Making Sense of Markets Q2 2017 Headlines

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Featured Speaker

Matthew Carvalho, CFA, CFP®Director Investment Research, Loring Ward

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Q2 Headlines

Jun 13

Who’s Worried about Passive

Investing?Bloomberg

Apr 7Passive Investments:

Far From PerfectThinkAdvisor

Apr 21Passive Investing

is Popular But Ignores Value

Forbes

May 29

The hidden dangers of

passive investingFinancial Times

Apr 17Is the Passive

Indexing Craze the New Tulip Bulb Mania?Wealth Management

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Today's fad is index funds that track the Standard and Poor's 500. True, the average soundly beat most stock funds over the past decade. But is this an eternal truth or a transitory one?

— Forbes Sept. 3, 1990

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Diversification neither assures a profit nor guarantees against loss in a declining market. Passive investing may lead to tax efficiency if turnover ratios are lower than actively managed funds. All investing involves risk, principal loss is possible.

Active or Passive?

Stock PickingMarket Timing

Active PassiveDiversified group of

securities

Tax efficiency

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INTERNATIONALFUNDS

vs. S&P 700

1 Year

5 Year

10 Year

15 Year

GOVERNMENTINTERMEDIATE

vs. Barclays Intermediate Government

1 Year

5 Year

10 Year

15 Year

Source: SPIVA U.S. Scorecard 2016. Past performance does not guarantee future results. Indexes are unmanaged baskets of securities in which investors cannot directly invest; they do not reflect the payment of advisory fees or other expenses associated with specific investments or the management of an actual portfolio.

The Traditional Choice: Active or PassiveSPIVA U.S. Scorecard 2016 % of Actively Managed Funds which Outperformed the Benchmark

SMALL CAP FUNDS

vs. S&P 600

LARGE CAPFUNDS

vs. S&P 500

1 Year

5 Year

10 Year

15 Year

34.0%

11.7%

15.4%

7.8%

1 Year

5 Year

10 Year

15 Year

14.5%

3.4%

4 .4%

6.8%

15.1%

33.1%

16.1%

10.6%

25.9%

18.9%

21.8%

18.2%

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Do Those ‘Winning’ Managers Persist?

Represented by managers with 12 month trailing outperformance to March of each year. Image for illustrative purposes only. Data source: Standard & Poor’s Does Past Performance Matter? The Persistence Scorecard, June 2014 and www.nytimes.com/2015/04/05/your-money/measure-for-measure-index-funds-rule.html

Number of Funds that stay in Top Quartile

2,862 0

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The Arithmetic of Active Management

William SharpeProfessor of Finance,

Emeritus, Stanford University Graduate School of Business

If "active" and "passive" management styles are defined in sensible ways, it must be the case that

1. before costs, the return on the average actively managed dollar will equal the return on the average passively managed dollar and

2. after costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar

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The Arithmetic of Active Management

William SharpeProfessor of Finance,

Emeritus, Stanford University Graduate School of Business

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Asset Flows

$1,563 Billion Inflows to Passive

$650 Billion Outflows from Active

Source: Morningstar Direct. Net Flows over last 36 months to May 2017 for all US OE Mutual Funds and ETFs ex MM ex FoF, including obsolete Funds

$0

Last 3 years to May 2017

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• Low Turnover

• Broad diversification

• Low Cash Drag

• Low security, sector or country concentration

• Consistent exposure to the desired areas of the market

• Good Value for Expenses paid

What Might You Look For?

Diversification neither assures a profit nor guarantees against loss in a declining market.

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Additional Commentary

Available at: https://www.youtube.com/user/LoringWardVideos