A Case Study of Asset Class Rotation From February 2000 – July 2002

1. A Case Study of Asset Class Rotation From February 2000 – July 2002 Presented by: Philip Rongo, ChFC, CLU Douglas A. Rongo, EA, CFS Your Mutual Fund and Retirement Plan Portfolio Didn’t Have to Suffer Morristown Financial Group, LLP, Registered Investment Advisor 65 Madison Avenue Suite 400 Morristown, NJ 07960 Securities Offered Through Linsco/Private Ledger, Member NASD/SIPC

2. Investment Myths of the 1990s • Pie Charts and Asset Allocation Models • Phrases such as “Buy the Dips,” “Diversification,” and “Buy and Hold for the Long-Term” • “Its time in the markets, not timing the market.” • Risk Categories such as Conservative, Moderate, and Aggressive

3. Beginning in early March 2000, the pieces of the investment puzzle came together to show a clear and decisive change in asset class favoritism. There were tools available to analyze this momentous shift that suggested high risk in the Large Cap Growth and Mid Cap Growth asset classes. • The market action since then has shattered the myths shown on the previous slide. More important questions for then, now, and the future would be as follows: • Should we attempt to accumulate wealth, or preserve wealth? • When did the risk level change? • Should I have been more in, or more out of the stock markets beginning in March 2000? • In the next few pages you will see some of the indicators of risk we use. You need to focus on the point of whether or not your current “financial advisor” is/has been data driven, as we are, or “myth” driven, as many of our “competitors” are, and making the right risk management call.

4. A major shift in stock/mutual fund favoritism occurred as the calendar changed to the year 2000. Y2K, as it was known, did not suffer from computer crashes as many had predicted, but a dramatic breakdown in the Large Cap Growth, and Mid Cap Growth stock/Mutual Fund Asset Classes. • Here are the purposes of this presentation: • Follow up on the previous slide show concerning investment risk management; • Show the clear signs of breakdown in the Large Cap Growth and Mid Cap Growth (LCG and MCG) mutual fund asset classes; • Show the clear signs of coming favoritism of the Small Company Value (SCV) mutual fund asset class; • Inform you, as a do-it-yourselfer, or your paid financial advisor must make the correct investment risk management call on an on-going basis. Data courtesy of Dorsey, Wright, and Associates, and Lager, and Co. Information herein is believed to be reliable, but not guaranteed.

5. At the left is the Bullish Percent Chart for Large Cap Growth Mutual Funds. Notice the 2. That shows that in February 2000, 98% of the LCG funds were showing buy signals on their long term Point and Figure charts. You may remember the television commercial with Stuart from that internet brokerage firm talking about how he wanted to “take the market by its ankles; shake it around; throw it on the ground, and stomp on it.” If Stuart continued to hold these types of stocks and funds, he probably would have lost that fight. Note: Xs mean that share prices are rising to the extent that new “buy” signals are made. Os mean that share prices are falling to the extent that new “sell” signals are being made.

6. In March 2000, the NASDAQ made its all-time high. Also in March 2000, enough investors with enough shares started supplying their shares to the market (selling). Since there was not sufficient demand for their shares, just as with any consumer item, prices must go down. Prices declined sufficiently that LCG funds fell down on their charts. Far enough, in fact, that the buy signals had changed to sell signals. As the neighboring chart shows, the Bullish Percent went from 98% in February to 68% by mid-April. This chart does not tell how much money was lost. It simply lets people know that by this indicator high risk was present in March 2000. Note: Xs mean that share prices are rising to the extent that new “buy” signals are made. Os mean that share prices are falling to the extent that new “sell” signals are being made.

7. The LCG funds made a recovery in late April 2000, but the asset class was on Defense by May 2000 (the 5 is hidden by the red filling at the 70% level). Another rally came in June 2000, and continued into July. But again, in July the bullish percent hit 86%, an extremely high level. The next reversal came late in July. This brought the index into a defensive mode through the remainder of 2000, and the entire year of 2001. A small rally came in January 2002, but the bullish percent dropped to a level of 6% by July 2002. The asset class has not shown much strength since January 2002. Note: Xs mean that share prices are rising to the extent that new “buy” signals are made. Os mean that share prices are falling to the extent that new “sell” signals are being made.

