Risk-Based Portfolios

Navigator Fixed Income

For the third quarter of 2015, the Navigator Fixed Income portfolio lost 2.09% (net) compared to a 0.95% gain for the Barclays Capital Intermediate U.S. Government and Credit Index. The Fixed Income portfolio’s mission is to seek to provide core U.S. fixed income exposure via a mix of solid, proven mutual funds and ETFs. The Firm’s longstanding bias toward credit risk and against interest rate risk has driven many recent investment decisions. In the fixed income world, the third quarter was an uphill climb for credit-oriented investors, and thus the portfolio’s favoring of credit risk over interest rate risk created a drag on returns. The Fixed Income portfolio includes a sizeable position in Navigator Duration Neutral Bond Fund (NDNIX), an interest-rate hedged municipal bond fund. Municipal bonds are historically very cheap compared to Treasuries and hedges out the interest rate risk. Over the long run, we continue to believe that Treasury bonds do not offer an attractive risk-reward ratio, and we are avoiding them until we see signs of a major economic downturn, during which their risk-off tendencies would make them an ideal safe harbor. We see no signs of sustained economic weakness during 2015. The portfolio’s top contributors were the BlackRock U.S. Mortgage Fund (MSUMX) and the Pioneer Bond Fund (PICYX). The top detractors were Legg Mason Brandywine Global Opportunities Bond Fund (GOBIX) and Loomis Sayles Investment Grade Bond Fund (LSIIX).

Navigator Capital Preservation with Sentry

For the third quarter of 2015, Navigator Capital Preservation with Sentry lost 3.47% (net) compared to a 0.84% loss for the Dow Jones Conservative Portfolio Index. The tactical fixed income portion of the portfolio shifted toward playing defense during the quarter, selling high yield bonds and buying Treasuries. As a result, the portfolio was defensive during August and September’s substantial market declines. The core fixed income portion of the portfolio continues to favor corporate bonds and spread contraction plays in general. The strategy also contains an interest-rate hedged municipal bond fund, which has been added to serve as a defensive bulwark when interest rates are rising and times are tough for bonds. Within the alternative sphere, the portfolio underweighted commodities and focused on large cap equity, long/short and managed futures. The alternative portion of the portfolio shifted from a defensive stance toward risk to risk-taking during August’s market turbulence.

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. When our assessment of the markets is broadly bullish — as it remains today and for the rest of 2015 — the portfolio’s hedging strategy (via the Navigator Sentry Managed Volatility Fund) attempts to manage the cost of hedging while maintaining a minimal hedge required to safeguard client assets. By both owning puts and then writing puts at a lower level, we are able to greatly reduce the cost of the portfolio’s protection.

Navigator Conservative Growth with Sentry

For the third quarter of 2015, Navigator Conservative Growth with Sentry lost 4.91% (net) compared to a 2.72% loss for the Dow Jones Moderately Conservative Portfolio Index. The tactical fixed income portion of the portfolio shifted toward playing defense during the quarter, selling high yield bonds and buying Treasuries. As a result, the portfolio was defensive during August and September’s substantial market declines. The core fixed income portion of the portfolio continues to favor corporate bonds and spread contraction plays in general. The strategy also contains an interest rate hedged municipal bond fund, which has been added to serve as a defensive bulwark when interest rates are rising and times are tough for bonds. Within the alternative sphere, the portfolio underweighted commodities and focused on large cap equity, long/short and managed futures. The alternative portion of the portfolio shifted from a defensive stance toward risk to risk-taking during August’s market turbulence. Within U.S. equity styles, the portfolio largely kept its focus on large cap and growth stocks, areas which have been leading in relative strength. As the quarter developed and markets corrected, small cap stocks in particular fell within our ranks. Within the U.S. sector sphere, the portfolio emphasized Health Care, Consumer Discretionary, and Technology.

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. When our assessment of the markets is broadly bullish — as it remains today and for the rest of 2015 — the portfolio’s hedging strategy (via the Navigator Sentry Managed Volatility Fund) attempts to manage the cost of hedging while maintaining a minimal hedge required to safeguard client assets. By both owning puts and then writing puts at a lower level, we are able to greatly reduce the cost of the portfolio’s protection.

