sri/esg for public equities · shareholder engagement to further reflect their values. for more...

For Professional Investor Use OnlyAperio v. [Latin] to make clear, to reveal the truth

E S GENVIRONMENTALSOCIALGOVERNANCE

Values-Aligned InvestingSRI/ESG for Public Equities

Copyright © 2018 Aperio Group, LLC101

For Professional Investor Use Only

For Professional Investor Use Only 2

Overview

Personalized, transparent, tax-efficient, lower-fee

solutions. Serving new institutional investors for more

than 19 years.

AUM: $25.6B TAX

SRI/

ESG

FACTOR

TILTS

Taxable

$22.4B(89%)

Total SRI/ESG

AUM

$6.3B(25%)

Accounts

1,038

Non-Taxable

$3.2B(12.5%)

Source: Aperio Group, LLC; data as of June 29, 2018.


Customization Options

Benchmark/Market Exposures

Standard

• US Total Market

• US Large Cap

• US Mid Cap

• US Small Cap

• US Large/Mid Cap

• US Small/Mid Cap

• Global Developed & Emerging

• Global Developed

• International Developed & Emerging

• International Developed

• International Developed ex-Canada

• Global Natural Resources

• US REITs

Blended Benchmarks: Individual, custom, market-exposure weights

to reflect allocations that differ from standard

market-cap-weighted benchmarks

Socially Responsive Indexing/ESG

Preconfigured Strategy Starting Points

• Low-Carbon Footprint Series

• Aperio Environment Series

• Humane Equity

• Women’s Inclusion

• Jewish Values

• Reproductive Rights

• No Racial or Ethnic Minorities on

US Company Board

• Catholic Values

• Aperio SRI

• Custom SRI Profile

Active Tax Management

Tax Rates

• Federal

• State

Tax-Loss Harvesting

• Standard

• Aggressive

• Tight Index Tracking

• Tax Neutral

Gain Harvesting

• Standard

Factor Tilts

Preconfigured Strategies

• Quality or Quality Light

• Minimum Volatility + Value

• Dividend Yield

• Multi-Factor

• Value

• Value + Small Size

• Value + Momentum

Factors Available for Tilting

• Book-to-Price

• Earnings Yield

• Dividend Yield

• Size

• Momentum

• Earnings Quality

• Investment Quality

• Earnings Variability

• Profitability

• Leverage

• Beta

• Volatility

Also available: industries, sectors, countries, regions

LM1

LM1 James has a new version of this -- that includes some of our services. not sure how it will work in a presentation format -- take a look and make a call which version is best.Liz Michaels, 7/4/2018


Aperio Values-Aligned Portfolios

Portfolio Construction

Values agnostic.

•Aperio represents clients

across the political,

religious and values-based

spectrum.

•We don’t make value

judgments in place of a

client’s own defined

objectives.

•Aperio does not override

approved ratings and data

sets, and handles updates

consistently.

Portfolio specific.

•Tracking error, alpha

seeking, risk tolerance

and tax sensitivity all may

factor into final portfolio

construction.

•We use an optimizer to

minimize portfolio

tracking error once client

parameters are set.

• If an investor does not

want to hold a particular

company or type of

company, it must be

flagged as a portfolio

exclusion.

Data driven.

•Data availability varies by

market and the

methodology employed

by third-party providers.

•A lag may occur between

when a company change

occurs and when it is

reflected in the data set

and in the portfolio.

•Transparency is key. Lack

of corporate disclosure of

ESG data may affect final

scoring.

Rules based.

•Aperio doesn’t pick

stocks. Our universe is

index-based and utilizes a

quantitative approach.

•Portfolios are built on

transparent rules that

clients help define.

•ESG scoring is relative and

does not explicitly exclude

any companies.

•Low-scoring companies

may remain in the

portfolio if they help

control for risk.

Custom fit.

•Clients control the

breadth and depth of their

SRI strategies and can

customize ESG scores of

companies held in their

separately managed

accounts.