8. The MCG category paints a similar picture. Again, in January 2000, 96% of all mutual funds in this category showed a buy signal. Also, this index went to defense in March 2000, as more of these funds gave up their buy signals for sell signals. Prices must come down for that to happen. The index bottomed at the 60% level in mid-April. Reversing to Os from above the 70% level is a high risk event that warrants attention from the investor, and, more importantly, from the investment risk manager, a k a, your “financial advisor.” Note: Xs mean that share prices are rising to the extent that new “buy” signals are made. Os mean that share prices are falling to the extent that new “sell” signals are being made.

9. The MCG funds made a recovery in late April 2000, but the asset class was on Defense by May 2000. Another rally came in June 2000, and continued into July. But again, in July the bullish percent hit 90%, an extremely high level. The next reversal came in October 2000. This brought the index into a defensive mode through the remainder of 2000. A small rally came in January 2001, but the bullish percent dropped to a level of 6% by February. Another rout ensued starting in late February 2001, and there has not been a significant rally in this asset class since that time. DO YOU WANT YOUR FINANCIAL ADVISOR TO MONITOR THIS TYPE OF RISK? Note: Xs mean that share prices are rising to the extent that new “buy” signals are made. Os mean that share prices are falling to the extent that new “sell” signals are being made.

10. Another useful indicator of risk is trend line analysis. The chart excerpt at the left denotes the percentage of LCG funds trading above their long term bullish support lines. Remember, trend lines have the effect of acting as “brick walls,” very tough to penetrate from either side, and typically bounce objects off of them. In July 1999, and January 2000, the PT index for LCG mutual funds topped out at a remarkable 98%. April 2000 brought a reversal of this index that continued into May, and bottomed at the 80% level. The PT index reversal of October 2000 continued to the 10% level by April 2001. Note: Xs mean that share prices are rising to the extent that more funds of this class are going above the bearish resistance line discussed in the previous slide show. Os mean that share prices are falling to the extent that more funds of this class are going below the bullish support line discussed in the previous slide show..

11. In August 2001, the PT index for LCG mutual funds started falling again. This descent stopped at the 4%. This level was reached again in July 2002. THE MORAL HERE IS THAT ONCE A TREND IS BROKEN, IT IS DIFFICULT TO REPAIR. Note: Xs mean that share prices are rising to the extent that more funds of this class are going above the bearish resistance line discussed in the previous slide show. Os mean that share prices are falling to the extent that more funds of this class are going below the bullish support line discussed in the previous slide show..

12. This is the PT chart for MCG mutual funds. It bears repeating that the reversal to defense takes place from high levels in April 2000. While television, radio, print, and internet media called the stock market situation nothing worse than a minor correction, somebody knew more. An often repeated phrase on Wall Street is “the trend is your friend.” If you stayed invested, this trend was not true to your account balance. Note: Xs mean that share prices are rising to the extent that more funds of this class are going above the bearish resistance line discussed in the previous slide show. Os mean that share prices are falling to the extent that more funds of this class are going below the bullish support line discussed in the previous slide show..

13. The pattern of MCG mutual funds falling below their trend lines continued to the 20% level in April 2001. After a series of reversals, the PT for the MCG asset class fell twice to a low of 8%. THIS TREND HAS NOT BEEN YOUR FRIEND FOR THE LAST FEW YEARS. IS YOUR INVESTMENT RISK MANAGER FOLLOWING THE TREND, OR JUST RIDING THE TREND? Note: Xs mean that share prices are rising to the extent that more funds of this class are going above the bearish resistance line discussed in the previous slide show. Os mean that share prices are falling to the extent that more funds of this class are going below the bullish support line discussed in the previous slide show..

14. The final evaluation tool for this presentation is to show the relative performance of LCG mutual funds against the S & P 500 Index.* Relative Strength (RS) tells us if the holding is “beating the average,” or the average is beating the holding. The average can be an index, a group of peers, or simply another holding. Increasing RS tells us that an asset class is going up faster than the average, or going down slower than the average. It is important to note that RS can be increasing at the same time that actual share value is decreasing. Note: Xs mean that more funds are outperforming the index.. Os mean that fewer funds are outperforming the index.. *The S & P 500 is an unmanaged index, cannot be invested into directly. Past performance is no guarantee of future results.

