Sage Advisory Services, Ltd. Co. Financial Management

our FIRM

What sets Sage apart from other institutional investment management firms?
Sage specializes in fixed income, exchange traded funds (ETF) and balanced portfolio management for taxable and tax-exempt clients. We offer a client liability-oriented approach to investing that is based upon well-developed risk control disciplines designed to work in all financial climates. Because the investment goals and requirements of each investor are unique, we pay careful attention to their individual liability funding and income needs. We manage each client portfolio separately and tailor each portfolio to suit the safety, liquidity, income, and total return expectations of the client. It is our belief that only an individually designed, conscientiously monitored investment management program can satisfy the constantly changing needs of each client.

Describe the ownership structure of the firm.
The firm was established in 1996 by Bob Smith and Mark MacQueen. Sage Advisory Services, Ltd. Co. is a privately held, SEC registered investment advisory firm. It is a limited liability company registered in the State of Texas. The firm is 100% employee owned.

What services does Sage provide?
The firm offers the following general services: equity, fixed income and balanced portfolio management, portfolio risk evaluation and diagnostics, performance analytics, financial and liability modeling, economic and bond market research, client training, access to online services, and general economic and capital market advisory services.

How does Sage communicate with it's clients and consultants?
The firm promotes communication through a variety of channels, including monthly market analyses and commentary, quarterly economic reports, special research reports, formal client presentations, online information services, periodic teleconferencing, and email correspondence.

Does Sage offer specialized investment services for organizations with special needs, such as foundations, insurance companies, healthcare companies?
Sage offers services to specifically address the needs of a diverse client constituency. This may include cash flowand asset/liability analysis, in addition to the segregation of securities according to tax lot. The professionals at Sage will work with a client to develop a comprehensive planfor liability funding and investment portfolio optimization.

What is asset/liability analysis and how will we benefit from the service?
Asset/liability analysis determines the optimal use of assets to satisfy predetermined cash needs. It permits the client to maximize the efficiency of their investment portfolio and to meet obligations in a timely manner. A thorough asset/liability analysis reveals periods of potential shortfall and alerts both Sage and the client of their possible impact.

What is the minimum account size?
$3 Million for High Net Worth Individuals and $5 Million for Institutions.

What is Sage's fixed income portfolio construction process and philosophy?
Sage employs a multi-factor review process for the portfolio's security selections. By combining fundamental economic and quantitative security analysis, we identify those sectors of the broad fixed income markets that offer optimal gross, risk adjusted and after tax returns over a rolling six-month horizon within a client's risk constraints. Once the preferred sectors of the market universe have been identified, the firm then selects securities within each sector that offer the best value in satisfying client's ongoing investment objectives. Through rigorous term structure and credit analysis, the firm also identifies specific securities that are priced less than the current market estimate of their potential. The firm focuses primarily on the use of high-quality investment grade securities. To reduce portfolio risk the firm limits a portfolio's exposure to any single market sector, with the exception of U.S. government securities. The firm does not use futures or options to enhance returns and avoids the use of exotic derivative securities within all portfolios.

What is Sage's sell discipline?
Sage's sell discipline is guided by a variety of factors including client funding requirements market environment and the viability of each security individually or within the context of it's role within a total portfolio. The firm will sell any security that fails to meet the minimum risk constraints established within client's investment guidelines. The firm will sell a security once it has satisfied the return objective identified in its ongoing investment strategy. This may be in the form of a specific price, spread or period return objective. Such sales are also dependent upon the identification of superior investment alternatives relative to the firm's market outlook. This disciplined approach helps to ensure consistency in portfolio returns and risk measures within each product composite.
The firm does not offer a high turnover portfolio management style. Therefore, short-term market volatility generally will not trigger a high percentage of portfolio sales. The firm prefers to exercise portfolio sales in a more considered and strategic fashion. Liquidations may occur if a security fails to meet it's anticipated return objectives. Routine horizon return analysis supports the decision process.

What key factors does Sage examine when making investment decisions?

Who is responsible for executing portfolio trades?
The firm's investment committee is responsible for organizing and implementing all portfolio management strategies. Portfolio trades are executed only by the firm's designated and approved trading staff. All portfolio transactions are reviewed and pre-approved by the firm's investment committee.

Who is responsible for reconciling monthly custodian statements to firm's client statements?
All client portfolios are reconciled daily and reviewed monthly by the firm's operations and trading staff. Portfolio holdings, transactions, and all accruals are reconciled against each client's individual custodial portfolio statements.

Who is responsible for overseeing client portfolios to verify positions are in compliance with investment policies?
The firm's investment committee, through the weekly portfolio review process, evaluates and confirms compliance with client investment guidelines. This process is supported and replicated by the firm's operations and client administration staff.

How frequently are portfolio reviews performed?
Sage performs regular portfolio reviews depending on market conditions. The firm's investment committee formally meets bi-weekly to review investment markets, evaluate investment policy, organize an implementation strategy, and analyze client portfolios.

