Investor Education Page for Portfolio Allocation

Saturday, May 25, 2013

Portfolio Allocation: Alternative Paths to a Diversified Portfolio

Different Paths To Your Financial Goals
The goal of portfolio construction is to build a diversified portfolio to best meet an investor’s financial goals. The first and most important step in portfolio construction is the strategic allocation decision - what percentage of stocks, bonds, alternative investments and cash to hold to meet the investor’s stated goals, risk tolerance and time horizon.

Portfolio returns can be unpredictable and may result in one falling short of achieving their goals. This risk can be reduced through the construction of a well-diversified portfolio of investments. The way to achieve true diversification is by choosing investments that do not behave in the same manner, in other words, that are not highly correlated.

TRADITIONAL EQUITY INVESTING		TRADITIONAL EQUITY INVESTING
Traditional equity portfolio diversification is characterized by holding a portion of each equity market segment capitalization or investment style. Advantages: • Offers the ability to set the desired level of equity exposure in an asset allocation mix. • Neatly carves domestic equity exposure into 9 style boxes. Challenges: • Full exposure to the market increases the likelihood of downside participation during market pullbacks.		Even a well-diversified portfolio of traditional equity funds can fall victim to the unpredictability of the market. Diversification works by combining assets that have low and/or negative correlations with each other during market ups and downs. As this illustration shows, it can be difficult to achieve even with an allocation that includes a full range of investment styles. (You cannot invest directly in an index.) Advantages: • Performance can be benchmarked against a corresponding market index. • Investments can be compared to corresponding peer group. Challenges: • All boxes are highly correlated to the broad market. (As a rule, a correlation coefficient of 0.80 or greater when compared to a market index or another mutual fund is generally considered to be highly correlated, whereas a correlation of 0.50 or less is generally considered lowly correlated.) • Limited diversification benefits. • Alpha generation limited to stock and sector selection.

TRADITIONAL EQUITY INVESTING

Fixed Style / Fixed Allocation

Traditional equity portfolio diversification is characterized by holding a portion of each equity market segment capitalization or investment style.

Advantages:
• Offers the ability to set the desired level of equity exposure in an asset allocation mix.

• Neatly carves domestic equity exposure into 9 style boxes.

Challenges:
• Full exposure to the market increases the likelihood of downside participation during market pullbacks.

Fixed Style / Fixed Allocation

Even a well-diversified portfolio of traditional equity funds can fall victim to the unpredictability of the market. Diversification works by combining assets that have low and/or negative correlations with each other during market ups and downs. As this illustration shows, it can be difficult to achieve even with an allocation that includes a full range of investment styles. (You cannot invest directly in an index.)

Advantages:
• Performance can be benchmarked against a corresponding market index.

• Investments can be compared to corresponding peer group.

Challenges:
• All boxes are highly correlated to the broad market. (As a rule, a correlation coefficient of 0.80 or greater when compared to a market index or another mutual fund is generally considered to be highly correlated, whereas a correlation of 0.50 or less is generally considered lowly correlated.)

• Limited diversification benefits.

• Alpha generation limited to stock and sector selection.

Blending traditional equity investing with tactical allocation takes your 2-dimensional portfolio in a new direction.

TACTICAL ALLOCATION INVESTING ADDS A NEW DIMENSION		QUAKER “GO ANYWHERE” TACTICAL ALLOCATION INVESTING
Tactical allocation provides diversification that goes beyond the 9 style boxes. Advantages: • Portfolio mandate ensures style purity. • Not constrained to remain fully invested. Strategy can raise up to 100% cash if the asset class is deemed excessively risky. • Strategy can also increase short positions up to 25% net short in an effort to hedge the portfolio or to generate alpha. • Lower correlation versus the Funds benchmark. Challenges: • Flexible allocation creates comparison issues versus other style-pure fully invested investments. • Flexible allocation makes performance benchmarking somewhat challenging.		Introducing flexibility into traditional equity investing gives the portfolio the ability to reach a level of diversification that it otherwise might not attain. Advantages: • Dual alpha generation: The opportunity for alpha generation exists simultaneously on both the long and short side of the portfolio. • Potential for lower correlation versus equity and fixed income investments. • Ability to raise up to 100% cash enables managers to potentially side step market pullbacks. • Strategy can also increase short positions up to 25% net short (Quaker Akros Absolute Return, and Quaker Event Arbitrage Funds have the ability to go up to 50% net short) in an effort to hedge the portfolio or to generate alpha. Challenges: • Flexible allocation and style makes benchmarking difficult. • Benchmarking difficulties create the need for longer evaluation periods in times of performance dislocations.

TACTICAL ALLOCATION INVESTING ADDS A NEW DIMENSION

QUAKER “GO ANYWHERE” TACTICAL ALLOCATION INVESTING

Fixed Style / Fixed Allocation

Tactical allocation provides diversification that goes beyond the 9 style boxes.

Advantages:
• Portfolio mandate ensures style purity.

• Not constrained to remain fully invested. Strategy can raise up to 100% cash if the asset class is deemed excessively risky.

• Strategy can also increase short positions up to 25% net short in an effort to hedge the portfolio or to generate alpha.

• Lower correlation versus the Funds benchmark.

Challenges:
• Flexible allocation creates comparison issues versus other style-pure fully invested investments.

• Flexible allocation makes performance benchmarking somewhat challenging.

