Risk-Based Portfolios

Navigator Fixed Income

For the second quarter of 2016, the Navigator Fixed Income portfolio gained 2.07% compared to a 2.67% gain for the Barclays Capital Government and Credit Index. The Fixed Income portfolio’s mission is to provide core U.S. fixed income exposure via a mix of solid, proven mutual funds and ETFs. The quarter was a very strong one for bonds, as global interest rates declined gradually through much of the quarter and then declined dramatically after the results of the Brexit vote. The portfolio maintained its credit-oriented focus with positions in Loomis Sayles Investment Grade Bond (LSIIX), Pioneer Core Bond (PICYX), two high yield bond ETFs (JNK and HYG), and a convertible bond ETF (CWB). International fixed income (largely emerging markets bonds) is an area the portfolio continues to allocate to via the Legg Mason BW Global Opportunities Bond Fund (GOBIX). With a huge number of sovereign bonds offering negative yields, we believe that emerging markets bonds provide relative value. The portfolio also owns municipal bonds and hedges out the interest rate risk. While that position has been a drag for the portfolio with global interest rates at record lows and municipal bonds often outyielding Treasuries, we believe this position continues to have a long-term risk-reward appeal.

Navigator Capital Preservation with Sentry

For the second quarter of 2016, the Navigator Capital Preservation with Sentry portfolio gained 2.49% compared to a 1.88% gain for the Dow Jones Conservative Portfolio Index. Within the fixed income allocation, the portfolio allocated towards high yield during the quarter, and the position produced newsworthy returns, even outperforming broad equities. Within equities, the equity mutual fund holdings for both U.S. and international equities were liquidated and the portfolio was switched to low-cost ETFs. Within U.S. equities, we utilize an approach that is partially low-cost indexing and partially factor-investing based. Within international equities, the decision was made to currency hedge a portion of the exposure, as our research showed that, over time, while this does not enhance returns (but also does not hurt them), it can reduce portfolio volatility.

Hedging one’s equity exposure during a strong market for equities is an exercise in patience and understanding the proper role of a hedge in a broader portfolio. We continue our constant policy of providing a hedge for the portfolio at all times, while at the same time looking to reduce the costs of hedging by shorting volatility (in small, risk-managed trades). Looking forward into the rest of 2016, our stance remains mildly bullish, as market breadth has expanded and value stocks appear to be providing new leadership. This unique election year should cause market volatility, but we do not expect to increase the size of our hedge position any time soon.

Navigator Conservative Growth with Sentry

For the second quarter of 2016, the Navigator Conservative Growth with Sentry portfolio gained 2.34% compared to a 2.48% gain for the Dow Jones Moderately Conservative Portfolio Index. Within fixed income, the portfolio allocated towards high yield during the quarter, and the position produced newsworthy returns, even outperforming broad equities. Within equities, the equity mutual fund holdings for both U.S. and international equities were liquidated, and the portfolio was switched to low-cost ETFs. Within U.S. equities, we utilize an approach that is partially low-cost indexing and partially factor-investing based. Within international equities, the decision was made to currency hedge a portion of the exposure, as our research showed that over time, while this does not enhance returns (but also does not hurt them), it can reduce portfolio volatility. Among U.S. equity styles and factors, we emphasized mid cap value and dividend paying stocks, while among U.S. sectors our rankings pointed us towards materials and metals and mining. Within international equities, we favored emerging markets and avoided Europe and Japan.

Hedging one’s equity exposure during a strong market for equities is an exercise in patience and understanding the proper role of a hedge in a broader portfolio. We continue our constant policy of providing a hedge for the portfolio at all times, while at the same time looking to reduce the costs of hedging by shorting volatility (in small, risk-managed trades). Looking forward into the rest of 2016, our stance remains mildly bullish, as market breadth has expanded and value stocks appear to be providing new leadership. This unique election year should cause market volatility, but we do not expect to increase the size of our hedge position any time soon.

Navigator Moderate Growth with Sentry

For the second quarter of 2016, the Navigator Moderate Growth with Sentry portfolio gained 2.01% compared to a 2.19% gain for the Dow Jones Moderate Portfolio Index. Within fixed income, the portfolio was allocated towards high yield during the quarter, and the position produced newsworthy returns, even outperforming broad equities. Within equities, the equity mutual fund holdings for both U.S. and international equities were liquidated, and the portfolio was switched to low-cost ETFs. Within U.S. equities, we utilize an approach that is partially low-cost indexing and partially factor-investing based. Within international equities, the decision was made to currency hedge a portion of the exposure, as our research showed that over time, while this does not enhance returns (but also does not hurt them), it can reduce portfolio volatility. Among U.S. equity styles and factors, we emphasized mid cap value and dividend paying stocks, while among U.S. sectors our rankings pointed us towards materials and metals and mining. Within international equities, we favored emerging markets and avoided Europe and Japan.

