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Tactical–Stocks-Bonds STRATEGY PROFILE | May 31, 2017 60 State Street, Suite 700 • Boston, Massachusetts 02109 • [email protected] • 617-854-7417 • http://modelcapital.com/ Foradvisoruseonly.Notforpublicdistribution. FIRM’SINVESTMENTPHILOSOPHY Model Capital Management LLC (MCM, we) is an investment manager that focuses on asset allocation. Tactical managementisastrategythatinvestsinassetclasseswiththebestreturn-riskoutlook.Asopposedtobuy-and-hold,this strategy alters portfolio allocations based on expected returns and risks – attempting to avoid significant market downturns, but to participate in the upside. However, it is as challenging as all of active management, and simplistic methodscanhardlywork.Wethinkthattacticalmanagementcanbesuccessfulifweincorporatefundamentalfactors thatdrivemarketsaspartofaforward-looking(forecasting)approach. To decide whether to allocate to risky assets, we utilize our statistical model (the PAR 20% Model™), developed since 2003, to forecast 6monthequityindexreturns.Themodelutilizes 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 over 20 fundamental factors such as valuation -20% BacktestedReal-Time and economic variables. It dynamically adjusts -40% to the market environment by detecting the 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 100% factorsthattendto“work”atanypointintime. S&P 500 Model's Buy Signal Model's Sell Signal Given the forecast, we then invest the 50% strategies either in risky assets, or in fixed 0% income/cash markets. We offer U.S. tactical -50% strategies ranging in risk profiles from Income, “Model Return Forecast” for 6-month S&P 500 return is MCM’s measure of attractiveness of the market, but is not promissory, and does not constitute an to Stocks-Bonds (average balanced), to investment recommendation. The forecast shown may not be up to date, and may 2xStocks-Bonds(growth,upto2xleverage). 40% S&P5006mReturns Model'sS&P500ReturnForecasts Mar31, 2017:1.7% changeatanytime.SourcefortheS&P500actualreturns:S&PDowJones. Allourstrategyportfoliosarelong-only.Forecaststypicallygenerate2-5re-allocationtradesperyear,andthestrategies havelowtradingvolume.Weuseonlybroad-indexETFsasanefficientwaytoimplementtheportfolios,whicharewell diversifiedacrosssecuritiesandsectors,arehighlyliquidandhavelowexpenses.Eachstrategyintendstodeliveradded returnvs.itsrespectivebenchmark,withcomparablevolatility,andwithlowermaximumdrawdownthanbenchmark. STRATEGYPROFILE:STOCKS-BONDS When equity return forecastis… Forecast<0% Forecast0%-2% Forecast>2% Benchmark:Morningstar®TacticalAllocation The objective of the Stocks-Bonds strategy is to provide US marketexposureandparticipationinrisingmarketswhileheavily emphasizing risk in down markets through the combination of multiple asset classes including equity, fixed income, and cash equivalents. The strategy allocates up to 100% of assets to equities(risk-onallocation)ortofixed-incomeorcashequivalents (risk-off), primarily based on the PAR Model’s™ 6-month return forecast for equities, also taking into account risk and other fundamentals. This top-level allocation to major asset classes is theprimarysourceofperformanceforthisstrategyrelativetoits benchmark. Wetypicallyallocateto: 100%fixedincome 60%equities,40%F.I. 100%equities Profile Style Risk*Profile Equity*%*Min/Max/Avg Strategy*Inception*Date BackHtesting*Start*Date Stocks-Bonds Tactical*Asset*Allocation Balanced 0%/*100%/*59% 3/1/2013 12/31/2001 When in risk-on mode (in equities), the manager allocates to broad large-cap equity ETFs or style ETFs (Value and/or Growth)thatareexpectedtooutperforminagivenenvironment.Inaddition,wemanageshort-termequityvolatilityrisk byutilizingourshort-termriskmodel–equityallocationmaybereducediftheriskmodelindicatescaution.Wheninriskoff mode (in fixed income) we allocate to short-term bonds, Treasuries, and/or investment-grade corporate bonds, depending on their term-risk and credit-risk premium. Interest-rate and credit risks are actively managed when the portfolioisallocationtofixedincome. ©2017ModelCapitalManagementLLC.Allrightsreserved. 