•Aperio’s public equity

SMAs are only one aspect

of a client’s entire

portfolio and mission-

alignment goals.

•Clients may also exercise

proxy voting rights and

shareholder engagement

to further reflect their

values.

For more information, please see Aperio’s Guide to ESG Portfolio Construction.

We align client values and investment goals by employing SRI screens and ratings, thematic tilts,

other portfolio construction techniques, and (if desired) tax optimization.


SRI Process

1

2

3

4

Clarify Client Values & Create Values Policy Statement

Balance Values & Investment Characteristics

Implement Portfolio & Vote Shares

Report Progress

5 Research & Resources


Clarify Client Values & Create

Values Policy

1


Tools Available to Reflect Values

Clarify Client Values

Shareholder

Activism

• Proxy Voting:

complement to issues

incorporated into

profile

• Shareholder

Engagement: support

dialogue with

companies on issues

that are important to

the investor

Tilts

Tilts toward companies

that more closely reflect

specific client values

using Social Scores*

Exclusions

• Business activity

• Industry

• Company

Third-Party ESG Data Providers: ISS/IW Financial, MSCI, Bloomberg, BlueStar, and others as needed.

*For more information, please see the Aperio Social Scores presentation.


Aperio supports advisors from start to finish through the SRI process. We use

our ESG/SRI expertise to assist your work in translating custom client values

into Social Profiles.

Two Paths to ESG Customization


SRI/ESG Menu

The Aperio Group SRI/ESG

Customization Menu helps you

clarify and prioritize your client’s

values so that we can create a

portfolio aligned with your

client’s values.

Social Conversation

For larger accounts,* Aperio

offers Full Customization: The

Aperio Social Conversation, a

broader level of data granularity

and problem-solving.

*This offering is for investors with accounts of $5 million or more. The customization menu is available at the $1 million level, and Aperio is available to help advisors work with their clients to

translate values into menu profiles.


Aperio SRI/ESG Customization Menu–SAMPLE



Full Customization: Aperio Social Conversation


A Personalized Process of Listening, Prioritizing, and Guiding to Help Translate Client

Values into Investments

Full Customization

Tools

Issue Briefings—Deep dive into the specific data available, including

methodologies, strengths, and weaknesses of the data.

Surveys—When working with groups, Aperio can create a survey to determine

which issues should be a part of the profile.

Preliminary Work

Revenue Thresholds—Clients may be interested in excluding companies at

different levels of involvement than are available on SRI Menu.

Intensity of Values Tilt—Aperio can work with clients to determine how

intensely to tilt the portfolio toward better-suited companies.

Relative Issue Weightings—Clients can customize the relative importance of

how their interests are expressed.

Parameters

Product

Custom Values Policy Statement—The client receives a customized memo

summarizing their unique values profile.

This option is only available for clients with account sizes of $5M or above.


2 Balance Values & Investment

Characteristics


Portfolio Construction of SRI/ESG Strategies

Aperio uses a multi-factor optimizer to construct portfolios with the targeted ESG exposures

while seeking to control for risk and other factors.

Optimized ESG construction and portfolio rebalancing seek to:

• Meet ESG guidelines (exclusions and/or social score tilts)

• Rebalance tax efficiently

• Control tracking error

• Control stock-specific risk

• Minimize differences between portfolio & benchmark

• Style Factors

• Value, Earnings Yield, Dividend Yield, Growth, Momentum, Long-Term Reversal, Prospect, Size, Mid Capitalization, Liquidity,

Beta, Residual Volatility, Leverage, Earnings Quality, Management Quality, Profitability

• Sector, Industry, Sub-Industry

• Country, Region

Balance Values


The differences between a portfolio return and its benchmark return over time can

be described as similar to a normal distribution with fatter tails. Forecast tracking

error can be used as a guide to understand the magnitude of underperformance risk.

