Moneyball meets Manager ID

The voyage of discovery is not in seeking new landscapes but in having new eyes.

1420 18th Street Denver Colorado 80202 email: mike@t3equity.com 303-860-7386 www.t3equity.com

PSN Top-Gun Awards

t3 equity labs, llc 3rd Quarter 2012

PSN Top Gun Rankings 3rd qtr 2012 (top ten in category) t3 equity labs All Cap Core

Universe

# of funds Bull & Bear 1 Star 2 Star 3 Star 4 Star 5 Star 6 Star in univ. Master 121 496 735 121 364 Qtr #4 1yr 3yr #4 5yr #4 5yr #1 #3 #4 5yr #1 #1 #5 3yr Making $ense of this is difficult to convey in a simple chart whats my take-away? Being top 10 in a category consistently is very difficult. But having a variety of products that are top 10 for a variety of different time frames is increasingly rare. Being top ten with a couple of products for the past 5 years is very humbling. But when the added responsibilty of doing this on a risk adjusted basis gets super imposed it becomes very difficult.

All Cap Core All-Cap US Core All Cap Core Large Cap Core

t3 equity labs All Cap Core Trigger t3 equity labs Large Cap Core

#6 #4

#7 #4 #10

Stars are good! More Stars are Better!! Stars across all products are best (and quite rare!)
http://www.informais.com/topguns/topguns.asp?
This document contains actual historic performance results, including assumptions, opinions and views of the Company and third part sources. Various known and unknown risks, uncertainties and other factors could cause the actual results, financial position, development or performance to differ materially from the performance presented herein. There is no guarantee, expressed or implied, that the performance presented here is free from errors nor is there any acceptance of responsibility for the present or future accuracy of the opinions expressed in this document. No representation or warranty expressed or implied is made as to, and no reliance should be placed on, any information, including projections, estimates, targets and opinions, contained herein, and no liability whatsoever arising directly or indirectly from the use of this document. In making investment decisions it is your responsibility to examine the investment and the relevant risks to such an undertaking. Past performance is not indicative of future performance. Performance is not guaranteed. This should not be considered an offer to buy or sell securities.

See how thinking beyond the box can help you.

Call Michael Jackson at 303-952-9296, or email mike@t3equity.com

1420 18th Street Denver Colorado 80202 email: mike@t3equity.com www.t3equity.com

What happened to the lost decade?

10.0

30.0

40.0

50.0

60.0

70.0

20.0

0.0

-30.0 12/1/1998 5/1/1999 10/1/1999 3/1/2000 8/1/2000 1/1/2001 6/1/2001 11/1/2001 4/1/2002 9/1/2002 2/1/2003 7/1/2003 12/1/2003 5/1/2004 10/1/2004 3/1/2005 8/1/2005 1/1/2006 6/1/2006 11/1/2006 4/1/2007 9/1/2007 2/1/2008 7/1/2008 12/1/2008 5/1/2009 10/1/2009 3/1/2010 8/1/2010 1/1/2011 6/1/2011 11/1/2011 4/1/2012

-20.0

-10.0

Active US Large-Cap Equity Mutual Fund Managers vs. S&P 500 Market

MKT Performance

MGR Performance

Linear (MKT Performance)

Linear (MGR Performance)

Percent of MGRs Outperforming Index 10.00 20.00 30.00 40.00 50.00 60.00 70.00 80.00 0.00 3/1/1999 10/1/1999 5/1/2000 12/1/2000 7/1/2001 2/1/2002 9/1/2002

4/1/2003
11/1/2003 6/1/2004 1/1/2005 8/1/2005 3/1/2006 10/1/2006 5/1/2007

SMA Manager Outperformance Large Cap Universe

12/1/2007
7/1/2008 2/1/2009 9/1/2009 4/1/2010 11/1/2010 6/1/2011 1/1/2012 8/1/2012

Diversification?