Navigator Moderate Growth with Sentry

For the third quarter of 2015, the Navigator Moderate Growth with Sentry lost 6.92% (net) compared to a 5.10% loss for the Dow Jones Moderate Portfolio Index. The tactical fixed income portion of the portfolio shifted toward playing defense during the quarter, selling high yield bonds and buying Treasuries. As a result, the portfolio was defensive during August and September’s substantial market declines. The core fixed income portion of the portfolio continues to favor corporate bonds and spread contraction plays in general. The strategy also contains an interest rate hedged municipal bond fund, which has been added to serve as a defensive bulwark when interest rates are rising and times are tough for bonds. Within the alternative sphere, the portfolio underweighted commodities and focused on large cap equity, long/short and managed futures. The alternative portion of the portfolio shifted from a defensive stance toward risk to risk-taking during August’s market turbulence. Within U.S. equity styles, the portfolio largely kept its focus on large cap and growth stocks, areas which have been leading in relative strength. As the quarter developed and markets corrected, small cap stocks in particular fell within our ranks. Within the U.S. sector sphere, the portfolio emphasized Health Care, Consumer Discretionary, and Technology.

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. When our assessment of the markets is broadly bullish — as it remains today and for the rest of 2015 — the portfolio’s hedging strategy (via the Navigator Sentry Managed Volatility Fund) attempts to manage the cost of hedging while maintaining a minimal hedge required to safeguard client assets. By both owning puts and then writing puts at a lower level, we are able to greatly reduce the cost of the portfolio’s protection.

Navigator Growth

For the third quarter of 2015, the Navigator Growth portfolio lost 6.42% (net) compared to a 7.74% loss for the Dow Jones Moderately Aggressive Portfolio Index. The tactical fixed income portion of the portfolio shifted toward playing defense during the quarter, selling high yield bonds and buying Treasuries. As a result, the portfolio was defensive during August and September’s substantial market declines. The core fixed income portion of the portfolio continues to favor corporate bonds and spread contraction plays in general. The strategy also contains an interest-rate hedged municipal bond fund, which has been added to serve as a defensive bulwark when interest rates are rising and times are tough for bonds. Within the alternative sphere, the portfolio underweighted commodities and focused on large cap equity, long/short and managed futures. The alternative portion of the portfolio shifted from a defensive stance toward risk to risk-taking during August’s market turbulence. Within U.S. equity styles, the portfolio largely kept its focus on large cap and growth stocks, areas which have been leading in relative strength. As the quarter developed and markets corrected, small cap stocks in particular fell within our ranks. Within the U.S. sector sphere, the portfolio emphasized Health Care, Consumer Discretionary, and Technology.

Looking forward to the rest of 2015, markets finally experienced what was a long overdue correction during August of 2015. While prices struggled for most of the quarter, the vast majority of the correction occurred during four days in August, over which the S&P 500 Index fell 12.5%. While prices remained weak for the rest of the quarter, the S&P 500 never again closed below its August lows. We are very encouraged by the extreme pessimism that we saw in both the stock and credit markets. In both cases, we saw the most fear since at least 2012. As a result, we believe a tradeable bottom has been made in equity prices, and we added to our risk-taking positions when fear took hold in August. We believe that the markets will conclude 2015 with a strong fourth quarter.

Navigator Aggressive Growth

For the third quarter of 2015, the Navigator Aggressive Growth portfolio lost 7.48% (net) compared to a 10.08% loss for the Dow Jones Aggressive Portfolio Index. Within the alternative sphere, the portfolio underweighted commodities and focused on large cap equity, long/short and managed futures. The alternative portion of the portfolio shifted from a defensive stance toward risk to risk-taking during August’s market turbulence. Within U.S. equity styles, the portfolio largely kept its focus on large cap and growth stocks, areas which have been leading in relative strength. As the quarter developed and markets corrected, small cap stocks in particular fell within our ranks. Within the U.S. sector sphere, the portfolio emphasized Health Care, Consumer Discretionary, and Technology. Internationally, there were few places to hide during the quarter. We were driven to Japan, continental Europe, and the U.S., but all areas participated in the decline as August and September developed.

Looking forward to the rest of 2015, markets finally experienced what was a long overdue correction during August of 2015. While prices struggled for most of the quarter, the vast majority of the correction occurred during four days in August, during which the S&P 500 Index fell 12.5%. While prices remained weak for the rest of the quarter, the S&P 500 never again closed below its August lows. We are very encouraged by the extreme pessimism that we saw in both the stock and credit markets. In both cases, we saw the most fear since at least 2012. As a result, we believe a tradeable bottom has been made in equity prices, and we added to our risk-taking positions when fear took hold in August. We believe that the markets will conclude 2015 with a strong fourth quarter.