Tracking Error

Balance Values

–2 TE +2 TEBenchmark

Return

–1 TE +1 TE

5% of Data

Points

63% of Data Points

90% of Data Points

5% of Data

Points

The above chart reflects 76,280 data points covering every Aperio account for every month through 7/31/2015 from Aperio’s historical database (earliest data point is October 2004). Aperio calculated each account’s one-month return before fees minus the benchmark’s one-month return, and then divided by the forecast tracking error at the beginning of each month.


The Social Efficient Frontier represents the trade-off between risk and values. For each increase

in the values intensity, the corresponding tracking error also increases. If we plot these

incremental increases on a graph, a curve much like the one below can be traced. This curve

represents the Social Efficient Frontier.

The Social Efficient Frontier

Balance Values

0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8%

Valu

es

Inte

nsi

ty

Tracking Error

High

Low

Reference: James Picerno,"The Final Frontier: Social Investing,“ June 2008.


The Advantages of Optimization

Balance Values

*Forecast tracking error is the forecast annualized standard deviation of benchmark-relative returns. In this case, the benchmark is the MSCI ACWI, a

global benchmark that reflects the range upon which Aperio is able to construct an SRI portfolio and is representative of the broad scope of equity

securities from which a potential investor may choose.

The above is shown for illustrative purposes only and does not represent any actual accounts. It is not possible to invest directly in an index. See disclosure

pages for additional information.

Aperio’s OptimizedApproach

Cap-Weighted Portfolio

Forecast

Tracking Error (%)*

Forecast

Tracking Error (%)*

MSCI ACWI 0.0% 0.0%

Aperio Global Tax-Loss Harvesting (No SRI) 0.41% 0.41%

Aperio Strategies - -

Adult Entertainment: Exclude at 5% of Revenue 0.41% 0.41%

Adult Entertainment: Exclude at First $1 0.71% 0.88%

Clean Technology Solutions: 10% Weighted-Average Revenue 0.44% 0.44%

Fossil Fuel-Free1 0.59% 0.97%

All Menu Exclusions2 1.36% 1.90%

Islamic Values 1.45% 2.42%

*Source: Aperio Group, LLC; data as of June 29, 2018 for $10 million all-cash portfolio with asset-based pricing.

1Oil, Gas & Consumable Fuels industry and Carbon Reserves exclusion2Fracking; Tar Sands; Carbon Reserves; Nuclear; Oil, Gas & Consumable Fuels; Coal Companies; Energy Equipment & Services; Factory Farming; GMOs; Animal Testing: Pharma Only; Animal Testing: Non-Pharma; Fur; Civilian Firearms Production; Civilian Firearms Distribution; Military Weapons; Anti-LGBTQ; Predatory Lending; Private Prisons; Sudan; Iran; No Women on Company Board; No Racial or Ethnic Minorities on US Company Board; Adult Entertainment at first dollar; Alcohol at first dollar; Gambling at first dollar; Life Choice at first dollar; and Tobacco at first dollar.


• Aperio Environment Strategy Portfolio Characteristics

Portfolio Characteristics of Reproductive Rights Hypothetical Portfolio

Balance Values

A sample portfolio

identical to the index.

Note that the tracking

error is 0.00%.

Hypothetical

PortfolioRussell 30001 Aperio All-Cap US SMA:

All Cash

Aperio Reproductive

Rights Portfolio

Forecast Tracking Error (%) 0.00 0.28 0.33

Forecast Beta 1.00 1.00 1.00

Forecast Volatility (%) 10.79 10.79 10.79

No. of Holdings 2,991 450 450

Dividend Yield (%) 1.80 1.85 1.82

Reproductive Rights Score 4 4 82

Notes on portfolio construction

using a Social Score:

The optimizer* determines the lowest

possible tracking error given a beta of

1.00 and a Social Score of 8, as well as the

number of holdings.

A sample Aperio All-Cap

US SMA portfolio with no

SRI constraints. Note the

incremental tracking error

of not holding the full

universe of securities.

A sample Reproductive

Rights tilted portfolio.

Note the additional

incremental tracking error

versus the other two

scenarios.

