INVESTMENT POLICY STATEMENT FOR HAND BENEFITS & TRUST COMPANY
TRADEMARK CAPITAL TARGET RETIREMENT FUND SERIES (2010, 2020, 2030, 2040 AND 2050)
APRIL 13, 2011
TRADEMARK CAPITAL TARGET RETIREMENT FUNDS INVESTMENT POLICY STATEMENT Trademark Capital Target Retirement Funds (“the CIFs or Funds”) are established to provide an efficient investment vehicle for use by client firms of Hand Benefits & Trust Company (“HBT”). The CIFs are available for use solely by ERISA qualified retirement plans for which HBT serves as either a Trustee or as an Agent for a duly appointed Trustee. It is anticipated that all units of each CIF shall be maintained in tax exempt trusts benefiting such retirement plans. Trademark Capital Management, Inc. (“Advisor”) in New Port Richey, Florida is the Advisor for the CIFs and HBT is the Sponsor. This Investment Policy Statement (the “Statement”) may be amended from time to time by written agreement between the Board of Directors of the Trust (the “Board”) and the Advisor. GENERAL DESCRIPTION The Trademark Capital Target Retirement Funds are designed for investors planning to retire during or near the year indicated by the name of the Fund. The names of the Funds are as follows:
Trademark Capital Target Retirement 2010 Fund Trademark Capital Target Retirement 2020 Fund Trademark Capital Target Retirement 2030 Fund Trademark Capital Target Retirement 2040 Fund Trademark Capital Target Retirement 2050 Fund
The CIFs are managed based on the specific retirement year (target date) included in their respective names and assumes a retirement age of 65. The target date refers to the approximate year an investor using the CIF would plan to retire and is likely to stop making new deposits in the fund. The funds are designed for investors who anticipate retiring at or around the target date and who plan to gradually withdraw the value of their account “through” their retirement. Each CIF allocates fund assets between stocks and bonds. It adjusts according to a glide path to become more conservative as the target retirement date draws closer and as the investor moves further into retirement. The Funds reach their most conservative allocation at age 85: Age
65
85
U.S. Equity
41%
12%
Non-U.S. Equity
14%
3%
U.S Fixed Income
37%
46%
Non-U.S. Fixed Income
8%
0%
Cash
0%
39%
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Additionally, each CIF incorporates the Trademark Flexguard Overlay (TFO), allocating a percentage of each Fund to drawdown protection. GLIDE PATH DESCRIPTION Wilshire Associates, Inc. (“Wilshire”) is serving as the consultant for the glide path strategy. Wilshire incorporates a proprietary method using optimized asset class inputs and liability forecasting to arrive at the recommended target date glide path allocations for each CIF. Wilshire dynamically models investors’ life expectancy as it develops the glide path, helping to ensure that investors can achieve their goals to and through retirement. Wilshire’s glide path methodology uses a proprietary asset/surplus frontier weighting algorithm which is based on an asset allocation approach that shifts as the individual gets closer to retirement. As the individual approaches retirement the glide path demonstrates a gradual transition from equities to fixed income and the composition of the glide path begins to use a different set of assets. For example, TIPS take on an increasingly large allocation as the investor approaches retirement to guard against inflation. Table I: Asset Allocation for the Trademark Capital Target Retirement Funds as of 03/31/2011 Wilshire Glide Path
Asset Class Domestic Equity Non-US Equity Fixed Income Other* Total
2010 Fund 36.0% 14.1% 45.0% 4.8% 100.0%
2020 Fund 38.7% 16.2% 40.6% 4.4% 100.0%
2030 Fund 41.8% 20.3% 33.3% 4.7% 100.0%
2040 Fund 46.1% 27.6% 20.4% 5.9% 100.0%
2050 Fund 52.0% 36.3% 3.9% 7.8% 100.0%
* Includes Commodity and REIT
Chart I: Asset Allocation at Each Target Date as of 03/31/2011
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Chart II: Asset Allocation by Age
Wilshire will review and update the recommended glide path allocations quarterly. The implementation of the updates, however, will be the sole responsibility of the Advisor – Wilshire will not have discretion over the Funds. THE NEED FOR RISK MANAGEMENT Protecting an investor’s accumulated savings is essential to achieving adequate capital resources for retirement. The final few years in the savings equation are particularly critical since an investor’s financial capital value is typically at its highest point and at greatest risk. TRADEMARK FLEXGUARD OVERLAY (TFO) TFO OBJECTIVE The primary objective of the TFO overlay is to provide drawdown protection in declining markets, not to add excess returns in rising markets. The goal is to: • Help participants improve results by not experiencing major losses • Help participants avoid making emotional decisions • Keep participants contributing consistently to their plan TFO MAXIMUM COVERAGE LIMITATIONS The TFO overlay is not applied equally across all Funds. The TFO will be lower for an investor having greater than 30 years to retirement and will completely overlay the glide path for investors not prior to 7 years from retirement.
