Synergy Asset Allocation Model: By: Karanveer Dhillon

Our philosophy: The Synergy philosophy rests on one simple principle: manage uncertainty. After taking into account an investor’s risk tolerance, time horizon, and financial goals, we create a customized portfolio through diversification into 20 different asset classes and we manage the portfolio through trigger point rebalancing. Collectively, this maximizes returns for any given level of risk assumed. The majority of a portfolio’s performance is a result of its construction, around 80%, and around 20% is the result of security selection. In addition to Synergy’s portfolio creation strategy, we have selected the top investment managers through a rigorous selection process.

Modern Portfolio Theory: This is the basis of Synergy’s asset allocation strategy. In 1990, Harry Markowitz, won the Nobel Peace Prize for his paper on “Portfolio Selection” in which he introduced a hypothesis known as Modern Portfolio Theory (MPT). MPT recognizes that risk is an inherent part of higher returns - it seeks to maximize expected returns on a portfolio while simultaneously lowering the risk (also known as variance and volatility) profile. Higher returns generally correlate with higher risk, however, MPT makes it possible to create an “efficient frontier”

between two assets, asset A and asset B, at which returns have increased but overall risk has decreased.

Within Modern Portfolio Theory, there is a mathematical formulation for the concept of investment diversification. It aims to select a collection of investment assets that, together, have a lower risk profile than any individual asset. This is possible, because assets class movements are driven by varying factors and their value often changes in different ways. Markowitz’s central tenant was that investing is not just about picking stocks, but about picking the right correlation of stocks.

Using Markowitz’s Equations For Our Portfolio Strategy: The difference between Markowitz’s theory and traditional portfolio selection theories is that Markowitz places returns at an equal importance with mitigating risk. To do this, he looks at the extent at which two or more asset classes move together- i.e. the correlation. Traditional portfolio theories sought to select individual stocks that had high return for a given level of risk and compile them together. Following traditional methods, an investor could deem that

biotechnology stocks all had favorable risk-return statistics; therefore, a portfolio should be compiled completely of biotechnology stocks. Markowitz decided to look at a portfolio holistically instead of at stocks individually. In doing this, he realized that by combining multiple volatile assets together, the overall risk profile of a portfolio could be lowered while also increasing returns. Let’s say that an investor wants to invest 50-50 in two funds that are equally volatile, such as a biotechnology stock and an automotive stock. The automotive fund only appreciates when gas prices are down and the biotechnology fund only appreciates if patents are continually approved. Now, instead of relying solely on gas prices or solely on patent approval, you can rely on both – thus, decreasing overall risk. In the long run, each individual fund will continue to have the same chance of making returns, however, if one fund is depreciating for some reason, the investor still has the potential to make returns. The addition of more and more funds continues to decrease the overall risk profile (so long as they are not correlated). Markowitz has compiled some equations for the purpose of calculating the return and the risk of a portfolio. Calculating Returns: For a given set of volatile assets, calculating return is essentially finding the collective weighted average return of the securities in the portfolio. Expected return equation for n assets:

E(rP) = w

iE r

i( )i=1

n

å

= 1

n = The number of securities = The proportion of the funds invested

in the security 𝑟𝑖 = Return of the ith security 𝑟𝑝 = Return of the portfolio

E ( ) = Expectation of the variable in the parenthesis.

Calculating Risk: The variance of an individual security is the expected value of the sum of the squared deviations from the mean. The variance of a portfolio, or combination of securities, is equal to the weighted average covariance of the returns on the individual securities that compose it. Risk Equation:

2

1 1

Var Cov ,n n

p p i j i j

i j

r w w r r

Var(𝑟𝑝) = Variance of the portfolio.

= The proportion of the funds invested

in security i. 𝑤𝑗= The proportion of the funds invested

in the security j. Cov(𝑟𝑖, 𝑟𝑗) = Covariance of the returns on

securities i and j.

5 statistical measures that encompass Modern Portfolio Theory:

Alpha: Determines the value a specific fund’s manager adds or subtracts from it – the return on an investment that is not a result of general movements in the broad market. Alpha values are generally numbers – an alpha of 5 means a

1

n

i

i

w

iw

iw

return of 5% greater than the benchmark or expected amount. There are two ways to determine this:

1. In most cases, fund performance is compared to benchmarks such as the S&P 500 or the Barclays Aggregate Bond, which try to imitate the performance of a portfolio that covers an entire market. This allows investor’s to see if their fund managers are providing them returns, additional to what they would have been able to achieve on their own by investing in a broad index. If the benchmark index returns 10% annually, but the fund returns 13%, then the alpha is 3.

2. For non-traditional funds that are not readily represented by a benchmark, we turn to other forms of risk-return analysis such as CAPM. This takes into account the time value of money, and risk, and gives an expected return rate. If a fund is expected to return 5% and it returns 10%, then the alpha value is 5.