The information in this table is shown as of 08/21/18. The Hypothetical Portfolios are not based on an actual Aperio Group portfolio and are being shown for illustrative purposes only. It should not be assumed that clients who actually invest in a Reproductive Rights portfolio will have the same results reflected above. This slide is presented solely as an example and should not be considered investment advice. Aperio has the benefit of hindsight when putting together the Hypothetical Portfolio, and there is no guarantee that the firm will make the same selections when putting together a similar portfolio for a client. This selection did not take into account any client’s overall investment objectives or restrictions that may be imposed. Please refer to the end of this presentation for additional important disclosures.

1The Russell 3000 is provided as an example of an index that Aperio has selected, after consultation with the client, as the most appropriate measurement index for

portfolio performance. Aperio refers to this selection as a portfolio’s “comparison index/benchmark.”2The weighted-average Social Score above, 8, is specific to the Russell 3000 and may adjust slightly per comparison index.

*Details on Aperio’s optimizer can be found in the Disclosure pages under the heading “Optimizer.”


Tax Transition to Hypothetical SRI/ESG Portfolio

Balance Values

This analysis is provided as an example and should not be considered representative of an actual portfolio.

See disclosure pages for important information. Source: Aperio Group, LLC.

A prospective client has $7.2 million in securities and cash held in three portfolios and wants to transition to a single global account, either a global

ESG ETF or an Aperio global SRI portfolio. The prospect is a California resident who pays the highest combined federal and state tax rates: 54.1%

for short-term gains and 37.1% for long-term gains. The prospect’s financial advisor sends the underlying tax lots to Aperio to analyze. In this case,

the existing portfolio had $1.3 million in unrealized gains and $64,000 in unrealized losses. Buying an ETF would require full liquidation with a tax

cost of $305,000. Instead, Aperio proposed three transition scenarios with lower tax costs, including one with a 1.50% forecast tracking error to a

global index for a net tax benefit (Scenario 1 below). Upon request, Aperio can provide charitable gifting recommendations as part of the transition

analysis to explore further reducing any tax liability. Please specify any charitable gifting plans that you would like us to consider.

Existing Portfolio ($ in 000s)

Forecast Risk¹

Stocks Cash Total (Stocks Only)

Market Value 5,205 2,000 7,205 Tracking Error % 4.34

Unrealized Gains 1,295 1,295 Beta 0.96

Unrealized Losses (64) (64) Number of Stocks 120

Liquidation Tax Cost ($) 305 305

Liquidation Tax Cost (%) 4.2% 4.2%

Cost Basis to Market Value 76% 83%

Transition Scenarios ($ in 000s)Forecast Risk¹ Trading Net Gains Taxes²

Scenario Tracking Number Sell Buy Short Long Total

Name # Error % Beta of Stocks Value Value Turnover Term Term Stocks ($) (%)

No Trade (Stocks Only) 4.34 0.96 120

Higher TE - Lower Tax 1 1.50 1.00 169 873 3,134 11.5% (40) 5 (15) (15) -0.21%

2 1.00 1.00 217 1,330 3,592 17.6% (21) 108 17 17 0.24%

Lower TE - Higher Tax 3 0.50 1.00 279 1,884 4,151 24.9% (11) 271 60 60 0.84%

¹ Forecast Risk statistics do not include non-stock positions. They are as of the Pricing Date and subject to change.

² All tax calculations assume an investor can use the full value of real ized losses to offset gains.


