About Yorkville

Investment Process

CORE & SATELLITE

Yorkville uses a two-tier approach in structuring portfolios. Each portfolio is made of a core and a satellite/thematic component. The core component is based on our Top Down (Market Health Compass) and Bottom Up (QVR) qualitative and quantitative screens supported by our team of experts. See below for greater details on our proprietary evaluation screens. The thematic/satellite section is more opportunistic in nature and any allocations to these possible investments would be held in the portfolio for shorter periods of time (3 to 6 months). The investment themes, or opportunistic shifts, can alter overall sector weights and security holdings. This is all managed relative to sector and stock weighting in its relevant benchmark to limit the risk we assume in the portfolio.

TOP DOWN / BOTTOM UP

Yorkville’s approach to managing investments is driven by our proprietary top down strategies that are complemented with bottom up security selection process. The Top Down investment process is guided by our Market Health Compass (A ten factor econometric model) while our bottom up security selection is driven by our unique value proposition that emphasizes investing in quality companies, trading at attractive valuations and offering the highest potential returns per unit of risk assumed.

TOP DOWN - MARKET HEALTH COMPASS

The Market Health Compass is comprised of six indicators from different asset classes. Each indicator was specifically selected to provide insight into the health of the financial markets from varying vantage points:

A high score for the Market Health Compass tells us that investors are properly compensated for taking on additional risk, while a low score would suggest the opposite. Based on this methodology, the Market Health Compass guides our top-down asset allocation, helping us determine our relative weights between equities, fixed income, alternative investments, and cash.

BOTTOM UP - QUALITY, VALUATION & RISK (QVR)

QVR guides our bottom up asset selection – taking into account all three aspects for every investment decision made. All Yorkville investments are those which reflect a balance of quality, valuation and risk. The following explains the three aspects in further detail:

i) Quality

Yorkville looks at Michael Porter’s competitive drivers for selecting quality companies. Strong rankings in the areas of product innovation, competitive advantage, management strength, market share and quality assets and earnings.

ii) Valuation

Yorkville looks at valuation rankings in the area of P/E, P/B, P/CF and P/S to ensure that we calculate valid stock entry and exit price levels. This valuation is continuously evolving as it includes comparisons to historical trading trends or to industry peers.

iii) Risk

Yorkville analyses a Portfolio’s Beta, Volatilities, Value at Risk, Time Under Water and Maximum Drawdown. This will allow us to better match the portfolio risk to the clients’ risk appetite.

FIXED INCOME PROCESS - YIELD CURVE POSITIONING

Yield Curve positioning is a core strategy used by Yorkville in managing fixed income portfolios. The shape of the yield curve is determined by a number of macro economic factors, supply and demand of money, and most recently monetary policy actions that are guiding the yield curve as a primary tool to stimulating economic activities. The yield curve could also react to a number of smaller economic variables such as unemployment, personal debt levels, trade balance and GDP trends.

i) Duration Management

Duration management is utilized to manage the overall interest rate risk in the portfolio. However, duration on its own has its limitations for measuring and managing interest rate risks if the shifts in the yield curve occur in a non-parallel fashion. Two portfolios could have the same duration but different risk profiles due to the yield curve positioning strategies employed (for example, a barbell strategy and layered strategy could have the same duration but totally different risk profiles).

ii) Credit Spread Management

Credit spread management has never been more important than in this era. movement in Canadian credit spreads pales in comparison to movement in spreads experienced in other developed markets. For the Canadian fixed income mandate, the dominant investment grade players offer attractive opportunities but nevertheless credit spreads on larger liquid issuers remain unattractive when compared to their international counterparts. This will play a bigger role in the near future as the Canadian economy stalls further on the wake of a slower global GDP.

iii) Intermarket Spreads

The Intermarket spreads are important satellite tools for capturing yield differentials between two economies that are closely intertwined. These strategies, if permitted by clients, allow Yorkville to capture the impact of interest rates on currencies, credit or Yield Curve spread differentials on Treasuries, or select investment grade issuers (oil producers would be one such example) and enhance overall return on the portfolio.

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