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Chart III: Maximum Trademark Flexguard Overlay Percentage by Participant Age
Table II: Maximum Trademark Flexguard Overlay Percentage for the Trademark Capital Target Retirement Date Funds as of 03/31/2011 FlexGuard TFO Portfolio Coverage
2050 Fund 15%
2040 Fund 22%
2030 Fund 45%
2020 Fund 80%
2010 Fund 100%
The illustration below shows how the TFO overlays the non-fixed income portion of the portfolio. The top of the green Flexguard band is the non-fixed income ceiling as prescribed by the Wilshire glide path. The bottom of the Flexguard band is the representation of increased nonrisky assets (by increasing fixed income or cash, and/or hedging) as the investment model mandates. Chart IV: Maximum Trademark Flexguard Overlay as a Percentage of the Non-Fixed Income Portion of the Portfolio
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THE MODEL The model is designed and implemented to protect a person’s lifetime of savings. It is a proprietary, mechanical quantitative risk management model. The model is designed to indicate the current level of risk in the market and to apply capital preservation strategies when risk becomes excessive relative to the Funds’ objectives. The TFO allows the Advisor to reduce exposure to the glide path as it indicates elevated risk in the market. The TFO model inputs include several factors and indicators such as: • Advance/decline measures • New highs/ new lows • Medium and long-term price trends • Interest rates • Relative strength among asset classes The TFO overlay can be applied incrementally within the bounds of the maximum TFO percentage. IMPLEMENTATION The TFO may be implemented within a range from 0% to 100%. This allows the portion of the Funds covered by the TFO to be directed exclusively by the glide path (0% implemented) or to be managed up to a market neutral position (100% implemented). The below tables (III & IV) demonstrate hypothetical, model driven, TFO implementations. The partial TFO implementation represents when the investment model signals for a lower allocation to non-fixed income. The Full TFO implementation represents when the model is at its most negative and the funds have the minimum exposure to non-fixed income, as described in table II.