Hedging one’s equity exposure during a strong market for equities is an exercise in patience and understanding the proper role of a hedge in a broader portfolio. We continue our constant policy of providing a hedge for the portfolio at all times, while at the same time looking to reduce the costs of hedging by shorting volatility (in small, risk-managed trades). Looking forward into the rest of 2016, our stance remains mildly bullish, as market breadth has expanded and value stocks appear to be providing new leadership. This unique election year should cause market volatility, but we do not expect to increase the size of our hedge position any time soon.

Navigator Growth

For the second quarter of 2016, the Navigator Growth portfolio gained 2.20% compared to a 1.94% gain for the Dow Jones Moderately Aggressive Portfolio Index. Within fixed income, the portfolio allocated towards high yield during the quarter, and the position produced newsworthy returns, even outperforming broad equities. Within equities, the equity mutual fund holdings for both U.S. and international equities were liquidated, and the portfolio was switched to low-cost ETFs. Within U.S. equities, we utilize an approach that is partially low-cost indexing and partially factor-investing based. Within international equities, the decision was made to currency hedge a portion of the exposure, as our research showed that over time, while this does not enhance returns (but also does not hurt them), it can reduce portfolio volatility. Among U.S. equity styles and factors, we emphasized mid cap value and dividend paying stocks, while among U.S. sectors our rankings pointed us towards materials and metals and mining. Within international equities, we favored emerging markets and avoided Europe and Japan.

Our outlook for 2016 remains mildly bullish, as we are encouraged by the improved market technicals and renewed credit market confidence. We are particularly optimistic about international markets, which have undergone a full blown bear market since 2014. However, the market bottom on February 11th looked to have been capitulative among international equities. We find international equity valuations to be compelling, and international equities, particularly emerging markets (which we feel are attractively valued on a relative basis), are beginning to display relative strength. While the 2016 elections will undoubtedly lead to some market volatility during the second and third quarters, we remain bullish on the markets for the foreseeable future.

Navigator Aggressive Growth

For the second quarter of 2016, the Navigator Aggressive Growth portfolio gained 2.04% compared to a 1.83% return for the Dow Jones Aggressive Portfolio Index. Within equities, the equity mutual fund holdings for both U.S. and international equities were liquidated, and the portfolio was switched to low-cost ETFs. Within U.S. equities, we utilize an approach that is partially low-cost indexing and partially factor-investing based. Within international equities, the decision was made to currency hedge a portion of the exposure, as our research showed that over time, while this does not enhance returns (but also does not hurt them), it can reduce portfolio volatility. Among U.S. equity styles and factors, we emphasized mid cap value and dividend paying stocks, while among U.S. sectors our rankings pointed us towards materials and metals and mining. Within international equities, we favored emerging markets and avoided Europe and Japan. The portfolio’s alternatives bucket took positions in platinum, grains, coffee, and mid and small cap U.S. equities. We also continue to trade volatility (often shorting it) and view that as an excellent opportunity to enhance returns.

Our outlook for 2016 remains mildly bullish, as we are encouraged by the improved market technicals and renewed credit market confidence. We are particularly optimistic about international markets, which have undergone a full blown bear market since 2014. However, the market bottom on February 11th looked to have been capitulative among international equities. We find international equity valuations to be compelling, and international equities, particularly emerging markets (which we feel are attractively valued on a relative basis), are beginning to display relative strength. While the 2016 elections will undoubtedly lead to some market volatility during the second and third quarters, we remain bullish on the markets for the foreseeable future.