Beta: A measure of the volatility and systematic risk, of a security or portfolio, as compared to the overall market. Beta values explained:

Beta less than 0: Indicates that the security or portfolio moves inversely to the market.

Beta 0: Regardless of market fluctuations, the value of the security remains unchanged (example: Cash, if there’s no inflation).

Beta 0 to 1: Includes companies that have volatiles that are lower than the market volatility.

Beta 1: Have identical volatility to the overall market. Benchmarks are considered to have a beta of 1 because they represent the overall market.

Beta greater than 1: Volatility greater than that of a given benchmark.

Technology companies often have betas larger than 1.

Standard Deviation: A representation of historical volatility. It is calculated as the dispersion of a set of data from it’s mean and measures the annual average rate of return on an investment. Equities, because they are more volatile than bonds, will generally have a higher standard deviation.

R-squared: This represents the percentage of a fund’s movements that can be explained by movements in its benchmark index. A high R-squared (such as 90) indicates that the fund moves closely with its benchmark, and vice versa. R-squared ratios and the validity of beta values go hand-in-hand; a higher R-squared value indicates a more trustworthy beta value. If a fund were to have a R-squared ratio of 99 and a beta value less than 1, that fund is offering higher risk-adjusted returns. If the same company hasdnan R-squared of 10, its beta value cannot be used.

Sharpe Ratio: The gold standard for calculating risk-adjusted returns. MPT indicates that combining assets, which have a correlation of less than 1, would decrease portfolio risk without sacrificing return – these combinations lead to higher Sharpe ratios. The higher the Sharpe ratio, the higher the risk-adjusted return for a given portfolio. The Sharpe ratio equation:

𝐒𝐡𝐚𝐫𝐩𝐞 𝐫𝐚𝐭𝐢𝐨 =𝒓𝒑̅̅ ̅ − 𝒓𝒇

𝝈𝒑

𝒓𝒑̅̅ ̅ = Average portfolio return

𝒓𝒇 = Risk free rate

𝝈𝒑 = Portfolio standard deviation

A key application of the Sharpe ratio is its use in analyzing the affects of adding additional asset classes to a portfolio. Furthermore, the Sharpe ratio can be used to determine whether additional returns are a result of smart investing or if they resulted from the acquisition of more risk.

Investment portfolio Composition: Synergy diversifies portfolios under our management in 3 main categories: Cash & Fixed Income, Equities, and Alternative Assets. Within these major categories we have sub-categories and within those sub-categories we have specified further areas of focus.

Cash & Fixed Income Securities: Government Bonds, Cash, and Absolute Return: These are extremely low risk and offer an absolute return. With government bonds, the government to which you are loaning money will pay the loan back at a fixed rate. Corporate Bonds: These are loans an investor makes to a company - the company will pay the investor back at a fixed interest rate. They can be low to high risk depending upon which company the money is being loaned to.

Low Volatility: Investment Grade High Volatility: Perps, Preferred,

High Yield, Leveraged Loans

Emerging Markets: Hard Currency Govt. Hard Currency Corp. Local Currency

Equities: Offer a higher return at a higher risk to the investor.

Large Cap Value Global: Value funds are stock mutual funds that generally hold stocks that are undervalued in price and will likely pay dividends. “Large Cap” refers to companies that have market capitalization greater than 5-bn USD.

North America Europe Japan

Large Cap Growth: Growth funds have diversified portfolios of stocks and their main goal is capital appreciation. Generally companies in these funds have greater than average capital growth in earnings and they reinvest funds in company development.

North America Europe Japan

Small and Mid Cap: Small cap funds contain firms that have market capitalizations between 300-mn USD to 2-bn USD and mid cap funds generally contain firms with market capitalizations between 2-bn USD and 10-bn USD.

North America Europe Japan

Emerging Markets Global: EM funds are mutual funds or exchange-traded funds that invest a majority of their assets in the financial markets of developing countries such as Eastern Europe, Africa, the Middle East, Latin America, the Far East, and Asia.

Asia Pacific Ex Japan Other

Alternative Assets: Non-traditional investments including hedge funds, managed futures, real estate, commodities and private equity. With Medium to High Equity Correlation: High equity correlation means that the appreciation

or depreciation of funds in this category correlates highly with equity markets.

Real Estate, Timber Reits Private Equity

With Low Equity Correlation: Low equity correlation means that the appreciation or depreciation of funds in this category does not correlate highly with equity markets.

Fund of Hedge Funds, Managed Futures, Macro

Soft Commodities and Precious Metals

We have done extensive research and use specific, well-known and established, inputs to determine which funds are put into our portfolios.