How often are securities priced and what sources are used to determine market values, including illiquid or thinly-traded issues?
All portfolio holdings are priced daily. Market valuations are checked weekly. The following pricing sources are commonly used for each of the firm's products: Bloomberg Information Systems, Interactive Data Corporation, and Merrill Lynch.

What is your policy regarding client directed trading/commissions?
The firm will adhere to the stated policy of the client to the extent that such policies serve the vested interests of the client. The firm will not execute transactions with institutions that are unable to provide competitive and timely execution services. This serves the fiduciary interests of the client and avoids potential damage to the firm's performance record.

Please describe the role of cash in your portfolios including minimum and maximum percentages.
Cash allocations are used for the defensive and duration balancing needs of the portfolio. Generally client fixed income portfolio durations are managed within a 25% range, either long or short, compared to the duration of the client's specific performance index. In normal market settings cash will be maintained around the 0 – 5% level and may reach 30% when in a very defensive mode.

What is the objective of Sage's All Cap Core Equity strategy? For whom is it suitable for?
The Sage tactical All Cap Core Equity strategy seeks tax-efficient capital appreciation through the investment in select exchange-traded funds.The product employs a multi-cap, multi-style rotation strategy that over-weights those segments of the market that appear positioned to outperform given current valuations, fundamentals and the macro environment. The strategy is geared towards clients desiring low-cost active equity management that minimizes individual security risk.

What is Sage's equity process?
Our tactical process is quantitatively driven using proprietary models to help in each of our three primary allocation decisions, i.e., equity weighting vs. cash; segment weighting (market cap-large/mid/small, and style-growth/value) and international vs. domestic weighting.
First, in analyzing the equity weighting versus cash we take into account both our strategic and tactical view on equities overall. For the strategic input we monitor our asset class relative value model, which assess the longer term attractiveness of holding cash versus equities based on current and forecasted short-term interest rates and equity earnings, as well as current valuation levels. For our tactical view on equities we employ an equity risk premium model that measures the current risk premium and projects the future implied risk premium over the next four quarters based on our expectations for profit growth, inflation and bond yields. These forecasts are translated into quarterly price targets for the broad market (S&P 500), as well as a fair value range around these targets. This gives us a fundamental based assessment of when it is attractive to tactically increase or reduce or cash/equity mix.
Second, the segment rotation strategy (equity composition) is supported by three proprietary models (market cap, style, international). Each is designed specifically to gauge the relative attractiveness of one segment vs. another using a set of fundamental and macro-economic variables that have shown a significant relationship to excess returns. Three month moving averages are used for each factor and are regressed against the average return spread between the different styles and market cap segments over the following 3 months to ensure the model is predictive in nature. Only factors that had a suitable level of explanatory power and were statistically significant over at least a 10 year period were considered. The result is a tactical indicator designed to show which market segments have the higher probability of generating excess return over the intermediate term (1-2 quarters). The results are applied by holding a bias to our portfolio toward the favored segments.
Although quantitatively driven, all model output is reviewed and discussed by the investment committee within the context of our overall market outlook and must be approved before implementing tactical shifts in our strategy.
Monitoring includes the calculation and tracking of the aggregate risk and return characteristics of our current allocation as well as proposed allocations. Aggregate sector and industry exposure is also tracked and viewed frequently for both current allocation and proposed allocation changes. Additionally, all individual ETF's are tracked and reviewed for suitability, index methodology changes, expenses and liquidity and other trading concerns on an ongoing basis. Sage also tracks the ETF market as a whole, keeping an historical database of information for most of the existing ETF universe.

What Exchange Traded Funds can be used in the All Cap Core Equity Strategy?
• SPDRS • iShares S&P 500/Citigroup Growth • iShares S&P 500/Citigroup Value • Rydex S&P 500 Equal Weight • MidCap SPDRS • iShares S&P MidCap 400/Citigroup Growth • iShares S&P MidCap 400/Citigroup Value • iShares S&P SmallCap 600 • Russell SmallCap Growth • iShares S&P SmallCap 600/Citigroup Growth • iShares S&P SmallCap 600/Citigroup Value • iShares MSCI-EAFE • iShares MSCI-EAFE Growth • iShares MSCI-EAFE Value • DIAMONDS

Why is a Sage A/L Study different from an Actuarial Valuation?
While we use actuarial data to perform our studies, we are not actuaries. A Sage A/L Study is a bridge between the actuarial world and the investment world. We translate complex actuarial issues into “CFO-friendly” terms making it easier for clients and consultants to develop multi-faceted solutions to their liability funding needs and goals.

What is Liability Drive Investing or LDI?
LDI simply put, is a means for dynamically managing an organization’s assets and designing asset allocation solely within the context of the size and structure of the organization’s liabilities. LDI offers an ongoing process and framework for understanding the security return, interest rate and short fall risks to which any liability based institution may be exposed. The liabilities can be pension benefits, OPEBs, insurance claims or endowment/foundation disbursements. Sage, in conjunction with our A/L Studies, provides LDI services.