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Table III 2030 Fund Partial and Full Implementation Examples:
Fixed Income
Treasury Inflation Protected Securities
TFO
2030 Fund
US Hedge
U.S. Aggregate Bonds High Yield Bonds Non U.S. Bonds Cash EAFE Hedge Large Cap Growth Large Cap Value
Non‐Fixed Income
Mid Cap Growth Mid Cap Value Small Cap Growth Small Cap Value Real Estate Investment Trusts Europe Pacific Excluding Japan United Kingdom Japan Emerging Markets Commodities
Target Allocation 17.1% 10.0% 0.9% 5.2% 0.0% 0.0% 0.0% 12.0% 11.4% 7.6% 8.3% 1.0% 1.5% 4.2% 4.7% 3.6% 4.8% 4.3% 2.9% 0.5%
Full TFO 17.1% 10.0% 0.9% 5.2% 0.0% 10.0% 5.0% 12.0% 11.4% 7.6% 8.3% 0.0% 0.0% 0.0% 4.7% 3.0% 0.0% 4.3% 0.0% 0.5%
Partial TFO 17.1% 10.0% 0.9% 5.2% 0.5% 10.0% 8.0% 12.0% 0.0% 7.6% 8.3% 1.0% 1.5% 0.0% 4.7% 3.6% 4.8% 4.3% 0.0% 0.5%
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Table VI 2010 Fund Partial and Full Implementation Examples:
Fixed Income
Treasury Inflation Protected Securities
TFO
2010 Fund
US Hedge
U.S. Aggregate Bonds High Yield Bonds Non U.S. Bonds Cash EAFE Hedge Large Cap Growth Large Cap Value
Non‐Fixed Income
Mid Cap Growth Mid Cap Value Small Cap Growth Small Cap Value Real Estate Investment Trusts Europe Pacific Excluding Japan United Kingdom Japan Emerging Markets Commodities
Target Allocation 35.5% 1.1% 0.0% 8.4% 0.0% 0.0% 0.0% 9.8% 9.7% 6.1% 7.9% 0.8% 1.6% 4.8% 1.4% 3.4% 3.9% 2.9% 2.6% 0.0%
Full TFO 35.5% 1.1% 0.0% 8.4% 5.0% 19.5% 6.2% 9.8% 9.7% 0.0% 0.0% 0.0% 0.0% 0.0% 1.4% 3.4% 0.0% 0.0% 0.0% 0.0%
Partial TFO 35.5% 1.1% 0.0% 8.4% 0.0% 10.0% 6.2% 9.8% 9.7% 6.1% 0.0% 0.8% 1.6% 0.0% 1.4% 0.0% 3.9% 2.9% 2.6% 0.0%
WHEN THE TFO COVERS 100% OF THE PORTFOLIO On average the TFO, when implemented, targets the portfolio beta from 0.70 to 0.30. However, when the investment model is at its most negative, the TFO will take the portfolio to a near market neutral allocation. The TFO is implemented for non-fixed income assets through: • Increasing cash levels • Using inverse 1X beta Exchange-Traded Funds or Mutual Funds (i.e. ProShares Short S&P 500 Ticker: SH) The Advisor does not intend to use leveraged Exchange-Traded Funds For fixed income assets the Advisor has the discretion to invest in low risk assets including cash. Based on current market conditions the model will indicate the percentage of fixed income to allocate to the available asset types. There is no overlay required to implement the capital preservation strategies for the fixed income portion of the portfolio. For non-fixed income assets the Advisor has the discretion to overlay a portion of the portfolio as described in the Trademark Flexguard Overlay section. WHEN THE TFO COVERS LESS THAN 100% OF THE PORTFOLIO The TFO is implemented in the same fashion as it is implemented when it covers 100% of the 8
portfolio, even when it covers less. However, it is limited by it maximum TFO allocation as described in Chart III. Fixed income assets are managed as described in the previous section. ASSET CLASSES AND SELECTION ASSET CLASSES Asset classes used in the funding of the glide path include the following: Fixed Income Cash TIPS U.S. Bonds High Yield Bonds Non-U.S. Bonds
Domestic Equities Large-Cap Growth Large-Cap Value Mid-Cap Growth Mid-Cap Value Small-Cap Growth Small-Cap Value
Overseas/International Europe – Developed Pacific Rim (ex-Japan) United Kingdom Japan Emerging Markets
Other REITs Commodities
EQUITY ASSET CLASS SELECTION The Advisor’s approach to stock selection is based on a proprietary model that is consistently applied to each fund. The model screens the universe of all stocks within the asset classes or indexes to create a “modified index”. The model utilizes a screen for individual stock selection, to build stock baskets representing the index or asset class. FIXED INCOME ASSET CLASS AND COMMODITIES ASSET CLASS SELECTION The Advisor will implement an indexing strategy that aims to replicate the movements of the specific fixed income asset class and commodities asset class. EXCHANGE-TRADED FUND UTILIZATION In certain circumstances, including the initial period after a Fund launch and at times when a Fund must invest inflows of cash; the Advisor may find it beneficial to allocate Fund assets to exchange-traded funds (ETFs). This provides exposure to the asset classes within the Fund’s glide path in lieu of investing directly in individual securities within such asset classes. Criteria for selecting ETFs includes but is not limited to: Size and volume Fund expense Tracking error TFO AFFECTS ON ASSET CLASS CEILINGS AND FLOORS Each asset class ceiling is limited to the Wilshire glide path allocations; however, the TFO may reduce exposure in any equity asset class. If the TFO covers 100% of the portfolio then it is possible, per the model, for it to take the portfolio to 95% cash (5% remaining in equities)—this is a TEMPORARY DEFENSIVE POSITION that generally last less than 12 months. The advisor also observes the right to take the portfolio to 100% cash in extreme market conditions.