Average Correlation amongst all size and style

3/2005-3/2008 0.897

3/2008-3/20011 0.963

Performance $1000 Annualized (12/1930-12/2010) becomes Return Buy and Hold Miss 30 Best Months Miss 30 Best & 30 Worst Months Miss 30 Worst Months
$74.08m $3.47m 5.53% 1.57%

$168.87m

6.62%

Most Asset Allocation Models still work off of a 8-10% long-term rate of return for the broader markets.

$3.60mm

10.78%

Traditional Efficient Markets conclusion.

Minimizing downside loss is more important to overall performance than maximizing upside return.

The key to success is learning how to fail quickly! Albert Einstein

Apple begins with "why." " 'Everything we do, we believe in challenging the status quo. We believe in thinking differently. The way we challenge the status quo is by making our products beautifully designed, simple to use and user-friendly. Want to buy one?' "

An Interesting Analogy --

The Distinction Between Fundamentals and Expectations

Quote by horse racing expert, Steven Crist:
The issue is not which horse in the race is the more likely winner, but which horse or horses are offering odds that exceed their actual chances of victoryThis may sound elementary, and many players may think they are following this principle, but few actually doThere is no such thing as liking a horse to win a race, only an attractive, discrepancy between his chances and his price.
(Bet With The Best. New York Daily Racing Forum Press, 2001)

Shackleford Wins Preakness Stakes In Nail-Biter

(ran 5/21/2011)

Picking winners vs making money! Mom $3.60

I didnt make any money on the Derby. What do you do?

Moms System
Betting to show = 21.% Betting to win =7%
We bet to show. At the final turn, we had the top 4 horses. Ended up with 2/3 of the winning horses. Sizing the bet is the tough part timing doesnt matter.

1st $6.80 2nd $8.00

Do I like the name? Have they made any money

Results
You made more money then me. We just do it for fun~ I initially had Astrology

Economic Principles
Risk Reduction (both fear & greed) Herd Mentality (how do they make the odds? Trending Risk vs. Reward Peer Comparatives Having a system Forecasting vs. backwards looking Sizing the bet Regret

Dad Still studying the results (backwards looking)

How many names do you know?

What to look for:

a fish swimming upstream! Michael Maubossian David Swensen
Legg Mason - Chief Equity Strategist CIO Yale University

Rich Bernstein

Merrill Lynch, Chief Equity Strategist

Money Managers that consistently beat their index tend to have a: Value bias, Run concentrated portfolios, Control their turnover, Operate geographically away from the normal market noise.

High Median Return Low Correlation Standard Deviation Skewness Kurtosis

Alpha is increasing obtained by beta, rather than manager value-addedTrue alpha has become rarer, so the [investment] manager who is indeed producing pure alpha has become increasingly rare. Or look for managers that operate outside the box naturally producing Alpha with-out having to leverage beta. Look for the Salmon swimming upstream!

Hedge-Hunters
Katherine Burton

Risk Adverse
Remain very humble Only Successful 58.5% of the time

Intellectual Capital
Proprietary Information
Manager Use of Public Information: New Evidence of Managerial Skills
MarcinKacperczyk and Amit Seru

Proprietary Information - Fund

Team Design Lean is Mean when it comes to a team!

Steve Johnson FT 11/6/07

In order to probe the relationship between public information and equity returns, the authors devised a measure of how aggressively and often mutual fund managers responded to analyst recommendations. They found that the more a manager did so, the worse his results. The authors concluded that the value of a sophisticated investor derives from the private information he brings to the process. Kacperczyk and Seru cannot possibly mean that successful fund managers are able to uncover material nonpublic raw data on a large number of companies. Rather than private information, I suspect what they meant was private evaluation. That is to say, successful manager demonstrate an ability to think for themselves. Whatever the authors precise meaning,, the message is clear: those who live by the buzz, die by the buzz.