Strategist Portfolios

Navigator Fixed Income Total Return

For the third quarter of 2015, the Navigator Fixed Income Total Return portfolio yielded 0.48% (net) compared to a 4.86% loss for the Barclays U.S. Corporate High Yield Index. Early in 2015, on January 12th, the Fixed Income Total Return portfolio allocated 100% to high yield bonds using a combination of high yield mutual funds and ETFs. Our models remained positive toward high yield bonds through the second quarter but, as the third quarter progressed, the weakness that was isolated in the high yield energy sector spread into the broader high yield market. As a result, our models turned and the portfolio became 100% defensive on July 28th. The portfolio sold its high yield bond positions entirely, and now owns intermediate-term U.S. Treasuries. The portfolio was wholly defensively invested during the market turmoil in August. While the S&P 500 endured a 12% decline over four days in August, the portfolio produced slight gains in its defensive Treasury position. High yield bond spreads continue to widen as September comes to a close. We see no particular end to the fear that has gripped credit markets since May. Here are some additional developments in the portfolio during the quarter:

  • The portfolio currently owns two U.S. Government ETFs, the iShares 3-7 Year Treasury ETF (IEI), and the iShares 7-10 Year Treasury ETF (IEF). The resulting duration of the portfolio is just over six.
  • Leading into September’s Fed announcement (in which rates were kept unchanged), our models nearly produced a neutral signal that would have allocated one third of the portfolio to each of high yield bonds, Treasuries, and cash. The Fed’s announcement led to a stock market and high yield bond selloff, and our models have returned to their maximum defensive position.
  • Many of the smaller explorers and producers in the high yield energy space face bank refinancing issues in the fourth quarter. Defaults are considered likely, particularly for smaller players. We believe that may lead to an extreme in fear and sentiment and could create a tradeable bottom.
  • The portfolio’s two Treasury ETFs were the top contributors on the quarter, while the Barclays High Yield Bond SPDR (JNK) and Neuberger Berman High Income (NHILX) were the top detractors.

Navigator Global Equity ETF

For the third quarter of 2015, the Navigator Global Equity ETF portfolio lost 9.43% (net) compared to a 8.45% loss for the MSCI World Index. The portfolio uses relative strength analysis to allocate to equities within the U.S. style, U.S. sector, and international equity spheres. Within U.S. equity styles, the portfolio largely kept its focus on large cap and growth stocks, areas which have been leading in relative strength. As the quarter developed and markets corrected, small cap stocks in particular fell within our ranks. Within the U.S. sector sphere, the portfolio emphasized Health Care, Consumer Discretionary, and Technology. These three sectors have been market leaders for many months. Our relative strength rankings have kept us out of the energy sector entirely for over a year now. Among international equities, our relative strength rankings pushed the portfolio toward Japan, Europe, and the U.S. and away from emerging markets. International markets provided very few places to hide, as China’s equity market bubble collapsed and many emerging markets nations struggled with current account deficits.

Looking forward to the rest of 2015, markets finally experienced what was a long overdue correction during August of 2015. While prices struggled for most of the quarter, the vast majority of the correction occurred during four days in August, over which the S&P 500 Index fell 12.5%. While prices remained weak for the rest of the quarter, the S&P 500 never again closed below its August lows. We are very encouraged by the extreme pessimism that we saw in both the stock and credit markets. In both cases, we saw the most fear since at least 2012. As a result, we believe a tradeable bottom has been made in equity prices, and we added to our risk-taking positions when fear took hold in August. We believe that the markets will conclude 2015 with a strong fourth quarter.

High Dividend Equity

As the Federal Reserve once again defers the first rate increase since 2006, the current volatility reminds us that the market doesn’t like uncertainty. Increased volatility often leads investors to quality dividend paying stocks to wait out the storm. Historically, dividend paying stocks outperform the S&P 500 Total Return Index an estimated 66% of the months when the index is negative. The fastest dividend growers tend to withstand dividend tightening cycles better than highest yielding stocks.

In the third quarter, the S&P 500 Index declined 6.94% over concerns of China’s slowing economy, lower oil prices and the timing of the Federal Reserve rate increase; this was the largest quarterly decline since the third quarter of 2011. U.S. equities outperformed international as the MSCI EAFE Index declined 9.0%, and the MSCI Emerging Markets Index was down 12.1%. We believe the U.S. expansion should continue to grow moderately between 2.50% to 3.0% on annualized basis which has so far supported stock prices.

Energy sector earnings are expected to drag down the S&P 500 Index the most, declining an estimated 64.7% for the quarter. Minus the Energy sector, the forecast shows a loss of 3.4%. The continued earnings compression is cause for concern despite the fact that we are headed into what is historically a seasonally strong period for the market. The 2016 S&P 500 Index earnings estimate is $130 versus the consensus estimate of $118 for 2015. Estimates will continue to change into yearend as we look for a stronger fourth quarter.

For the quarter, some of the portfolio winners were: Kimberly-Clark, Clorox, Reynolds American and Western Refining while losers included Macys, Williams Group, and Hasbro and Abbvie.

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 net performance shown is based on the CL 5 shares.  Your investment may have higher or lower fees than the CL 5 shares.  Please contact your representative for additional information about the performance of other classes of shares available for investment.

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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