private debt and equity funds

Life Insurance Cash Value

How much of the account should be convertible to cash in a short period of time?

• The account may be required to liquidate 5% of its holdings each year

Identify Constraints:Drawdown Requirements

• The account must support a 5% annual drawdown.

• Minimizing the volatility of the account will allow for more predictable income.

Step 3: Determine Allocations

Determine AllocationsDominant Benefit Asset Allocation

Growth %

Income %

Stability

%

• Choose the percentage that you want to allocate among the Dominant Benefit provided by the investments.

Determine Allocations:Asset Class Selections

Dominant Benefit

Lowest Risk to Principal

Medium Risk to Principal

Higher Risk to Principal

Stability Cash in bank, CD’s, Money Market Funds

Treasury Notes; Fixed Annuities; Index Annuities

Short Term Bonds/Funds; Floating Rate Notes; Zero-Coupon Bonds

Income US Government Bonds

US Corporate Bonds; Municipal Bonds; International Bonds

Mortgage-Backed Securities; High Yield Bonds, Investment Real Estate, Private Debt

GrowthUS Large Company Stocks; Large Global Stocks

US Mid/Small Company Stocks; Foreign Stocks

Emerging Market Stocks; Private Equity, Hedge Funds

Determine AllocationsExpectations of risk and return

Source: Morningstar

Benefit Asset Class Proxy10 YR Avg

Ann Return10 Yr Avg Ann

Std DevUpside Return

Downside Return

Your Percentage

Safety Cash EquivalentsBarclays Capital U.S. 1-3 Year Treasury Index

3.93% 1.55% 5.48% 2.38% 15%

Income Bonds Citi World Gov Bond Index 5.57% 4.63% 10.20% 0.94% 0%

Growth Stocks MSCI EAFE All-World Index 7.56% 18.29% 25.85% -10.73% 85%

Approximate Weighted Results 7.02% 15.78% 22.79% -8.76% 100%

Your Allocations

Cash Equivalents Bonds Stocks

Active Management

Reduce RiskHigher Returns

We select top-tier managers and implement tactical and tax management strategies to the portfolio to capture as much Upside while avoiding the potential Downside of the asset classes.

Proposed Portfolio AllocationAllocation %

Strategy Objective

40% Main Street Large Cap Blend Portfolio

The Large Capitalization Blend Portfolio contains small to large sized companies that have average risk and provide moderate growth. This portfolio has the goal of beating the S&P 500.

20% Vanguard Total Bond Market ETF

Vanguard Total Bond Market ETF tracks the Barclays Capital Aggregate Float-Adjusted Bond Index, which is widely used as a proxy for the United States investment-grade bond market.

10% Vanguard Total Intl Stock Index ETF

Vanguard Total International Stock is a solid choice for passive cap-weighted exposure to international equities. The fund invests in stocks from 46 developed and emerging markets, which currently account for about 55% of the world's market capitalization.

10% Vanguard FTSE Emerging Markets ETF

Vanguard FTSE Emerging Markets provides broad, cap-weighted exposure to emerging-markets equities

10% AQR Long/Short Equity Strategy

The Fund seeks to provide higher risk adjusted returns with lower volatility compared to global equity markets. The Fund’s approach seeks to explicitly separate the return of market exposure (“beta”) from the true “alpha” of long and short stock selection.

10% Pinnacle S&P Directional Strategy

The S&P Directional Strategy is a tactical investment strategy that seeks to earn profits in both bull markets and bear markets. It utilizes Exchange Traded Funds (ETFs) to replicate the S&P 500 and the inverse of the S&P 500.

Portfolio Performance

Portfolio Performance vs Benchmark

Step 4: Manage to Policy

Manage to Policy

• Rebalance the account quarterly

• Maintain a consistent policy going forward

• Resist changes to policy based on performance or economic cycles

Product Sheets