FUND BENCHMARKS 9
The funds are benchmarked to the S&P 500 for a broad based index and to their corresponding S&P Target Date index.
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ACCOUNT REVIEWS The Advisor will meet with the Sponsor periodically to review the investment outlook, structure of their portfolio and results. A general agenda for these meetings may include (but is not limited to):
A review of the investment results achieved over the prior quarter and year in relation to the Advisor’s investment views and internal policies in effect prior to and during the period.
The Advisors current view of economic and capital market events relative to the CIFs’ objectives.
Internal policies that have been adopted in response to evolving capital market and economic events.
The appropriateness of the current portfolio allocation relative to Fund objective.
Reviews of the guidelines relative to any restraints that they may limit the Advisor’s ability to fully reflect policy.
A review of the investment results relative to the longer-term investment performance standards outlined herein including actual results achieved vis-à-vis the performance indices and standards established for the total portfolio. The Investment Advisor will furnish a letter to the Investment Review Committee on a quarterly basis providing information that can be distributed to the clients with the Hand Composite Employee Benefit Trust Report.
On a quarterly basis, the Investment Advisor will give an update covering the following three areas: o Overall quarterly performance o Asset classes performing well during the quarter o Asset classes underperforming during the quarter
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TERMS AND DEFINITIONS Capital Preservation Investment Techniques - the TFO Overlay investment approaches deployed for the Implemented portion of a Fund, which result in an allocation that is more conservative than dictated by the glide path. These techniques are meant to provide drawdown protection in declining markets. Implemented –Trademark’s Capital Preservation Investment Techniques are applied to this portion of the Fund’s assets. The Implemented portion of a Fund’s assets is limited by the TFO Maximum Coverage and determined by the TFO Overlay Methodology. Trademark Flexguard (TFO) Overlay Methodology – A methodology designed by Trademark, which utilizes a proprietary, mechanical quantitative risk management model to determine the portion of a Fund to be covered by the TFO Overlay (i.e. the Implemented portion) and the Capital Preservation Investment Techniques to be deployed. TFO Maximum Coverage – the maximum percentage of a Fund that may be covered by the Capital Preservation Investment Techniques. This will be lower for a Fund having greater than 30 years to target date and will be 100% of a Fund not prior to 7 years to target date.
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ACKNOWLEDGMENT The Committee shall review this policy statement annually. Changes to any portion of this Statement will be made to the extent such changes would be in the interest of the unit holders and will be communicated in a timely manner to the appropriate fiduciaries for each retirement plan owning units of any CIF.
APPROVED:
HAND BENEFITS & TRUST COMPANY By:
______________________________
Title: ______________________________ Date: ______________________________
AGREED:
TRADEMARK CAPITAL MANAGEMENT, INC By:
______________________________
Title: ______________________________ Date: ______________________________
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