3 Implement Portfolio & Vote Shares


Proxy Voting

Vote Shares

PROXY VOTING: Aperio uses the Institutional Shareholders Services (ISS) Social Advisory Services’ SRI Proxy Voting Guidelines, a

voting policy structure that has been in place for 18 years at this major proxy voting firm. In 2017, Aperio clients voted on 1,005

different corporate behavior resolutions, 293 of which were directly social and/or environment related.*

Area of Interest Sample Leading ESG Issues by Category Proposals

Political

Political Contributions and Lobbying 21

Political Lobbying Disclosure 42

Political Activities and Action 21

Environment

Phase Out Nuclear Facilities 33

Climate Change 30

Sustainability 21

Social

Anti-Discrimination Miscellaneous(E.g., Report on Company Non-Discrimination Policies in States with Pro-Discrimination Laws)

17

Gender Pay Gap 15

Adopt Holy Land Principles 14

Governance

(Environmental & Social)

Board Diversity 16

Establish Environmental/Social Issue Board Committee 14

Link Executive Pay to Social Criteria 8

Governance

(Shareholder Interests)

Elect a Shareholder-Nominee to the Board 60

Require Independent Board Chairman 50

Appoint Alternate Internal Statutory Auditors 42

These topics are not comprehensive of Aperio clients’ proxy voting in 2017. They are selected as representative examples. The tallies are derived from Aperio’s records in

ProxyExchange.

*For more information, please see the Aperio SRI Proxy Voting Info Sheet.


Aperio Group works with As You Sow to give clients the opportunity to join shareholder

initiatives that promote change in corporate practices. Clients use shares they already

own to either sponsor or join shareholder resolutions that address significant ESG

issues.

In 2017, Aperio clients sponsored 28 resolutions at the following companies.*

Shareholder Resolution Sponsorship

Vote Shares

*Some companies had more than one resolution filed by As You Sow.

• Hormel Foods

• McDonald’s

• Restaurant Brands

• Sanderson Farms

• Whiting Petroleum

Corporation

• Southern Company

• Time Warner, Inc.

• Johnson & Johnson

• WGL Energy

• Sempra Energy

• Chevron Corporation

• Pfizer Inc.

• Emerson Electric

Company

• Kroger

• Monsanto

• Amazon.com

• Mondelēz

International, Inc.

• Target Corporation

• Pinnacle West Capital

Corporation

• Mead Johnson Nutrition

• AbbVie

• T. Rowe Price

• Walgreens

• Kraft Heinz Company

• Dominion Energy, Inc.


4 Report Progress


Report Progress

Annual Client SRI Report

Aperio’s annual Client SRI Report

presents a comparison of a client’s

portfolio to the benchmark index based

on the criteria selected to reflect these

values.

By comparing the chosen benchmark

index against an SRI portfolio, Aperio

intends to demonstrate how SRI

investing customized to client values

differs from a traditional indexing

strategy.

Low-Carbon

Footprint

INDEX CLIENT

Weighted-

Average

Score

Count of

Companies

Weighted-

Average

Score

Count of

Companies

Carbon

Intensity212 2,254 42 254

Carbon

Emissions6,771,713 2,255 1,337,945 254

*Carbon Emissions: annual company greenhouse gas emissions

*Carbon Intensity: annual carbon emissions / annual company revenue

The table below documents the exclusionary criteria selected by a client,

showing the weight of the exposure present as well as the number of

companies with involvement in each exclusion.

Client SRI Reports are available upon request. A sample of this report is also available.

Data Element

INDEX CLIENT

Market Cap

(%)

Count of

Companies

Market Cap

(%)

Count of

Companies

Casinos &

Gaming0.34 15 0.00 0

Tobacco > 0% 2.10 9 0.00 0


5 Research & Resources


In a different study, Aperio analyzed the impact of consistent annual gifting at two

levels: 3% gifting per year and 6% gifting per year.

• The historical study covered the period December 1972 to January 2017.

• By elevating cost basis, optimal gifting augmented tax alpha in both the

estate/donation and liquidation dispositions.

• At a 10-year horizon, the incremental tax alpha over the base case observed in our

study was:

Back-Tested Tax Alpha with Consistent Gifting

Research & Resources

Consistent gifting may increase tax alpha

Source: Aperio research presentation, “The Double Bottom Line—Tax-Loss Harvesting for the Altruistic Investor,” on www.aperiogroup.com.

