MANAGED ACCOUNTREBALANCING SERVICE [MARS]Automating the Portfolio Manufacturing Process Considering

Risk/Return, Tradeoffs and Taxes

Introduction

The wealth management industry is rapidly evolving towards more and more customi-zation. As such, there is a need in the mar-ketplace for operational efficiencies that enable the manager to meet the demands of the high net worth client profitably.

MARS provides a complete production infrastructure for the private banking market by automating key parts of the overall man-agement process. MARS ties together separately managed databases such as; portfolio accounting, customer relationship systems, risk modeling, tax optimization, trade order management and other report-ing databases into one seamless process rather than stand-alone databases that dont communicate efficiently. The service is flexible and built to accommodate individual client company preferences. We believe this infrastructure capacity is a powerful tool to enhance investment processes and position your firm for growth.

MARS is run off Northfields portfolio rebal-ancing service, which was developed in 1996. Today, Northfield is considered a pio-neer in the tax exempt and taxable portfolio management business; its Open Optimizer and related risk models that comprise Northfields portfolio rebalancing service are already deployed in a large number of lead-ing financial institutions world-wide.

Northfield has partnered with SoftPak Financial Systems (SoftPak), who installs and main-tains the MARS interfaces to client company internal systems. SoftPak specializes in the de-sign and development of analytical tools, database applications and client-server/web-based solutions for the investment management industry.

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MARS Data and Workflow Diagram

Users

MARS Analytics

Northfield Portfolio

Rebalancing Service

MARS GUI

Interface

Interface

Inputs

Holdings

Tax Lots

Investment Objectives

Alphas

Model Portfolios

Constraints

Benchmarks

Portfolio

Accounting and Customer Relationship Management

System Databases

Outputs

Trades

Positions

Activity

Balances

Risk Reports

Gain/Loss Summaries

Portfolio Transi-tion Analyses

Reporting Systems

Databases

Northfield Risk

Model Data Updated Monthly

Investment Strategy

MARS integrates each part of the portfolio manufacturing process. Beginning with account data and client specific mandates, MARS aggregates such data from a com-panys portfolio accounting and customer relationship systems: holdings, tax lots/cost basis, buy lists, model portfolios, constraints, benchmarks, risk model data and more.

With this collection of data and analytics, each companys investment strategies are leveraged operationally as MARS provides user driven output that ties directly into trade order management and other report-ing systems integral to completing the wealth management workflow.

The MARS computation engine enables the User to trade off risk, return and taxes at the individual portfolio and/or the aggre-gate account level depending upon com-pany preference.

In addition, MARS can be configured to fit your companys investment process, i.e.; central-ized, decentralized or somewhere in between, by limiting the roles of each user based upon company preference.

The ability to integrate robust portfolio analytics and account customization with operational scalability is a competitive advantage for Managers in the private banking market today.

The Portfolio Manufacturing Process

Account

Established

Asset

Allocation

Build Model

Portfolios

Portfolio

Accounting Trade

Execution

Security Selection

Risk

Decomposition

Trade

Compliance

Backtesting Build

Investment Strategy

Client

Reporting

Performance Measurement

Performance Attribution

MARS Utility Overview

Portfolio Construction and Tax Management

The service provides users with ability to identify, measure and control risk before, during and after the rebalancing process.

With Northfields open tax optimizer, any structured risk model may be used to trade off the benefits of risk, return and taxes across client portfolios.

Client specific tax information may be captured and utilized during the rebalancing of portfolios; including wash sales, short/long term tax rates, year-to-date realized gain/loss information (including non-managed assets) and maximum limits on capital gains.

Rebalancing templates offer users the ability to fulfill client directed mandates (harvest losses, harvest gains, cash withdrawals, etc.) in a tax efficient manner while taking client specific re-strictions into consideration.

The service provides the flexibility to apply HIFO, LIFO, FIFO or best tax lot selection when re-balancing taxable portfolios.