Introducing flexibility into traditional equity investing gives the portfolio the ability to reach a level of diversification that it otherwise might not attain.

Advantages:
• Dual alpha generation: The opportunity for alpha generation exists simultaneously on both the long and short side of the portfolio.

• Potential for lower correlation versus equity and fixed income investments.

• Ability to raise up to 100% cash enables managers to potentially side step market pullbacks.

• Strategy can also increase short positions up to 25% net short (Quaker Akros Absolute Return, and Quaker Event Arbitrage Funds have the ability to go up to 50% net short) in an effort to hedge the portfolio or to generate alpha.

Challenges:
• Flexible allocation and style makes benchmarking difficult.

• Benchmarking difficulties create the need for longer evaluation periods in times of performance dislocations.

Blending traditional, highly correlated equity investing with tactical allocation results in a 3-dimensional, diversified portfolio.

DYNAMIC ALLOCATION WITHIN AN INVESTMENT STYLE		DYNAMIC PORTFOLIO DIVERSIFICATION
Tactical Overlay Within the Style Box • Set your strategic allocation (equity, fixed income, cash). • Decide what percent of your equity portfolio should be allocated to each style box. • Utilize a Quaker Style Pure Tactical Allocation Fund within the style box. • A money manager with expertise in that style will evaluate the risk and opportunities of the style box. • The outcome will be a strategic portfolio that utilizes a dynamic style tilting mechanism, one in which style-box exposures are adjusted in an effort to capitalize on short to intermediate term market opportunities.		Tactical Overlay Within the Portfolio • Set your strategic allocation to include a low correlation tactical allocation investment. • Allocate a percentage of portfolio assets to Quaker Go Anywhere Tactical Allocation Funds. • Go Anywhere Funds are potentially lowly correlated and could act as the true diversifier your portfolio needs. • By being flexible, the Go Anywhere Funds provide a tactical overlay to your strategic allocation.

DYNAMIC ALLOCATION WITHIN AN INVESTMENT STYLE

DYNAMIC PORTFOLIO DIVERSIFICATION

Tactical Overlay Within the Style Box
• Set your strategic allocation (equity, fixed income, cash).

• Decide what percent of your equity portfolio should be allocated to each style box.

• Utilize a Quaker Style Pure Tactical Allocation Fund within the style box.

• A money manager with expertise in that style will evaluate the risk and opportunities of the style box.

• The outcome will be a strategic portfolio that utilizes a dynamic style tilting mechanism, one in which style-box exposures are adjusted in an effort to capitalize on short to intermediate term market opportunities.

Tactical Overlay Within the Portfolio
• Set your strategic allocation to include a low correlation tactical allocation investment.

• Allocate a percentage of portfolio assets to Quaker Go Anywhere Tactical Allocation Funds.

• Go Anywhere Funds are potentially lowly correlated and could act as the true diversifier your portfolio needs.

• By being flexible, the Go Anywhere Funds provide a tactical overlay to your strategic allocation.

THE QUAKER FAMILY OF FUNDS

The Quaker Funds’ capabilities cover the range of funds, from traditional to tactical, to satisfy a broad range of investor needs. Used in combination within a diversified portfolio, they can go a long way toward smoothing out your return streams. All Quaker Funds are managed in an entrepreneurial, hands-on style.

Investment Strategies	Style/Allocation	Standard Benchmarking	Correlation	Minimum Rebalancing Interval	Investment Evaluation Period
Traditional Equity Investing	Fixed/Fixed	Fully benchmarked	High	Annually	Short Term
Style Pure Tactical Allocation	Fixed/Flexible	Partially benchmarked	Moderate	Semi-Annually	Intermediate Term
Go-Anywhere Tactical Allocation	Flexible/Flexible	Un-benchmarked	Low/Moderate	Quarterly	Long Term

TACTICAL ALLOCATION FUNDS: Add a third dimension to your portfolio

Tactical Characteristics	Maximum Short Selling Limit	Style-Pure	Go-Anywhere	Maximum Cash Limit
Quaker Akros Absolute Return Fund	50%		√	100%
Quaker Event Arbitrage Fund	50%		√	100%
Quaker Global Tactical Allocation	25%		√	100%
Quaker Small-Cap Growth Tactical Allocation	25%	√		100%
Quaker Strategic Growth	25%		√	100%

TRADITIONAL FUNDS: YOUR FULLY INVESTED ALTERNATIVE

Quaker Mid-Cap Value Fund
Quaker Small-Cap Value Fund

Speak with your financial advisor to explore how the Quaker Funds could enhance your ability to meet your financial goals.

For a more in-depth look at the role asset allocation plays in portfolio construction, click here to read “Portfolio Construction for the Long Run (and Now)” by Michael Falk, CFA.

Investor Education: Diversifying Your Portfolio

Key Definitions

Investing in the Quaker Funds may involve special risks that require special investment expertise including, but not limited to, investments in smaller companies, non-diversification, short sales, foreign securities, special situation companies, debt securities and value and growth investing. Please refer to the prospectus for more complete information. Diversification does not assure a profit or protect against a loss in a declining market.

Mutual fund investing involves risk including the possible loss of principal.

Before investing, carefully consider a fund's objective, risks and expenses. Download a current prospectus containing this information or call 800.220.8888 for a copy. Read it carefully.