Tax Alpha over Base

Gifting Level Liquidation Estate/Donation

3% 0.5% 0.3%

6% 1.0% 0.5%


• Optimal gifting, donating highly appreciated stock and replenishing with cash, had a bigger

impact on after-tax alpha in the liquidation disposition than in the estate/donation

disposition.

• As we have seen for tax-loss harvesting strategies with no gifting, tracking error tended to

drift upward as horizon lengthened.

• However, for 3% optimal gifting, tracking error was under 1% even at a 20-year horizon.

• Median risk-adjusted returns exceeded 1.0 at all horizons for 3% optimal gifting.

• At a 10-year horizon, the median difference in after-tax alpha earned by gifting at annual and

monthly frequencies ranged between –0.03% and 0.09% across the estate/donation and

liquidation dispositions.

• We believe the incorporation of optimal gifting with tax-loss harvesting has the potential to

increase both financial and philanthropic return.

Summary of Findings: The Double Bottom Line—Tax-Loss

Harvesting for the Altruistic Investor


After-Tax Alpha over Base*

3% 6%

Estate/Donation 0.25 0.54

Liquidation 0.48 0.97

*percentage points


• Building a Carbon-Free Portfolio

• Measuring the Risk Impact of Social Screening

• Mitigating the Unnecessary Risk of Specialized Indexes

• What Gets Measured Gets Managed

• Is There a Green Factor?

• Portfolio Construction for Alpha-Seeking ESG Investors

Aperio SRI/ESG Research



Additional Resources


Faith-Based

• Catholic Values: Exclusions & Scoring

• Catholic Values: Exclusions Only

• Islamic Values

• Jewish Values: Exclusions & Scoring

Governance

• Governance Tilt

• No Racial or Ethnic Minorities on US Company

Board

Geography

• Israel Exposure Tilt

• Place-Based Investing

Shareholder Activism

• Shareholder Resolution Sponsorship Review

• SRI Proxy Voting Info Sheet

• SRI Proxy Voting Review

General

• Aperio Social Scores

• Aperio SRI: Exclusions & Scoring

• Aperio SRI: Scoring Only

Environment

• Aperio Environment (Scoring Only)

• Low-Carbon Footprint Tilt

• Clean Technology Solutions Tilt

Social

• Women’s Inclusion

• Animal-Friendly

• Pro-LGBTQ Tilt & Anti-LGBTQ Exclusion

• Reproductive Rights


Appendix


The information contained within this presentation was carefully compiled from sources Aperio believes to be reliable, but we cannot guarantee accuracy. We provide this

information with the understanding that we are not engaged in rendering legal, accounting, or tax services. In particular, none of the examples should be considered advice

tailored to the needs of any specific investor. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.

With respect to the description of any investment strategies, simulations, or investment recommendations, we cannot provide any assurances that they will perform as

expected and as described in our materials. Past performance is not indicative of future results. Every investment program has the potential for loss as well as gain.

Due to the complexity of tax law, not every single taxpayer will face the situations described herein exactly as calculated or stated, i.e., the examples and calculations are

intended to be representative of some but not all taxpayers. Since each investor’s situation may be different in terms of income tax, estate tax, and asset allocation, there

may be situations in which the recommendations would not apply. Please discuss any individual situation with tax and investment advisors first before proceeding.

Taxpayers paying lower tax rates than those assumed or without taxable income would earn smaller tax benefits from tax-advantaged indexing or even none at all

compared to those described.

Sources of Research

Mandatory Disclosure: In certain cases, companies must comply with regulatory requirements for the disclosure of information. This kind of information can range from

financial information to information the US Environmental Protection Agency requires company facilities to disclose. The advantage of this information is that it is

comprehensive across the universe of companies. Unfortunately, in many issue areas, no mandatory disclosure applies.

Voluntary Disclosure: Much of the information available is voluntarily disclosed by companies, often in corporate sustainability reports or in sustainability or responsibility

sections of their websites. This information can be more difficult to incorporate into evaluations and ratings. First, since it is voluntary, many companies disclose

information only about some issue areas. Second, even when information is disclosed, the definitions and structure of what is disclosed may be different from company to

company. NOTE: For data elements involving disclosure, a company will receive a score of 1 for each issue area where it has not provided any data. Aperio’s methodology

weights disclosure and the associated transparency as an important criterion in its ESG evaluation, and companies that do not disclose data are scored more poorly than the

worst-performing-but-disclosing company in that issue area.