1 REAL-TIMEMODELPERFORMANCE(Mar1,2013–May31,2017) REAL-TIMEMODELPERFORMANCE(Mar1,2013-May31,2017) Performance YTD2017 2016 2015 2014 Mar-Dec2013 SinceInception,ann. 8.6% Morningstar® Tactical Allocation 5.2% 5.3% -8.5% 9.5% 21.8% 8.2% 6.2% -6.0% 2.7% 5.9% 3.2% StocksBonds StandardDeviation 6.3% Morningstar® Tactical Allocation 5.9% 3.4% -0.9% -2.5% 6.8% 15.9% 5.0% Betavs.S&P500 0.60 0.60 0.00 SharpeRatio SortinoRatio InformationRatio 1.10 2.04 1.48 0.49 0.73 0.60 1.31 1.48 StocksBonds Risk(3y) Relative Relative 0.5% InvestmentObjective: TheobjectiveoftheStocks-BondsstrategyistoprovideUSmarketexposureandparticipation in rising markets while heavily emphasizing risk in down markets through the combination of multiple asset classes including equity, fixed income, and cash equivalents. MCM commenced offering the strategy on Mar 1, 2013 by providingrecommendationstootheradvisors.MCMstartedmanagingclientaccountstothestrategyonJan1,2014. FiguresforperiodbetweenMar1,2013andJan1,2014reflecttheperformanceoftheStocks-Bondsmodelportfolio asitwasrecommendedtoadvisors,netofaverage trading costs and MCM’sinvestment management fee of 0.90%, rd andwasverifiedbyanindependent3 party.However,MCMdidnotdirectlymanageindividualclientportfoliostothe strategyduringthisperiod.Actualaccountperformancemayvaryduetotimingoftrades,securitypricing,andtrading expensesbyeachparticularadvisor. Composite returns reflect the performance of all fee-paying accounts managed to the Stocks-Bonds strategy since inception of the composite on Jan 1, 2014. All performance figures presented are net of trading costs and MCM’s investment management fee of 0.50%. All realized and unrealized gains and losses, dividends and interest from investments, and cash balances are included in return calculation. Past performance is not a guarantee of future returns. Benchmark: The benchmark for the Stocks-Bonds strategy is the average net total return of all funds included in Morningstar® Tactical Allocation category, updated monthly. This benchmark is relevant due to similarity of its managementstyle,anditsriskprofiletothoseofthestrategy. Onthisbasis,thestrategyoutperformedthebenchmarkby5.0%annuallysincethestrategyinceptiononMar1,2013. MODELCUMULATIVERETURNS(Mar12013–May312017) 50% Stocks-Bonds39.6% Morningstar®TacticalAllocation14.2% S&P500RiskControl10%45.0% 30% REPRESENTATIVEETFsCONSIDEREDFORTHESTRATEGY Stocks-Bonds Ticker IVV QQQ VTV VUG LQD IEF VCSH FLOT TIP SecurityName iSharesCoreS&P500 PowerSharesQQQETF VanguardValueETF VanguardGrowthETF iSharesiBoxx$InvestmentGradeCorp.Bnd iShares7-10YearTreasuryBondETF VanguardShort-TermCorporateBond iSharesFloatingRateBondETF iSharesTIPSBondETF SourceforAUMandexpenses:Morningstar ©2017ModelCapitalManagementLLC.Allrightsreserved. Feb-17 Type Equity Equity Equity Equity FixedIncome FixedIncome FixedIncome FixedIncome FixedIncome Aug-16 Feb-16 Aug-15 Feb-15 Aug-14 Feb-14 Aug-13 -10% Feb-13 10% AUM,$mil ExpenseRatio $119,860 0.04% $50,670 0.20% $32,060 0.06% $23,310 0.08% $36,070 0.15% $7,560 0.15% $19,190 0.07% $5,770 0.20% $23,190 0.20% Fund Expenses: MCM implements the desired portfolio exposures primarily withlow-costindexETFs.WeselectETFs thatmeetourcriteriaoflargeAUMsize, high liquidity, and low fees. We are not limited to any particular ETF sponsor. Most ETFs currently approved have expenseratiosbelow0.2%.Ourchoiceof ETFsmaychangeinfrequently. 2 AdditionalDisclosures DEFINITIONS RelativeReturn:Theportfolio’sreturn relative to its benchmark. It is calculated as the difference between the portfolio’s annualized return and its benchmark annualized return for thesameperiod.Activereturncanbe used to measure the value added or subtractedbyafundmanagerrelative topassiveindexbenchmark. Standard Deviation: measures the volatility,orthedegreeofvariationof returns around the average return. Thehigherthevolatilityofinvestment returns, the higher the standard deviation will be. For this reason, standard deviation is often used as a measure of investment risk. A more volatile stock or investment would haveahigherstandarddeviation. Maximum Drawdown: A measure of risk that captures the largest percentage drop of an investment from any peak to trough, in a given historical period. It is generally calculated using month-end data. It showsinpercentagetermsthelargest loss during that particular historical