“Survival of the Nimble”

1. Presented to: Atlantic Connection’s 6th Annual Economic & Financial Conference “Fund of Funds: Where are the Opportunities? “Survival of the Nimble” Why Smaller Investment Managers Outperformed Large Managers Despite a Challenging Five Years for Fundamentally Based Active Management Strategies By Tina Byles Williams, CIO & Portfolio Manager, Global EquitiesFIS Group July 13, 2011

2. Macro Events that Dominated the Last Five Years Led to Heightened Volatility and Correlation “Bubble”

3. Heightened Correlations Have Diminished the Alpha Generated from Fundamental Stock Selection by Active Managers Diminishing excess return troughed in 2009

4. What Forces Have Elevated Correlations and Will They Normalize? Structural Forces • Increased use of index based products (S&P 500 futures contracts or ETFs) • Increased use of high frequency trading Cyclical Forces • Macro uncertainty encourages trading methods that heighten correlations (index trading and arbitrage). • With greater macro certainty these trading techniques should also self-reinforce to push correlations down Answer – Yes at Slightly Higher Levels and They Have Already Begun to do so Correlations averaged .27 pre 2007; peaked at .7 in the fall of 2008, early 2009, May 2010 and December 2010 and have subsequently subsided Result – active management strategies’ performance should improve and Have Already Begun to do so

5. How Have Entrepreneurial Managers Fared? • ENTREPRENEURIAL MANAGER defined as: Asset ClassAssets no more than: Large Cap Equity $2 billion Mid/Small Cap Equity $300 million Global Ex-US Equity $2 billion

6. Over the last Five Years, Developing Managers have Outperformed Established Managers Without Incurring Appreciably More Risk

7. Entrepreneurial Managers’ Performance Advantage Most Pronounced in Down Markets

8. What Characteristics lead to the Performance Advantage? • Portfolio Structure: • Investment insight amplified through more concentrated portfolios and “Best ideas” • less diluted • With smaller AUM, Entrepreneurial Managers can more efficiently invest in less liquid • segments of the market opportunity set • In certain cases, they can trade more nimbly with negligible market impact • Organizational Dynamics • Compensation more directly tied to alpha production; whereas managers at • established firms have greater “safety net” from baseline fee income from large • asset pools and the firm’s franchise value • Passion for success and focus unencumbered by bureaucracy and “Committee think”

9. Entrepreneurial Managers Held More Concentrated Portfolios • Most Entrepreneurial Managers employ active management strategies and tend to hold more concentrated portfolios

10. Tracking Error vs. Annualized Return – Large Growth Managers

11. Tracking Error vs. Annualized Return – Large Value Managers

12. Tracking Error vs. Annualized Return – Large Core Managers

13. Tracking Error vs. Annualized Return – Small Cap Managers

14. Developing Managers Incurred Greater Tracking Error which Produced More Excess Return than for Established Managers

15. Most Compelling Performance Advantage is the Opportunity Cost • Source: Huber Capital Management

16. Increased AUM Limits Access to Lower Liquidity Quintiles Underlying assumptions: • White = 0%-5% of the float • Red = 5%-10% of the float • Yellow = 10% - 15% of the float • Green is >15% of the float • Source: Huber Capital Management

17. But Lower Liquidity Quintiles Have Generally Outperformed

18. For Value Segments

19. And Growth Segments

20. Conclusions • Heightened macro uncertainty over the last five years as well as the increased use of index trading products diminished the relationship between security price changes and fundamental characteristics. Active long-only and long-short managers have struggled to generate alpha. • Increased macro certainty should be more hospitable for active management strategies going forward. • Even though most Entrepreneurial Managers offer active management strategies, they outperformed their Established Manager Peers over the last five years. • Entrepreneurial managers exhibited more concentrated, higher conviction portfolios with higher tracking error than their Established manager peers. • Entrepreneurial firms produced more excess return per unit of tracking error for 4 of the 5 major equity categories studied (Large Value, Large Growth, Small Cap and Global Ex-US Equity). • The combination of large asset pools with commonly used guidelines that limit a manager’s exposure to a maximum percentage of the outstanding shares of listed companies likely constrained Established managers’ ability to take advantage of the higher returns generated by smaller and less liquid stocks. • The structural performance advantage caused by Entrepreneurial Managers’ greater flexibility to access less liquid and higher returning segments of the liquidity spectrum is likely to continue.