Too many cooks spoil the broth, rather than many hands make light work, appears to be the apt proverb for the fund management industry. Research by Jim Hunter, a business psychologist who previously worked for the Association of Investment Trust Companies and Aberdeen Asset Management, suggests larger teams using team decision-making and managing more vehicles are more likely to underperform than small ones. He studied 54 UK fund managers from 27 companies and found that eight of the top 10 best-performing managers (measured using fund performance and independent ratings worked in teams of nine or fewer individuals. In comparison, only three of the bottom 10 worked ins such small teams. Six of the top 10 managers (and only 13 of the remaining 44) were responsible for nine or fewer vehicles, while the top two managers were both individual decision-makers, rather than relying on team approaches.

In his recent open letter to investors, Robert Litterman (Litterman 2003), Managing Director and Head of Quantitative Resources at Goldman Sachs, defines reliance on the data not already fully digested by the market as one of the important factors to consider in judging the investment skills of fund managers.

Predictive Factors --- Building a new Model

Interest Rates
An 20 year analysis of semi-annual U.S. Treasury bond yield forecasts as presented in the Wall Street Journal The analysis shows that the consensus estimate forecast is poor. During this time period, 67 percent of the time the consensus estimate of the yield change is wrong in direction. The consensus estimate is only beneficial from a contrarian viewpoint. or
80 70 60 50 40 30 20 10 0 0 200 400 600 800 1000 1200 1400

S&P 500 Earnings

100 Years R2 = 0.9293

1600

Experts earnings predictions exhibit positive bias and disappointing accuracy. These shortcomings are usually attributed to some combination of incomplete knowledge, incompetence, and/or misrepresentation. Human desire for consensus leads to herding behavior among earnings forecasters. Herding results in a reduction in the dispersion and an increase in the mean of the distribution of expert forecasts, creating positive bias and inaccuracy in published earnings estimates. Investors mistake reduced dispersion for reduced risk and positive bias for high future returns.

Using a nave forecast of the current yield results in a 25 percent reduction in the standard deviation of forecast error.
(taken from a study by when asked if hed updated the study to incl. the most recent 5 years . Responded to me --- why, has human nature changed?)

Where to look --

A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be!.
Wayne Gretzky

Traditional Earnings Surprise Triggers

Earnings Estimate Revision

Earnings Momentum

Projected 5-year EPS Growth

R2 for Quarterly Return versus Earnings

1

0.9

0.8

0.7

R2

0.6

0.5

0.4

0.3

0.2

0.1

R = 0.0024

0 1865

1885

1905

1925

1945

1965

1985

2005

the Challenge
avoiding the Herding behavior!
Experts earnings predictions exhibit positive bias and disappointing accuracy. These shortcomings are usually attributed to some combination of incomplete knowledge, incompetence, and/or misrepresentation. Human desire for consensus leads to herding behavior among earnings forecasters. Herding results in a reduction in the dispersion and an increase in the mean of the distribution of expert forecasts, creating positive bias and inaccuracy in published earnings estimates. Investors mistake reduced dispersion for reduced risk and positive bias for high future returns.

Measuring Disagreement
A Variant Perspective: An opinion about something that rightly differs from the common wisdom!

t3 Risk manager
Equity Market Noise Level Indicator

- Michael Steinhardt

Predicting
where to begin the search!

Irrational Exuberance

Which one is it?

Chicken Little (the sky is falling)

If youre foolish enough to forecast forecast often!
Jamie Dimon
CEO JP Morgan

Telecom

Sector Rotation
Industrials

Increasing Chance of a Positive Earnings surprise

Increasing Chance of a Negative Earnings surprise

Energy

S&P 500 Sector Weighting Changes

Materials

Example of Monthly Shift in Sector Emphasis

30% 25% 20% 15% 10% 5% -5% -10% -15% -20% -25% -30%
Industrials Consumer Staples Telecom
Consumer Discretionary

Consumer Stapler

Healthcare
Energy Materials Financials Utilities Information Technology

Healthcare

Russell 3000 Sector Weighting Changes 30% 25% 20% 15% 10% 5% -5% -10% -15% -20% -25% -30%
Telecom Industrials Consumer Staples
Consumer Discretionary

Consumer Discretionary

Utilities

Financials

Materials

Healthcare

Financials

Utilities

Energy

Information Technology

Info. Tech

Analysts move estimates up after the beginning of earnings seasons and following the move up by the market.