period.Forexample,ifyoubeganwith a $100,000 investment and your maximum drawdown was 30%, your maximum loss from peak to trough during that period would have been $30,000. Sharpe Ratio: A return-to-risk ratio developed by William Sharpe that measures the return generated per unit of risk. The return (numerator) is defined as the incremental average return over the risk-free rate (such as 3-month Libor). Risk (denominator) is defined as the standard deviation of theseincremental returns over the risk-free rate. A higherSharpeRatiowouldindicatean investment manager, method, or strategy achieving higher returns (relative to risk-free rate) per unit of risk. Information Ratio: An active returnto-risk ratio that measures the active return (over benchmark) generated per unit of active risk. The active return (numerator) is defined as difference between the portfolio’s annualized return and its benchmark annualizedreturnforthesameperiod. The active risk (denominator) is defined as the standard deviation of these active returns over the benchmark. A higher Information Ratio would indicate an investment manager, method, or strategy achieving higher active returns per unitofactiverisk.Inactiveinvestment management analysis, Information Ratio is often considered to be a measure of skill of a manager or method. PERFORMANCECALCULATION MCM commenced offering the strategy on Mar 1, 2013 by providing recommendations to other advisors. MCM started managing client accounts to the strategy on Feb 1, 2014.FiguresforperiodbetweenMar 1, 2013 and Feb 1, 2014 reflect the performance of the Stocks-Bonds model portfolio as it was recommended to advisors. Model performance for this period was calculated by MCM, and was verified rd byanindependent3 party.However, MCM did not directly manage individual client portfolios to the strategy during this period. Actual accountperformancemayvarydueto timing of trades, security pricing, and trading expenses, among other factors. The Stocks-Bonds composite was created on February 1, 2014. Composite returns reflect the performance of all fee-paying accounts managed to the StocksBonds strategy since inception of the compositeonFeb1,2014. Unless noted otherwise, all performancefigurespresentedarenet of trading costs and of MCM’s investmentmanagementfeeof0.90%. Past performance is not a guarantee offuturereturns. MCM claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared this report in compliance with GIPS® standards. MCM’s performance has been independently verified for compliance with GIPS® standards for the periods Jan 1, 2014 through June 30, 2014. The verification reports are availableuponrequest. Investment results are time-weighted performancecalculationsrepresenting total return. Monthly geometric linking of performance results is used tocalculateannualreturns.Allrealized ©2017ModelCapitalManagementLLC.Allrightsreserved. andunrealizedcapitalgainsandlosses as well as all dividends and interest from investments and cash balances areincludedinreturncalculation. The investment results shown are not representative of an individually managedaccount’srateofreturn,and differences can occur due to factors such as timing of initial investment, client restrictions, cash movement, etc. securities used to implement the strategiescandifferbasedonaccount size,custodian,andclientguidelines. RISKS The value of investments and the income derived from them can go downaswellasup.Futurereturnsare notguaranteedandalossofprincipal mayoccur. The investment strategy described herein does not ensure a profit and does not protect against losses in declining markets. Model Capital Management’s risk-management process includes an effort to monitor and manage risk, but should not be confused with (and does not imply) lowrisk. The 10-year time period shown in Risk/ReturnMetricsisshort,anddoes not include all potential market scenarios that can occur, and their impact on the portfolio. Maximum drawdown is calculated as the worst cumulative peak-to-trough decline fromanymonth-enddatapointtoany other month-end data point. The potential drawdowns of the StocksBonds investment strategy could exceed that shown in Risk/Return Metrics. Maximum drawdown for the benchmark was incurred from Nov 1, 2007throughFeb28,2009. There are risks associated with any investmentapproach.Investorsshould carefully consider risks before Investinginthisstrategy.Onlysomeof therisksaredescribedasfollows: 1. Equities: Our tactical strategies may,fromtimetotime,allocate100% of client portfolios to a broad equity market index or a combination of equity market indices. Investing in equity markets involves significant risks: (a) Common stock holders of a company may lose 100% of their investment in case of bankruptcy of thecompany.