Our 3 Main Portfolios: Conservative, Balanced, and Growth (In Euro, USD, and CHF) Synergy has compiled 3 main portfolios tailored to investor preferences. Each of these portfolios has the same investment categories – the only difference is the percentage weights given to any one category. Equities inherently carry higher risk than cash & fixed income securities; therefore, an aggressive investor would have a higher weight allocated to equities than a conservative investor and vice versa. Exposure to currencies, other than the base currency, is generally no more than 25% in any portfolio.

Investor risk tolerance: This is the main factor taken into account when assigning a portfolio to a client. Risk tolerance is determined through the Synergy Mandate, which the Investor completes (with a banker) at the

beginning of the partnership process. Higher risk can lead to higher returns, but it also can lead to greater losses. The investor must determine his own comfort with risk exposure. Below is an example of the returns on our 3 portfolios over the course of 2015.

Time Horizon: This refers to the overall duration of the investment portfolio.

Financial Goals: Provision: Retirement or Succession Future Obligations: Children’s Education, Property, or Self-Employment Future Non-Mandatory Consumption: Boat, Car, or Holiday Home

In addition to the specific investment goals, we take into account risk appetite. Once the portfolio is chosen, it can be managed in one of two ways: Strategic or Tactical. Strategic management relies heavily on structured rebalancing; Tactical management relies largely on tactical inputs and investment manager discretion.

Examples of our 3 different portfolios and the relative weights given to specific categories:

Portfolio Implications Over A Broad Time Horizon: There is risk in setting and forgetting. Creating a diversified portfolio with various investment categories is only the first step. Over a broad time horizon, investments will have varying rates of return – therefore, a portfolio’s composition will change if left on it’s own. This is known as “portfolio drift”. If you started at a 40-35-25, cash-equities-alternatives split, over time as asset classes have varying returns, you could end up at a 35-40-25, cash-equities-alternatives split. This exposes the investor to greater risk than they were originally willing to accept. Historically, equities have outperformed cash and fixed income securities. If a portfolio is 50% equities, and 50% cash & fixed income, over a large span of time, it will gradually shift to being 99% equities and 1% cash & fixed income. A depiction of variations in portfolio composition over time is given below.

Although this hypothetical portfolio’s returns have increased, a higher percentage allocated to equities means more volatility and more risk. Therefore, in order to stay aligned with an investor’s risk exposure profile, the portfolio must be rebalanced. This brings us to the “strategic” aspect of our portfolio management.

Strategic Portfolio Management: This approach to portfolio management relies heavily on structured rebalancing.

The Art of Rebalancing: Rebalancing is the practice or realigning portfolios to their target asset allocation weights. Benefits of rebalancing:

Gives Investors the Opportunity to Sell High and Buy Low: If a portfolio is never subject to rebalancing guidelines, then it can seem counter-intuitive for an investor

to sell one of their higher performing asset classes (which may still be going up) for a lower performing one (that has potential to go up). However, this is a way of potentially locking in your returns.

Portfolio Stability: Periodic rebalancing allows a portfolio to hold a more consistent risk profile. This means less volatility due to market fluctuations.

Alignment with Investor Goals: If a portfolio is never rebalanced, it will tend to shift away from the pre-determined investor preferences causing the investor to take on more risk than what they are comfortable with.

Greater Returns Over Time: Markets inevitably fluctuate up and down. When a portfolio is rebalanced, high-performing assets are often sold when they are up in value. This locks in returns before those asset classes have a chance to fall and allows you to re-invest in lower-performing asset classes that have the potential to go up in the near future.

Costs of Rebalancing:

Transaction Fees: For individual securities and exchange-traded funds (ETFs), the costs are likely to include brokerage commissions. For mutual funds, costs may include purchase or redemption fees.

Time and Labor: Rebalancing, unless computer automated, requires time and effort from the investment manager.

Synergy is able to keep costs of rebalancing down by rebalancing only at major market turns and are able to negotiating lower fees with depository banks because of the critical mass of our AUM (2.6-bn USD). Different types of rebalancing:

Calendar rebalancing: This can be done on a periodic basis regardless of how much a portfolio has shifted. Most often it occurs annually or semi-annually, however, it can be done daily, weekly, monthly, etc. Trigger Point rebalancing: This type of rebalancing allows for a specific band of variance (ex. +/- 5%), which the portfolio is allowed to drift between. However, if an asset class surpasses the band within which it is allowed to move freely, then the portfolio must be rebalanced.