Analysts move earnings estimates up following the beginning of the earnings season and after the markets 1st move 2..083% move

15.873% move
Market starts to move

Market move begins upward climb in advance of the beginning of the earnings season.

Analysts earnings revision based models missed this move and caught this one..

Our research continues to show that the rewards from accurately forecasting earnings surprises are much greater in the weeks before the earnings report than they are in the
weeks after the earnings report. Furthermore, the most significant rewards are obtained by correctly forecasting surprises from two to five weeks before the earnings report to the week of the report.

Keith Miller Citigroup Global Markets

Individual Security Model

Fundamental Inputs & Technical Overlay
Anticipate earnings surprises using a quantitative macromodel w/fundamental micro inputs and a technical overlay. Increase exposure to upside surprises Decrease exposure to downside surprises.
Entry Points

Positive Earnings surprise

Negative Earnings surprise

Notice Volume lead/lag

Earnings Surprise viewed through a different lens.

30

Example of a tie (dell vs payx)

Technology Sector

+6.4% New names going into the LCC model 6/11/2011

Comparison of low score vs. high score in selected sector (eqt vs vlo)

Energy Sector +20.59%

Active Share = .90

Systematic outperformance requires variant perception: one must believe something different from what the market believes, and one must be right. This usually involves weighting publicly available information differently from the market, either as to its magnitude or its duration.

In Markets, competitive advantages are three: informational, analytical and behavioral Behavioral advantages are the most interesting because they are the most durable
Bill Miller, CFA

At t3 equity labs, llc, the market is viewed as a discounting mechanism. People buy and sell based on their expectations about the future. The key question in markets is always what is being discounted. Investors earn excess returns when expectations are different from what occurs, driven by heterogeneous time horizons or diversity breakdowns.

In markets, everyone tends to see the same things, read the same newspapers and get the same data feeds. The only way to arrive at a different answer from everybody else is to organize the data in different ways or bring to the analytical process things that are not typically present ..
What we are really trying to do is to think about thinking Understanding how groups behave is central to understanding how complex adaptive systems such as the stock market --- work.
Bill Miller, CFA Legg Mason Capital Management

Quantitative Factor (1)

Wall Street has it wrong!

Downside risk management is significantly more important than upside capture!!

What ?
In an open letter to investors, Robert Litterman (Litterman 2003), Managing Director and Head of Quantitative Resources at Goldman Sachs, defines reliance on the data not already fully digested by the market as one of the important factors to consider in judging the investment skills of fund managers.

Technical Factors (2)

When ?

Fundamental Factors (6)

Why ?

The issue is not which stock in the race is the more likely winner, but which stock or stocks are offering odds that exceed their actual chances of victory This may sound elementary and many investors may think they are following this principle, but not many do. There is no such thing as liking a stock to win, only an attractive discrepancy between it's chances and it's price.
(adapted the Kelly Criterion to the equity markets) 1420 18th Street, Denver, Co 80202 303.860.7386 (office) www.t3equity.com mike@t3equity.com

Short-term capital gains vs. Long-term Buy and hold

t3 equity labs, llc All-Cap Core model

Period beg bal $ return annual % end. val $ dividends 2% cap gains $ div taxes 15% cap gain tx 35% ending balance $ Inv Mgt fees (pre-tax) Tax Proc