(b)Broadequitymarket indices (such as the S&P 500) are volatile – the index level, or price, 3 fluctuates significantly over time. Investors may incur a loss if the time of redemption of their investment coincides with a downturn in general equitymarket. 2. Exchange-Traded Funds (“ETFs”): ETFs are securities the price of which isbasedontheunderlyingportfolioor index. ETF’s total assets (size), liquidity, expenses, and premium/discount to their net asset value(NAV)aresubjecttochangedue to the ETF sponsor or manager actions, market conditions, or other reasons beyond our control. One or moreofthefollowingrisksmaycause anETFinvestmenttodeviatefromthe underlying index and to erode the value of a portfolio investment: high expenses,lowliquidity,thepricebeing materiallydifferentfromNAV. BENCHMARKS The peer benchmark for the StocksBonds strategy’s real-time performance is the average total return of all funds included in Morningstar® Tactical Allocation category, updated monthly by Morningstar®. This benchmark is relevant due to similarity of its management style, average equity/bond allocation, and risk profiletothoseofthestrategy. The market-based benchmark for hypotheticalback-testedresultsofthe Stocks-Bonds strategy is the mix of 60% equities and 40% bonds, rebalanced monthly. The benchmark for the equity portion is the total return of SPDR® S&P 500 ETF (SPY), managed by State Street Global Advisors.Thebenchmarkforthebond portion is the total return of iShares Core U.S. Aggregate Bond ETF (AGG), managedbyBlackrock. These benchmarks are chosen based on similar management style and/or risk profile between the benchmark and the portfolio’s strategy. The benchmarkshavenotbeenselectedto represent that an investor’s performance would follow it closely, but rather is disclosed to allow for comparison of the investor’s performance to that of a similar managementstyle,andofwell-known andwidelyrecognizedindex. Reference to a benchmark does not imply that the Stocks-Bonds strategy will achieve returns, experience volatility, or have other results similar to the index. The composition of a benchmark does not reflect the manner in which the Stocks-Bonds investment portfolio is constructed in relation to expected or achieved returns, investment holdings, asset allocation guidelines, restrictions, sectors, correlations, concentrations, volatility, or tracking error targets, all of which are subject to change over time. ABOUTTHEMANAGER Model Capital Management LLC (“MCM”, “Model Capital”, “we”) is an investment advisor registered in the Commonwealth of MA. Model Capital focuses on tactical management. We believe that tactical management of broad index exposures has significant potential for achieving excess return relative to a buy-and-hold portfolio. We utilize our forecasting models to determine near-term risk-return opportunities in broad asset classes, such as U.S. stocks and bonds. We then tactically rebalance portfolios to take advantage of these risk-return opportunities. Model Capital offers a choice of several tactical portfolio strategies to its clients to invest in, including U.S. Stock-Bonds, U.S. Complete Market, and 2xStocksBonds. We implement the portfolios using primarily ETFs or other broadbasedindexfinancialinstruments. ABOUTTHEINVESTMENT Tactical – Stocks-Bonds strategy may beofferedtoinvestorsasaseparatelymanaged account (SMA) or as an investment portfolio on a custodian platform. It is typically managed by the applicable Investment Advisor or FinancialAdvisorwhoholdscustodyof client assets, and sub-advised by Model Capital Management LLC. Termsandrestrictionsmayapply,such asaminimuminvestmentamount. ©2017ModelCapitalManagementLLC.Allrightsreserved. 4