Allows for tax optimized portfolios by considering the tax implications in every trade. Portfolio transitioning template allows for tax sensitivity analysis where multiple, optimal port-

folios may be created for the same account for different levels of risk. This allows users to view different scenarios before trading.

Risk Management

Using Northfield or any structured risk model, the service provides for detailed risk analysis (decomposition) which may expose unintended bets within a single portfolio or across a group of portfolios. This effectively transforms implicit assumptions into explicit decisions.

Empowers asset management firms with automated tools for monitoring and managing risk across multiple portfolios.

Northfields optional Everything Everywhere (EE) Risk Model includes security level coverage for all asset classes including optional coverage of mutual funds, hedge funds, ETFs, US municipal bonds, US collateralized instruments and derivatives that may be used to structure private wealth portfolios.

Model Management

The service provides users with ability to load, maintain and manage their own proprietary model portfolios with no limit on the number of models or holdings.

Model portfolio information may be loaded as part of an automated process or created manually within the application. Model portfolios may be set to be either static (loaded once a day) or dy-namic (loaded intra-day to reflect price changes in underlying constituents).

Single strategy models may be easily blended together to create multi-style model portfolios, with the option to apply position and sleeve level tolerances.

Client portfolios may be linked on the fly with single or multi strategy model portfolios, effec-tively minimizing dispersion and drift among all managed accounts.

Security and Compliance

MARS is an N tier client server hosted service with web features. The service provides application level security to allow for user access controls and the monitor-

ing of all user activity.

Role level permissioning granted to groups of users provides authorization levels to control ac-cess and functionality.

The service provides users with the ability to apply account specific restrictions as hard con-straints during the rebalancing process.

Customized Reporting

With complete transparency to all of the information stored in the MARS database, clients can either leverage the set of reports that are provided with the technology or build their own set of reports using any desirable technology.

Built around Crystal Reports, the standard set of reports include both individual and aggregate level reports that maybe saved in a variety of formats; including PDF, HTML, XLS, CSV, XML.

MARS Templates

Step 1: MARS Log-in and Data Load

Acquire applicable data from portfolio accounting and customer relationship database systems, including:

Select Account

Mars Settings Project Level [ Project = 11734786 ]

Holdings Market data

Proprietary research Risk model

Managed Account Rebalancing Service

User Login

Step 2: Define Account Investment Objectives and Constraints

Select Benchmark Select benchmark (model portfolio) tied to selected account, and select other applicable inputs to the rebalancing process; including alpha forecasts, account level constraints (do not buy, do not sell, no to-bacco, etc).

Select Risk Model

Select other Account Level Constraints (risk aversion, tax situation, etc.)

Benchmark Growth Large Cap Growth Value Large Cap Value SPX S&P 500 Index

Mars Settings Project Level [ Project = 11734786 ]

Fundopt Northfield US Fundamental

Aegis BARRA Risk Model EE Northfield EE Risk Model Global Northfield Global Risk Model APT Northfield Macroeconomic (APT) US Country Northfield US Country Fundopt Northfield US Fundamental

Risk Model

Mars Settings Project Level [ Project = 11734786 ]

Mars Settings Project Level [ Project = 11734786 ]

Portfolio Construction- What If Optimization

Step 3: Determine the optimal investment strategy for the Client taking tax costs into account:

Tax Cost %

Tra

ckin

g E

rro

r

In what-if optimization, one can plot predicted tracking errors against costs As one moves the initial portfolio closer to its benchmark or model account, you can measure the trade offs between risk reduction and tax cost.

Initial Tracking Error

Step 4: Portfolio Activity

Incorporated into the application are a number of utilities and templates that make routine tasks like handling cash withdrawals, harvesting of gains/losses and creating batches of accounts quick and easy. Cash Withdrawal

Loss Harvesting

Loss Harvesting Utility

Cash Withdrawal Utility

Automate routine tasks such as cash withdraw-als and gain/loss harvesting requests

Step 5: Reports

With a number of pre-defined reports, asset management firms can view both the initial and the opti-mal portfolios at either the aggregate or individual account level; before submitting trades to any trade order management system. Note: reports can be displayed in both graphical and tabular formats:

Initial Share Lot Summary Report

Optimize Portfolio and Review Reports

Aggregate Reports (2.9.2) - (MARS)

Compare initial and optimal results at either the aggregate or individual account levels

Aggregate Reports (2.9.2) - (MARS)

Review suggested trades-canceling where desired

...and then load the trade data into any trade order management system.