Strategist Portfolios

Navigator Fixed Income Total Return

The Fixed Income Total Return (FITR) portfolio entered 2016 in a defensive position, owning 100% U.S. Treasuries. The defensive bias immediately paid off, as credit markets underwent a dramatic decline into mid-February and high yield bonds yielded the most since 2009. When the trend became extreme and began to reverse, it took less than three weeks for the FITR model to become aggressive and we bought back into high yield at the end of February. Since February, credit markets have been strong, led by a dramatic decrease in high yield bond yields, as sentiment improved with regard to the energy and materials sectors in particular. Our model favored high yield and was at an all-time high coming into the Brexit vote. In just two days, the combined strength in Treasuries and weakness in high yield nearly forced us to sell and become defensive – but only nearly. The quick, dramatic rally after the two day decline in the aftermath of the vote affirmed our view that the Brexit vote was a sentiment-related and not economy-related event. We were relieved when the FITR model weakened but didn’t weaken enough to prompt what we viewed as an untimely sale of high yield. We are pleased that so far this year the FITR portfolio achieved its primary goals of preserving capital and being tactically opportunistic within the high yield bond sphere. Here are some additional developments from the portfolio during the quarter:

  • The Barclays U.S. Corporate High Yield Bond Index was up 5.2% on the quarter, and the Energy and Materials sectors accounted for over half of that return, 3.2%, despite their weight being only 20% in the High Yield Index. Technology and Utilities were the weakest high yield bond sectors.
  • As of June 30th, the resulting duration of the FITR portfolio is 4.01, with a yield to maturity of 7.02%. The average maturity is 6.77 years, and average credit quality is B+.
  • On the quarter, the portfolio’s top contributors were High Yield Bond ETFs (JNK and HYG) and Lord Abbett High Yield (LAHYX). The portfolio’s top detractors were the Barclays Short-Term High Yield Bond SPDR (SJNK), PIMCO High Yield (PHIYX), and PIMCO High Yield Spectrum (PHSIX), all of which are on the more conservative side of the spectrum within high yield.

Navigator Global Equity ETF

For the second quarter of 2016, the Navigator Global Equity ETF portfolio gained 0.72% compared to a 0.99% gain for the MSCI World Index. Within U.S. equity styles, the portfolio favored mid cap value stocks and dividend paying and dividend growing stocks. The portfolio’s sector allocations saw a major change as Materials allocations became the biggest weight, after a number of years in the doldrums. We continue to utilize small cap sector ETFs and view small caps favorably. Within international equities, the portfolio pivoted towards emerging markets and commodity producing nations, and we now feature allocations to Russia, Argentina, Brazil, Canada, Thailand, and New Zealand.

Our outlook for 2016 remains mildly bullish, as we are encouraged by the improved market technicals and renewed credit market confidence. We are particularly optimistic about international markets, which have undergone a full blown bear market since 2014. However, the market bottom on February 11th looked to have been capitulative among international equities. We find international equity valuations to be compelling, and international equities, particularly emerging markets (which we feel are attractively valued on a relative basis), are beginning to display relative strength. While the 2016 elections will undoubtedly lead to some market volatility during the second and third quarters, we remain bullish on the markets for the foreseeable future.

Navigator High Dividend Equity

The final days of the June quarter were marked by a decline that averaged 5.0% in U.S. markets as they reacted to the results of the historic United Kingdom referendum to exit the European Union. The surprise Brexit vote sparked concerns of future economic and political uncertainty in the U.K. The negative market action lasted two days with “bond proxy” assets such as dividend stocks resilient relative to the broader market. Historically, companies with persistent dividend growth have provided excess returns during periods of market volatility. Despite the global turmoil, the brief correction was followed by an immediate “risk on” rally recovering most of the decline by quarter end.

Despite concerns of sluggish GDP growth and stretched equity valuations, investors took advantage of the volatility to buy equities on sale. Two market declines this year (February 11th and June 24/27th) resulted in rapid rebounds. However, given current valuations (S&P 500 index P/E 18) the risk–reward dynamic may result in the market remaining range-bound until we near the U.S. presidential election.

Dividend Growers vs. Non-Payers Performance During Months When VIX Increased
VIX Monthly Increase Average Out/Under Performance of Dividend Growers
Greater Than 40% 1.7%
20-40% 0.3%
10-20% 1.1%
Less Than 10% 0.0%
Average (across all months when VIX increased) 0.7%
Source: Ned Davis Research

The thirty-five year decline in U.S. Treasury bond yields has resulted in a historic low yield environment with the ten-year Treasury yielding 1.46% versus the S&P 500 Index yield of 2.1%. An even wider spread exists between bonds and more defensive stocks in the Telecom, Utilities and Staple sectors which are yielding 3.0% on average. With Brexit providing yet another reason for the Federal Reserve to postpone a 2016 rate hike, yield seekers are motivated to continue to invest in dividend stocks versus bonds.

