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Investment Philosophy

The ActivePassive Funds can help investors realize their financial goals by enhancing value to portfolios through careful combinations of active and passive investments. This blend offers the benefits of both in one product: the potential for higher returns with active management in categories that have historically outperformed their benchmarks and the lower cost advantages of passive management in categories where actively managed strategies have not historically beaten their benchmarks.

The ActivePassive funds are the building blocks used to construct a broad spectrum of diversified portfolios in an effort to meet a wide range of investor needs. The funds cover the broad asset classes of stocks and bonds, both domestic and international. The funds feature investment categories that we believe have the potential to provide style specific extra returns on top of the market risk premium and/or diversification with what we feel is an appropriate risk/reward tradeoff.

The ActivePassive Funds include a blend of two opposing yet complementary investment approaches.

How the ActivePassive Funds are Constructed

Active/Passive Ratio Guidelines are Established

Each Fund has established Active/Passive Ratio Guidelines. These are the minimum and maximum boundaries for the fund's allocation to actively and passively managed components. These guidelines are based on proprietary research which focuses on two important elements:

• The level of Manager Skill for each investment category. This identifies the potential additional return of investment strategies versus their benchmarks that truly stems from the unique ability and skill set of the investment manager.
• The Manager Success Rate for each investment category. This identifies the percentage of investment strategies in each investment category we consider successful due to their consistent outperformance over their benchmarks over various time periods.

In a hypothetical example, ActivePassive Fund X has established Active/Passive Ratio Guidelines which allow the fund’s allocation to its active component to range from 40% to 70% and allow the fund’s allocation to its passive component to range from 30% to 60%.

Current Optimal Ratio is Determined

Within each fund's Active/Passive Ratio Guidelines, the portfolio managers establish the fund's Current Optimal Ratio (COR). The COR is based on FundQuest's proprietary and ongoing analysis of the Manager Success Rate for each investment category and may change over time.

Continuing with the example above, the ActivePassive Fund X's Current Optimal Ratio is set at allocations of 62% and 38% to the active and passive components, respectively.

"Best-of-Breed" Sub-Advisors are Selected to Manage the Fund's Active Component

Our portfolio managers utilize both quantitative and qualitative analysis to identify what we believe are best-of-breed investment firms to manage the active components of the funds. We seek investment strategies that feature:

Strong Performance. Returns are evaluated on a time-weighted, trailing, calendar and quarterly basis. We also evaluate the consistency of returns.
Outperformance Stemming from Security Selection. We select managers that have consistently generated positive Real Alpha through security selection. Real Alpha is the additional return of the investment strategy over the return of its best fit/investment category benchmark that truly stems from the unique ability and skill set of the investment manager. We favor managers that have generated Real Alpha through security selection rather than sector allocation.
Reasonable investment expenses associated with trading/turnover and manager fees.
Strong adherence to investment style. We seek managers that can clearly articulate their investment philosophy, have an investment process that reflects that philosophy, and that have maintained their discipline to the process over time.

"Best Fit" Investments are Selected for the Fund's Passive Component

With over 1,000 passive investments currently available, selecting the "best fit" investments for inclusion in the funds requires comprehensive investment analysis. Our portfolio managers select either Exchange Traded Funds (ETFs) or traditional open-end index funds for each fund's passive component. ETFs generally provide a low cost, diversified and low turnover investment which is usually tax-efficient. However, many of the larger index funds provide comparable benefits and they may also be selected for inclusion in the funds.

While some passive investments are exact replicas of the market-cap weighted indices they represent, others aim to achieve a similar return than that of the investment's benchmark using a more concentrated approach. In addition, different breeds of ETFs have become available which are based on newly created indices and which may take a non-market weighted approach.

When selecting passive investments we assess the investment's tracking error versus its benchmark, expenses, liquidity, and size and if the investment's underlying index provides a true representation of the fund's investment category. Our research also determines if a single passive investment is to be utilized in each fund or if a blend of passive investments provides a better opportunity to achieve full exposure to the fund's investment category.

Ongoing management

The fund's portfolio managers continually evaluate the relative performance, risk parameters and other characteristics of the active component to ensure the sub-advisor continues to meet the criteria established for inclusion in the fund. We look for signs of underperformance or trends that warrant further scrutiny. Sub-advisors that no longer meet the criteria and the fund's "best-of-breed" standard would be replaced. Likewise, we continually evaluate investments which comprise the passive component of the fund to ensure they retain "best fit" status for the fund and to determine if more attractive opportunities are available.

The fund charges a maximum 5.75% sales load. The sales load is waived for investors purchasing shares through the Advisor's wrap program. Speak with your Investment Advisor for more details.

Mutual fund investing involves risk. Principal loss is possible. Past performance is not a guarantee of future results.