Third-Party Information/Evaluation of Companies: Other pieces of information that are available to Aperio do not fit cleanly into either of these categories or may be a

hybrid of the two. For instance, there is mandatory disclosure of certain kinds of international operations, including registered subsidiaries. When this information is

combined with evaluations of countries’ political and civil liberties provided by a nongovernmental organization (NGO), we have a hybrid data element. In another example,

we use ratings by the Human Rights Campaign (HRC) as an indication of a company’s approach to sexual-orientation issues. HRC gathers information from companies,

including by conducting surveys (voluntary disclosure), and then scores the companies. So this is a combination of voluntary disclosure and evaluation.

Disclosure

Appendix


Aperio data is gathered from sources including IW Financial, EIRIS, MSCI, Bloomberg, and industry classifications. In addition, for certain data elements, Aperio will gather

data from advocacy organizations that it deems to be reasonable and credible based on feedback from the industry and those interested in the specific issue area. In these

cases, the advocacy group will be identified and the investor should review to ensure that the organization’s views align with the investor’s views.

Data Frequency & Updates

Aperio updates its ESG data for the menu periodically on a preset schedule. Data elements are updated during the year as our data providers receive new data from either

the company or publicly available sources. Aperio updates all exclusions and scoring profiles annually at the beginning of each calendar year. As accounts are rebalanced,

the updated data will be incorporated. NOTE: Because the data sets are not updated in real time, there may be a lag between a change at the company and when the

change flows into the data set, and again when it flows into the portfolio during a rebalance. Aperio handles all updates consistently and does not override the approved

data sets.

Index Definitions

The Russell 3000® Index is an equity benchmark for US stock performance. It is a capitalization-weighted index covering the largest 3,000 publicly-traded US stocks. The

index represents approximately 98% of the total market capitalization of the US stock market.

The MSCI ACWI is an equity benchmark for global stock performance. It is a capitalization-weighted index covering large and mid-sized companies. The index includes

approximately 2,500 stocks from 23 developed market countries and 24 emerging-market countries.

Optimizer

The optimization process used in tax-loss harvesting by Aperio relies upon an optimization model built and designed by MSCI Barra. The model utilizes a mathematical

objective function which seeks to minimize the combination of active risk (i.e., forecast tracking error), and the tax liability on realized gains, all while also meeting the

conditions presented by a series of simultaneous equations, the values of which are, in part, populated by data based upon the securities being analyzed. With respect to

measuring potential equity risk in the process of tax loss harvesting and portfolio analysis, Aperio also uses and relies upon MSCI Barra risk models. You should note that

such use and reliance of the MSCI Barra models in the optimization and equity risk analysis presents model risk, which is defined as the potential for adverse consequences

from decisions based on incorrect or misused model outputs and reports. Model risk can lead to financial loss.

The model may have fundamental errors and may produce inaccurate outputs when viewed against the design objective and intended business uses. The mathematical

calculation and quantification exercise underlying any model generally involves application of theory, choice of sample design and numerical routines, selection of inputs

and estimation, and implementation in information systems. Errors can occur at any point from design through implementation. In addition, shortcuts, simplifications, or

approximations used to manage complicated problems could compromise the integrity and reliability of outputs from those calculations. Finally, the quality of model

outputs depends on the quality of input data and assumptions, and errors in inputs or incorrect assumptions will lead to inaccurate outputs. The model may be used

incorrectly or inappropriately. Even a fundamentally sound model producing accurate outputs consistent with the design objective of the model may exhibit high model risk

if it is misapplied or misused. Models by their nature are simplifications of reality, and real-world events may prove those simplifications inappropriate.

Disclosure (continued)

Appendix

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