IFS Quant Equity Money Management

IFS EQUITY MANAGEMENT A quantitative approach Version 2016-08B

A quantitative approach to managing investments Focus on discipline and reducing biases Investment screens as a first step Factor based approach to selecting equities Multiple factors weighted into a proprietary ranking score Filtering out certain risks and potentially dangerous equities Portfolio construction Multiple strategy approachOVERVIEW

Screening down to a manageable list of equities based on what has worked well historically Initial Screen  Minimum company size, share price and liquidity requirements We avoid many of the companies that are too risky by nature of their size, share price or are too thinly traded to provide a cost effective way to purchase them. This will reduce the number of securities to under 3,000. Selection Screens  Historically Tested Screens Those will vary based on a given strategy. Screens may include screening for cash flow, growth and profitability measures, as well as earnings variability and technical considerations. In many cases, screening for the best metric in a given category can actually lead to more volatility. We instead truncate out extreme values, high and low on a particular screen which historically would have enhanced the risk/return trade-off. This prepares a list of securities for the next step, the ranking process, without excessively limiting the number of securities to select from.SCREENS

Combining factors that have historically produced strong returns over time but also have a low or negativecorrelation with each other can help reduce the volatility of the portfolio as a whole and smooth out returns. Valuation Factors Strong historical or back-tested performance for a particular strategy does not guarantee that the  Intrinsic Valuation Model particular strategy will do well in the future. It is often  Relative Valuation Model the case that strategies that do well over time, will under-perform at various times along the way. The Momentum Factors achievement of out-performance from a particular strategy often requires an approach that is different  Analyst Revision Model than the mainstream or indexing approach.  Price Momentum Model Therefore, in the short and intermediate term performance will typically deviate from that of the popular indexes. Successfully participating in such strategies will require adopting a longer term view.There is consistent evidence that Value and Momentum Factors when combined achieve superiorrisk adjusted returns. Pure value based strategies can do well on their own, however securities canhave a tendency to stay under-valued for long periods of time, sometimes being referred to asvalue traps. Adding Momentum factors can help reduce that effect and thereby reduce risk.FACTORS

Factors are combined and each is weighted into a ranking score.Extensive testing was done to select factors that are common to equities that havehistorically out-performed in a consistent manner. The objective of combining multiplefactors is to balance the potential for return while giving strong consideration forvolatility, risk and consistency of return over time. The resulting ranking score is alsoback-tested to see how it has done historically, considering return as well as risk andconsistency and persistence.The following chart represents an example of a ranking score where the higherrankings, those from the top deciles (1 and 2) have historically yielded more activereturn, which is return in excess of the chosen benchmark. The above is for illustration purposes of the concept and is not indicative that a specific active return can be achieved from the application of our proprietary rankings. Past performance is not a guarantee of future results.RANKING

Digging further and eliminating the riskier companiesThus far, the screening and the rankings havetaken place using reported information.It is not unusual for accounting earnings to fail tobe representative of the economic reality behindthose earnings.We use research that analyzes the footnotes anddisclosures in thousands of SEC filings to makeappropriate adjustments to financials. This is toassess the impact and potential risks involvedwhen accounting earnings overestimate acompany’s financial performance.Some of the Issues that can distort earningsEmployee Stock Options Pension Over/Under Funding Excess CashRestructuring Charges Discontinued Operations Goodwill AmortizationUnconsolidated Subsidiaries Capitalized Expenses Deferred compensationRISK FILTER

A portfolio of securities must be assembled appropriately. Simply adding qualified securities to a portfolio fails to consider the resulting characteristics of the portfolio.Diversification is not just about adding more stocks to the portfolio. These have to bereviewed within the overall context of the portfolio. The return, volatilitycharacteristics along with the correlation among securities will affect the overallbehavior of the portfolio.A review of portfolio volatility, sector and industry concentrations are important so asto minimize the risk of having too many eggs in one basket. Overweighs amongcertain factors can also create potential risks.Ultimately It is about proper diversification among many of the potential sources ofreturn and risk with the outcome designed to try to minimize the chances ofnegative surprises.We employ multiple strategies within a portfolio with a different emphasis for each.For example, strong valuation characteristics tend to have a longer term horizon topan out while momentum characteristics are designed to capture a smaller positiveoutcome in the shorter time frames. Balancing the emphasis on these as well asusing variations on screening criteria's and other factors can bring additionaldiversification to the process from a methodology standpoint.PORTFOLIO

Important InformationThis information describes IFS’s Investment Philosophy and approach to investing inindividual equities and should be accompanied with our form ADV Part 2.This material is designed to give you an overview of some of the investment philosophyand processes at IFS. Some of the concepts presented do not apply to every singlestrategy. IFS may use variations and at any time can revise and implement newconcepts not described here.Past performance does not guarantee future results. Investment returns and principalvalue will fluctuate, so that investors' shares, when sold, may be worth more or less thantheir original cost.Investing in any equity strategy does not guarantee that an investor will make money,avoid losing capital, or indicate that the investment is risk-free. There are no absoluteguarantees in investing. Reference to any back tested performance concept ishypothetical (it does not reflect trading in actual accounts). It is provided forinformational purposes and to indicate historical performance had the investmentstrategies or model portfolios been available over the relevant period.DISCLOSURES