2007 100000 2008 117135 2009 88676.6 2010 117145 2011 138464 2012 145985

23.13 -26.79 28.94 19.42 7.82 7.82 10.0567

125746 2000 89028 2342.7 117411 1773.53 141605 2342.9 149183 2769.27 157044 2919.7

23746 -30449.598 26960.8728 22117.1304 7950.16361 8139.24692 72611.9174

-300 -8311.1 -351.4 0 -266.03 0 -351.43 -2790 -415.39 -2782.5573 -437.96 -2848.7364 -2122.2 -16732.394 -18854.609

117134.9 88676.5953 117144.9702 138463.5651 145985.052 153757.3084

1128.73 1030.81 1030.44 1293.75 1438.23 1515.15 7437.11

200 200 200 200 200 200 1200

Long-term Buy & Hold Russell 3000

Period beg bal $ return annual % end. val $ dividends 2% cap gains $ div taxes 15% cap gain tx 15% ending balance $ Inv Mgt fees (pre-tax) Tax Proc

2007 100000 2008 104965 2009 71262.1 2010 93533.2 2011 110048 2012 112681

5.14 -37.31 28.34 16.93 3 16.13 5.37167

105265 71577 93747 110329 113011 131748

2000 2099.3 1425.24 1870.66 2200.97 2253.62

3265 -35487.3 21059.6529 14925.122 761.631634 16813.5281 33187.4262

-300 -314.9 -213.79 -280.6 -330.15 -338.04 -4978.1139 -1777.5 -6755.5826

104965 71262.105 93533.21369 110048.4004 112680.8548 126431.8435

100 100 100 100 100 100 600

Michael C. Jackson

Michael Jackson founded t3 Equity Labs, LLC in April of 2006. He currently serves as manager-member and is responsible for designing and implementing all equity strategies. Mr. Jackson brings 25 years of experience in the areas of asset allocation and investment management. He began a successful career with Merrill Lynch, Private Client Group in 1989. While at Merrills Denver office, he held positions including Wealth Management Advisor and Certified Financial Manager, as well as being appointed the position of Portfolio Manager within the Personal Investment Advisory Program. He also earned the title of Certified Investment Analyst (CIMA), through the Investment Management Consultants Association, IMCA. While at Merrill Lynch he was responsible for assisting high net worth individuals, small and middle market institutions and selected non-profits with the management of their investment asset. He focused on managing risk through the design and implementation of a formalized investment policy statement, strategic long-term asset allocation strategy, professional manager search and professional portfolio performance review. Mr. Jackson currently serves on the board of his own foundation, the t 3 Alpha Project. In the past, Mr. Jackson has served on the Finance Committee for the Archdiocese of Denver and the Development Committee of Mt. St. Vincent's School. He has served on the Board of Directors of The University of Notre Dame Club of Denver, Denver Athletic Club, The Denver Athletic Club Scholarship Fund, The University of Notre Dame Scholarship Fund, the Board of The Applied Research and Development Association, and on the Development Committee of The Seeds of Hope. Mr. Jackson holds a BBA degree in Business Management from the University of Notre Dame. He is currently studying for an MA in Economics at The University of Denver and is a thesis candidate.

Google is not a conventional company, we do not intend to become one!

(taken from Googles IPO Offering Circular)

Disclosure

Past performance is no guarantee of future results.

All Investments carry a certain amount of risk. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Sector, capitalization and style weightings reflect the weightings as of 9/30/2012 based on the aggregate dollar value for a representative account; however, the preceding chart represents the actual performance of the representative account. All information is provided for informational purposes only and should not be deemed as a recommendation to buy or sell any security. The historical sector allocations identified and described do not represent all of the securities purchased, sold or recommended in the Rank Strategy. Past performance is no guarantee of future results. There is no assurance that a separately managed account will achieve its investment objective. Separately managed accounts are subject to market risk, which is the possibility that the market values of securities owned will decline and that the value of the securities may therefore be less than what you paid for them. Accordingly, you can lose money investing in a separately managed account.