Trade File

Aggregate Reports (2.9.2) - (MARS) [Accounts]

Aggregate Reports (2.9.2) - (MARS) [Trade File]

Step 6: Batch Processing the utility that scales the investment process handling hundreds to thousands of accounts:

Define the accounts of a given batch using various filters

Repeat process for accounts with similar account characteristics

Batch Creation Utility

Mars (Risk Based) - (2.9.2) - (Mars) - [SP 500]

Founded in 1985, Northfield is a market leader in developing open, analytical models to identify, measure and control risk for the investment management industry. These risk models cover most marketable securities traded world-wide. Based upon sound investment theory, Northfields services have stood the test of time from users within the global institu-tional investment community. The risk models are broken

down by geography global, regional or country, and applied by users of our portfolio rebalancing service. Both our analytical tools and risk models that com-prise the rebalancing service are completely transparent which allows our cli-ents access to all factor data and underlying assumptions. To compliment our core rebalancing service, we offer our clients an asset allo-cation service, style analysis service, manager search and performance attribu-tion services. These offerings target a traditional user base of institutional money managers, plan sponsors, pension consultants and high net worth family advisors. These services are considered state of the art analytical solutions to assist in asset class selection and determining the source of investment performance. Northfield includes tax optimization within the portfolio rebalancing service for Managers who handle taxable, managed accounts. Northfields tax optimizer was launched in 1996 and is considered one of the best analytical tools avail-able for private wealth managers. Multiple portfolio batch processing combined with Northfields portfolio rebalancing service is a powerful solution for auto-mating the rebalancing of hundreds to thousands of taxable accounts. Invest-ment managers can use the Northfield portfolio rebalancing service to adopt a portfolio manufacturing process that allows for both improved operating effi-ciency and investment quality. With over 200 clients worldwide with offices in Boston, London and Tokyo, Northfield strives to be the preferred partner for money managers. While Northfield is responsible for MARS marketing and investment related cli-ent support, our partner, SoftPak Financial Systems in Boston, MA is responsi-ble for MARS installations and ongoing maintenance. SoftPak specializes in pro-viding information technology (IT) consulting to the investment management industry. The SoftPak mission, in coordination with Northfield, is to insure that the MARS application integrates seamlessly with our clients existing IT infrastructures.

Northfield Overview and MARS Strategic Partner

Growing number of managed accounts

Same number of hours in a day

Same rebalancing process This might be a good time to talk to us ...

In the managed account industry, everyone shares a common objective to see that the investors' portfolio grows in value. Our objective is to ensure that your profits do not get lost along the way.

For more information, please contact your Northfield Sales Representative or Northfield Sales at 617.208.2050, sales@northinfo.com.

Scalability Customization

MARS

Investment Analytics

Growing number of managed accounts

Same number of hours in a day

Same rebalancing process This might be a good time to talk to us ...

NORTH AMERICA

Northfield Information Services, Inc.

77 North Washington St.9th FloorBoston, Massachusetts02114USA

Sales: +1 617-208-2050Support: +1 617-208-2080Headquarters: +1 617-451-2222Fax: +1 617-451-2122

www.northinfo.com

EUROPE

Northfield Information Services UK Ltd.

2-6 Boundary RowLondon, SE1 8HP

Sales & Support: +44 (0) 20 3714-4130

ASIA

Northfield Information Services Asia Ltd.

Level 27Shiroyama Trust Tower4-3-1 ToranomonMinato-kuTokyo, 105-6027

Sales: +81 (3) 5403-4655Fax: +81 (3) 5403-4646