15. Managed funds seek to outperform the S & P 500. The chart at the left shows the percentage of LCG mutual funds that were outperforming the S & P 500. As you can see, this percentage increased to a peak of 68% in March 2000. Late in March, this returned to a column of Os. What this means is that LCG mutual funds, as an asset class, fell faster than the S & P 500. This particular column of Os bottomed in late April at the 4% level. Note: Xs mean that more funds are outperforming the index.. Os mean that fewer funds are outperforming the index.. *The S & P 500 is an unmanaged index, cannot be invested into directly. Past performance is no guarantee of future results.

16. At the left is an excerpt of the RS of the MCG mutual fund asset class against the S & P 500.* It is worth repeating, March 2000 saw the MCG mutual fund asset class fall out of favor. Notice how the percentage of MCG funds outperforming the S & P 500 fell to Os. That column of Os continued to the 6% level at the end of March, bounced up slightly in April, and then went back to the 4% level by the end of April 2000. This was another clear confirmation that money was leaving this asset class, and going elsewhere. Note: Xs mean that more funds are outperforming the index.. Os mean that fewer funds are outperforming the index.. *The S & P 500 is an unmanaged index, cannot be invested into directly. Past performance is no guarantee of future results.

17. WHERE DID THE MONEY GO?

18. Shown at the left is the bullish percent index for small company value (SCV) mutual fund asset class. While nobody can guarantee future performance, this stands out as the favored asset class over the last few years, as was evident to anyone who would pay attention to some indicators. Just like the other asset classes shown earlier, this class was making buy signals through the end of 1999. Unlike the other classes, this area did not breakdown in March 2000. It did fall in October, but regained strength as we went into 2001. Simply put, big money wanted SCV companies and mutual funds at that time. We could continue the timeline, but it would be redundant. Note: Xs mean that share prices are rising to the extent that new “buy” signals are made. Os mean that share prices are falling to the extent that new “sell” signals are being made.

19. The PT chart for the SCV asset class shows more and more SCV funds going positive all the way up to September 2000. This tops out at 78%. After dropping to 66% in December, these types of funds again started going positive on their trends. Note: Xs mean that share prices are rising to the extent that more funds of this class are going above the bearish resistance line discussed in the previous slide show. Os mean that share prices are falling to the extent that more funds of this class are going below the bullish support line discussed in the previous slide show..

20. The September 11, 2001 tragedy brings tremendous selling pressure on the SCV asset class. The PT chart drops to the 46% level. Demand reemerges in December 2001, and continues through June 2002. Note: Xs mean that share prices are rising to the extent that more funds of this class are going above the bearish resistance line discussed in the previous slide show. Os mean that share prices are falling to the extent that more funds of this class are going below the bullish support line discussed in the previous slide show..

21. The RS of SCV mutual funds was declining in early 2000. In May 2000, there was a tremendous demand for this asset class relative to the S & P 500.* The percentage to SCV mutual funds outperforming the S & P 500 went from 18% in May, to 92% by March 2001. Demand was clearly in control of this asset class. Since then, the chart at the left shows that this class has been strong relative the S & P 500.* Note: Xs mean that more funds are outperforming the index.. Os mean that fewer funds are outperforming the index.. *The S & P 500 is an unmanaged index, cannot be invested into directly. Past performance is no guarantee of future results.

22. QUESTIONS • Who is monitoring the risk in your portfolio? • Did you see the clear changes in risk in certain asset classes? • Did your current financial advisor adjust to these major trends before your portfolio was hurt? • Do you want to work with an advisor who monitors these trends each day, and seeks to keep your portfolio intact during the difficult times? • Would you like us to review your portfolio? If so, call Phil Rongo, Doug Rongo, or Christa Cicchetti at 973-538-7030 to arrange a convenient time.

23. CONCLUSIONS • Lack of investment risk management can be hazardous to your wealth. • Somebody, either you, or your compensated financial advisor, has to monitor the risk. • There is risk of losses by holding certain asset classes when they go out of favor. • By the time the major media catch on to the asset class rotation, it may be too late to be highly successful. • If your current financial advisor is unaware of these changes, call Phil Rongo, Doug Rongo, or Christa Cicchetti at 973-538-7030.