The strongest S&P 500 Index sectors during the quarter were Energy and Telecom versus the weakest performance in the Technology and Consumer Discretionary sectors. The High Dividend Equity portfolio is overweight in Energy and Staples while underweight Financials and Healthcare. Several stocks we purchased were AT&T, Whirlpool and Intel versus sales of PNC, Lincoln Financial and Gilead. Financials were the hardest hit over investor concern that a U.S. rate hike is off the table for 2016 which does not bode well for ongoing bank profitability. Going forward we see added value in the Energy sector as earnings improve with stabilization of the price of oil and the Technology sector which demonstrates consistently above average earnings growth. We are interested in select Utility and Staple stocks but cautious on a valuation basis in the short term.

Past performance is not indicative of future results. This is not a recommendation to buy or sell a particular security. Please see attached disclosures.

The opinions expressed are those of the Clark Capital Management Group Investment Team. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. There are no guarantee of the future performance of any Clark Capital Investments portfolio. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. For educational use only. This information is not intended to serve as investment advice. This material is not intended to be relied upon as a forecast or research. The Investment or strategy discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Past performance does not guarantee future results.

The Dow Jones Industrial Average is a stock market index that shows how 30 large publicly owned companies based in the U.S. have traded during a standard trading session in the stock market.

The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performers of developed markets outside the U.S. and Canada.

The MSCI Emerging Markets Index is a freefloat-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.

The Barclays U.S. Government and Credit Bond Index measures the performance of U.S. dollar denominated U.S. Treasuries, government-related, and investment grade U.S. corporate securities that have a remaining maturity of greater than 1 year. In addition, the securities have $250 million or more of outstanding face value, and must be fixed rate and non-convertible.

The Barclays U.S. Corporate High-Yield Index covers the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

The Dow Jones Aggressive Portfolio Index measures aggressive stocks, bonds, and cash which are represented by multiple subindexes and is quoted in U.S. dollars.

The Dow Jones Moderately Aggressive Portfolio Index measures moderately aggressive stocks, bonds, and cash which are represented by multiple subindexes and is quoted in U.S. dollars.

The Dow Jones Moderate Portfolio Index measures stocks with moderate risk, bonds, and cash which are represented by multiple subindexes and is quoted in U.S. dollars.

The Dow Jones Moderately Conservative Portfolio Index measures moderately conservative stocks, bonds, and cash which are represented by multiple subindexes and is quoted in U.S. dollars.

The Dow Jones Conservative Portfolio Index measures conservative stocks, bonds, and cash which are represented by multiple subindexes and is quoted in U.S. dollars.

MSCI World Index measures large and mid cap representation across 23 developed markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country.

Index returns include the reinvestment of income and dividends. The returns for these unmanaged indexes do not include any transaction costs, management fees or other costs. It is not possible to make an investment directly in any index.

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For each separate account with at least a three-year history, Morningstar calculates a Morningstar Rating™ based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a separate account’s monthly performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of separate accounts in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. The Overall Morningstar Rating for a separate account is derived from a weighted average of the performance figures associated with its three-, five- and ten-year Morningstar Rating metrics.

The relative strength measure is based on historical information and should not be considered a guaranteed prediction of market activity. It is one of many indicators that may be used to analyze market data for investing purposes. The relative strength measure has certain limitations such as the calculation results being impacted by an extreme change in a security price.

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Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. Not every client’s account will have these exact characteristics. The actual characteristics with respect to any particular client account will vary based on a number of factors including but not limited to: (i) the size of the account; (ii) investment restrictions applicable to the account, if any; and (iii) market exigencies at the time of investment.

Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided in this report should not be considered a recommendation to purchase or sell any particular security, sector or industry. There is no assurance that any securities, sectors or industries discussed herein will be included in an account’s portfolio. Asset allocation will vary and the samples shown may not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. It should not be assumed that any of the securities transactions, holdings or sectors discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices and which shows the market’s expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk. The S&P 500 measures the performance of the 500 leading companies in leading industries of the U.S. economy, capturing 75% of U.S. equities. The Barclays Capital U.S. Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bonds, Corporate bonds, and a small amount of foreign bonds traded in U.S. The Barclays Capital Aggregate Bond Index is an intermediate term index.

The volatility (beta) of a client’s portfolio may be greater or less than its respective benchmark. It is not possible to invest in these indices.

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CCM-676

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