Mixed rebalancing: This is a mix between the other two. Rebalancing can be done either on a timed basis or if trigger points are reached. Grounds for rebalancing: If you are engaging in calendar rebalancing the only determinant in the rebalancing decision is the current date. If you are engaging in trigger point rebalancing, the determinant is the trigger point. Each asset class has it’s own pre-

determined trigger point. Details on how this is done: Determining trigger points: To determine trigger points, you must take an asset class and look at its historical variance – how much it shifts on average over an extended, set, period of time. Once you have determined the average amount of shift, the trigger point can be determined by taking 1 standard deviation from the mean (or 2 or 3 depending upon your preferences) of variance. Statistically, an asset class shift of 1 standard deviation is a fairly rare event. Calculating trigger points for each individual asset class: Once you have determined the standard deviation for a whole asset class, you can then determine what the trigger point should be for a specific asset class. This is done by taking the allocated weight of an asset class and then creating an acceptable range of +/- 1 standard deviation. An example trigger point calculation:

Implementing a rebalancing strategy:

Rebalancing strategies are theoretical frameworks, so the actual implementation can be complicated. Many of the “costs” of rebalancing aren’t directly measureable and are difficult to quantify.

There are a number of ways to finance the rebalancing of your portfolio such as using dividends, interest payments, realized capital gains, or new funding contributions. Synergy’s choice: We have decided to implement the trigger point rebalancing strategy. Example of a Rebalancing:

Example of Strategic Allocation:

Tactical Portfolio Management: This is for clients who do not wish to follow a specific investment structure and would like investment managers to take a more proactive role in the asset allocation process. For investors interested in this type of management, we develop discretionary portfolios based on a set of tactical inputs.

Synergy’s Tactical Inputs: International Monetary Fund GDP and Currency Outlook: The IMF is comprised of 189 member countries and has a staff of over 2600 people from 147 countries. They aim to ensures the stability of the international monetary system by promoting international monetary cooperation, facilitating and growing international trade, promoting exchange stability, and making resources available to members that are experiencing balance of payments difficulties. They produce an economic report on every major economy, annually. UBS Asset Allocation Model: UBS, a Swiss global financial services company, is the world’s largest manager of private wealth assets. (over 3 trillion USD). Morgan Stanley Select Themes Research: Morgan Stanley is an American multinational financial services corporation, holding over 1.4 trillion in invested assets.

Their select themes research is a powerful tool that provides Research on Strategic Change methodology, which seeks to identify and analyze evolving macro trends powerful enough to impact corporate performance across multiple industries. JP Morgan Macro Outlook: JP Morgan is focused on conducting original research, developing expert insights, framing critical economic problems, and convening policymakers, business leaders, and other decision makers to consider the most pressing economic issues Their research agenda extends across the portfolio of JPMorgan Chase’s lines of business and global reach. They focus their analyses on consumer finance and financial health, businesses large and small, financial markets, and other critical economic topics. Julius Baer Currency Strategy: Julius Baer’s currency research offers unrivaled insights into developed market and emerging market currencies. Deutsche Bank Global Equity Views: Deutsche Bank is a critical player in the Global equity markets, delivering innovative trading solutions across a diverse client base. They provide information on a global network of execution and high-touch services – establishing a gateway for idea generation and cross-border expertise Additionally, they have an unparalleled presence in markets worldwide with specialists dedicated to client excellence in local geographies JP Morgan US Equity Core List:

Composed of 25 major U.S. stocks, the Equity Core List is an unmatched indicator of general economic movements in the United States Economy. Nomura Emerging Markets Outlook: A global leader in Emerging Markets research, Nomura has around 400 research personnel stationed in 15 different countries. They cover 90% of global economic and financial indicators and are no.1 in the Nikkei Veritas ranking of analysts and economists following Japanese Bonds and currencies. Bank of America Merrill Lynch Asia Views: They offer a network of 23 offices within 12 countries and territories in the Asia Pacific. The bank has had ground presence in the Asia Pacific for over 60 years and has developed into one of the leading financial service companies in the world. Harvard Management Company: The Harvard Endowment, run by the brightest minds of this century, combines deep expertise and decades of experience with a wide spectrum of investment and operational disciplines. It has grown to over 35 billion with an annualized return of 12% since its establishment. The Harvard Public Markets team brings top-quality investment management to HMC's trading platform and their Alternative Assets team ensures access to cutting edge capabilities from specialized teams around the world. Active management through both these platforms enables HMC to be nimble and responsive to changing market conditions. Quantum Global Views: Quantum Global Research conducts independent research with a mission to lead innovation and

excellence in the delivery of bottom-up econometric models. Their Lab advances original thinking and novel insights. Soros Fund Management Prime Research: The Soros fund is regarded as one of the most successful hedge funds in history, averaging a 20% rate of return over 4 decades. Their Prime Research provides us with industry leading investments research. Goldman Sachs Strategic Asset Allocation Model: The Investment Strategy Group in the Goldman Sachs Investment Management Division has developed a novel, multi-factor, approach to strategic asset allocation. This approach is designed to help investors better understand the key sources of long-term return across asset classes and to increase the precision of long-term risk and return estimates

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