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Kevin M. Wilson, ChFC , PhD President/CEO/CIO

Monthly Market Review “Back-Testing the Performance of Stocks & Markets Yields Opportunities” (An Evaluation of What Has Worked) May 16, 2013. Kevin M. Wilson, ChFC , PhD President/CEO/CIO. Dheenu Sivalingam, MBA AVP/CCO/Senior Analyst. Ted A. Pavlovich, WMS VP Wealth Management.

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Kevin M. Wilson, ChFC , PhD President/CEO/CIO

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  1. Monthly Market Review • “Back-Testing the Performance of Stocks & Markets • Yields Opportunities” • (An Evaluation of What Has Worked) May 16, 2013 Kevin M. Wilson, ChFC, PhD President/CEO/CIO Dheenu Sivalingam, MBA AVP/CCO/Senior Analyst Ted A. Pavlovich, WMS VP Wealth Management Office: 218-464-4399 Toll Free: 877-327-5062 Fax: 218-464-4397 Email: info@bluewater-cap.com www.bluewatercapitaladvisors.com 1405 Medical Arts Building 324 W. Superior Street Duluth, MN 55802 1

  2. IntroductionTed a. pavlovich 2

  3. Caveats & Disclaimers 1. Back testing involves hypothetical results and does not represent actual results 2. Past performance is no indication of future returns. 3. Models by their very nature are over-simplified. 4. Limitations to the model results have been imposed by the lack of appropriate benchmark securities for some periods, the arbitrary 10-year limit to available models, and the necessarily over-simplified nature of the models. Investors should view all results as tentative and use caution in interpreting these results. 5. Tail risks are nearly impossible to model, but can have a major but unpredictable impact.

  4. Published Work on what has workedTed a. pavlovich 4

  5. Back Testing Indicates That High Performance Has Been Associated With Using Certain Fundamentals To Select Stocks Quality = low debt/high assets relative to earnings Value = low price relative to earnings or net worth Source: Novy-Marx, 2013 5

  6. Stocks With Cheap Valuations Outperform; High Fliers Underperform Over Time

  7. Sell in May and Go Away Has Worked Over Time

  8. Empirical Back Testing Of Bear Market Signals Appears To Have Worked (With A Lag) OVBBYR Syndrome ? Over-Valued Over-Bought Over-Bullish Yields Rising -20% -49% -58% -32% Source: Hussman -48%

  9. Historical Valuation Data Can Also (On Their Own) Pinpoint Market Tops

  10. Our back-tested technical modelsDheenu v. sivalingam 10

  11. Simple 12-26 Moving Average Test – Catching Wave Shifts Assume: Either 100% Cash Or 100% Stocks Assume: Partial Allocations (NOT Full Portfolio Allocations) 11

  12. Simple 12-26 Moving Average Test (Assumes Model Followed Without Deviation) 12

  13. Simple 12-26 Moving Average Test 13

  14. Method: Long, Entry at $147.87, on 01/07/13: Profit Status: Profit, $19.41 per share or 13.12% 14

  15. Current Trade: Long @ $148.75 on 01/14/13 Current Profit: 12.46% (MKT @ $167.28) Stop Loss: @ $141.23 (5.05%) Exit: $152.31 (2.39%) Turtle System: (PPS,MACD,Volume,Accum/Distru) 15

  16. Our back-tested fundamental models KEVIN M. WILSON 16

  17. BWCA Bloomberg Back Test #1: Q + V (All Cap)

  18. BWCA Bloomberg Back Test #2: Q + V (Cap. > $2.0 Billion) 18

  19. Our back-tested allocation models KEVIN M. WILSON 19

  20. GMO’s Econometric Models for Expected Return Have Been Very Useful Over Long Term S & P 500

  21. BWCA Growth Portfolio BT: Down Capture in Meltdown Scenario 07/02/07 02/12/10 Top: TR Bottom: Volatility Benchmark: SPY Composition: Stocks: 45% Bonds: 40% Cash: 15% Max. Draw: BWCA: -15% SPY: -55% 21

  22. BWCA Growth Portfolio BT: Up Capture – Full Cycle Benchmark: SPY Composition: Stocks: 65% Bonds: 30% Cash: 5% Max. Draw: BWCA: -29% SPY: -55% 07/02/07 05/13/13 Top: TR Bottom: Volatility

  23. BWCA Moderate Portfolio Back Test: Down Capture in Meltdown Scenario 07/02/07 02/12/10 Top: TR Bottom: Volatility Benchmark: VIG Composition: Stocks: 35% Bonds: 50% Cash: 15% Max. Draw: BWCA: -13% VIG: -47%

  24. BWCA Moderate Portfolio Back Test: Up Capture in a Bull Rally 03/09/09 05/13/13 Top: TR Bottom: Volatility Benchmark: VIG Composition: Stocks: 75% Bonds: 14% Cash: 11% Max. Draw: BWCA: -13% VIG: -17%

  25. BWCA Moderate Portfolio Back Test: Up Capture – Full Cycle Benchmark: VIG Composition: Stocks: 45% Bonds: 40% Cash: 15% Max. Draw: BWCA: -18% VIG: -47% 07/02/07 05/13/13 Top: TR Bottom: Volatility

  26. BWCA Conservative Portfolio BT: Down Capture in Meltdown Scenario 11/10/08 02/12/10 Top: TR Bottom: Volatility Benchmark: AOK Composition: Stocks: 20% Bonds: 70% Cash: 10% Max. Draw: BWCA: -8% AOK: -11%

  27. BWCA Conservative Portfolio BT: Up Capture – Full Cycle Benchmark: AOK Composition: Stocks: 28% Bonds: 60% Cash: 12% Max. Draw: BWCA: -10% AOK: -11% 11/10/08 05/13/13 Top: TR Bottom: Volatility

  28. BWCA Conservative Portfolio BT: Up Capture – Bull Rally Benchmark: AOK Composition: Stocks: 50% Bonds: 42% Cash: 8% Max. Draw: BWCA: -9% AOK: -4% 03/09/09 05/13/13 Top: TR Bottom: Volatility

  29. Back testing has been useful in determining allocation strategies • Back testing has moved our fundamental stock selection to a new level • Back testing has allowed our technical analysis of market trends to greatly improve • Opportunities going forward involve improved stock selection, longer holding periods, • less trading, better long term portfolio allocations, and reduced risk of loss Summary/q & a KEVIN M. WILSON 29

  30. Disclaimer This report is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity and is not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Any opinions expressed herein are subject to change at any time without notice. Information has been obtained from sources believed to be reliable, for its accuracy and interpretation are not guaranteed. Investing in securities involves risk, including possible loss of principal. Past performance should not be taken as an indication of guarantee of future performance and no representation, express or implied, is made regarding future performance. The firm does not provide tax advice; clients should contact their attorney, accountant, or other tax adviser regarding tax matters. “BWCA is a state registered investment adviser in all states in which it is required to be registered. All Blue Water Capital Advisors’ customer assets are held in the customer name with Fidelity Institutional Services, clearing through National Financial Services (NFS), Member SIPC, a Fidelity Investments Company as Qualified Custodian.” 30

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