Interest rates remain low and equity index valuations are historically high. What approach should a prudent financial steward take to evaluate the financial market risks while seeking a positive return on capital? This session will explore the asset management philosophies and approaches used by several large institutional money managers to assist corporations and individuals address this issue. The discussion will be led by Mr. Birnie, Managing Partner of Piedmont Wealth Advisory and a representative from Blackrock Investments. Mr. Birnie has been a trusted advisor to SC&RA for over 15 years and has developed an expertise in risk-managed investing. Blackrock Investments is the largest money manager in the world, advising the world’s largest institutions, endowments, pensions and governments. Speaker: Douglas Birnie, Managing Partner, Piedmont Wealth Advisory

1. Modeling & Managing
Risk in Todays Financial
Markets
Douglas Birnie, Managing Director
Piedmont Wealth Advisory
Ian Uhar, CIMA®, CFP®, VP & Market Leader
Blackrock

2. Introductions
Ian Uhar, Blackrock
• Global Leader in Asset Management & Risk Analysis
Douglas Birnie & Piedmont Wealth Advisory

3. “Fear & Greed”

4. Defining Risk?
• Everyone’s definition is different!
• Risk has many faces:
– Fear of Losing $ / Market Risks (Real & Imagined)
– Fear of missing out (Leaving $ on the table!)
– Fee Risk (Internal and External Fees)
– Tax Risk (Voluntary & Involuntary)
– Information Risk (News Media)

5. Risk is Best Managed..
…..…before it needs to be!
WHY?

6. Investor Math - Win by Losing less!
Investment Loss
Return Needed to
Break Even
(5%) 5.3%
(10%) 11%
(20%) 25%
(30%) 43%

7. Investor Behavior – Adds Risk!

8. Viewed another way…investors often buy
winners – after they’ve won!

9. Managing Risk
Risk Management IS NOT avoiding risk.
Risk Management IS understanding risk and
planning for it.
“The first step in the risk management process is to acknowledge the reality
of risk. Denial is a common tactic that substitutes deliberate ignorance for
thoughtful planning.”
– Charles Tremper (Risk Management Author)

10. Cash = Fear = Risk Avoidance
$1.9 tn
$2.9 tn
$2.6 tn
$2.3 tn $2.3 tn $2.4 tn $2.4 tn
$2.5 tn
$2.6 tn
$2.7 tn
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Investor Cash in Money Markets

11. PLAN - Investment Policy Statement (IPS)
• “Plan your Work and
Work your plan!”
• NOT just for
Endowments,
Foundations, etc.
• Keeps emotions in
check when markets are
in turmoil
Contents of Policy
• Risk driven Allocation
Ranges
• Permissible investments
by asset class
• Desired Outcomes –
purpose of investment
– Generate income
– Fund long term goal
• Establish Benchmark

12. Constructing Risk Managed Portfolios

13. Portfolio Construction: Aligning Risk
Equities
• U.S. (Large, Mid, Small, Growth or Value)
• International (Developed & Emerging)
• Alternative Assets (Private Equity, Hedge Funds)
Fixed Income
• U.S. Bonds (Taxable and Tax Free)
• International Bonds (Developed & Emerging)

14. Define the Role of Your Bonds?
• Diversify risk from Equity draw downs
• Lower Yields & Higher Rate Risk
Equity
Diversification
• Against Interest Rate Risk
• Against Credit eventsProtection
• Multiple sources of Higher Income
• Trading yield for equity diversificationIncome
In current environment – no one Fixed Income strategy can accomplish all of above!

15. Mutual Funds & ETF’s
Active vs. Passive Management
• Mutual Funds for “Active Management” – intended to add
Outperformance or “ALPHA”
• Exchange Traded Funds for “Passive Management” – intended
to add cheap Asset Class Coverage – “Cheap BETA”
REALITY!
ETFs’ reshaping the investment landscape with Lower
fees, better tax efficiency, active risk management –
“Smart Beta” – Best approach is to use Both Approaches

16. Know the Managers Investment Process
 What is the managers investment approach?
 How do they do what they do?
 Managing for Growth or Risk Mitigation?
 How much are they charging to provide the
outcome? Internal Fees?

17. Screen the Risk – Blackrock Aladdin®
Sophisticated Risk Management Platform
• Blends People, Technology, Wall Street and
Silicon Valley
• Monitors over $14 Trillion Globally
• Identifies where Portfolio Risk is coming from
• Its Available to YOU!

18. What is the Aladdin® Process?
Stress Test Portfolios against over 30 Individual “What if” Scenarios to
determine portfolio sensitivity:
• Equity Markets Moves (U.S. & Overseas)
• Interest Rate moves
• Commodity Price Shifts
• High Yield Spreads Tighten or Widen
• Inflation Expectations Rise
• Past Market Events
• ETC.

19. Measuring Portfolio Risk: Upside & Downside Capture
110%
On average, for
every +1% the
index returned,
the portfolio
returned +1.1%
100% Benchmark
75%
On average, for
every -1% the index
returned, the
portfolio returned
-0.75%
Avg return of portfolio when market is positive
Avg return of benchmark when market is positive
Avg return of portfolio when market is negative
Avg return of benchmark when market is negative

20. Strategies to Potentially Improve Stock Portfolios
77
87
96
93
65
82
87
81
Minimum Volatility Stocks Dividend Stocks Dividend Growth Stocks Quality Stocks
Upside Capture Downside Capture
Upside / Downside Capture Ratio Over the Last 10 Years (Versus the S&P 500 12/31/16)

21. Long Term: Style Boxes and Tax-Inefficient Underperformance
Actively managed US style box mutual funds1 were some of 2016’s biggest capital gains distributors. The percent of
distributing funds in each style box category is well above the broad average for mutual funds.
–
A
D
M
A
S
T
E
R
-
S
T
A
M
P
!
I
C
R
0
9
1
7
U
-
2
5
9
7
9
4
-
8
0
8
3
2
3
• 1 Source: Morningstar Direct. US style box mutual funds are those active funds incepted before 10/31/16 that are categorized by Morningstar as US Large Cap Growth / Blend / Value, US Mid Cap Growth / Blend / Value or
US Small Cap Growth / Blend / Value. Calculated using the oldest share class of all Open-End Mutual Funds available in the U.S. Past distributions not indicative of future distributions. Certain traditional mutual funds can
also be tax efficient.
% of Active US Style Box Mutual Funds Making 2016 Capital Gains Distributions 1
Value Blend Growth
Large
Mid
Small
65%
of Funds Paid Distribution
70%
of Funds Paid Distribution
76%
of Funds Paid Distribution
69%
of Funds Paid Distribution
76%
of Funds Paid Distribution
69%
of Funds Paid Distribution
54%
of Funds Paid Distribution
67%
of Funds Paid Distribution
67%
of Funds Paid Distribution

22. Exchange Traded Funds & Taxable
Capital Gains
FOR FINANCIAL PROFESSIONAL USE ONLY. NOT TO BE SHOWN OR DISTRIBUTED TO CLIENTS.
A
D
M
A
S
T
E
R
-
S
T
A
M
P
!
I
C
R
0
9
1
7
U
-
2
5
9
7
9
4
-
8
0
8
3
2
3
• * Represented by the oldest share class of each Open-End Mutual Fund available in the United States that incepted on or before 10/31/16, as of 12/31/16.
• Sources: BlackRock, Morningstar as of 12/31/16. Past distributions are not indicative of future distributions. Transactions in shares of the iShares Funds will generate tax consequences. iShares Funds are obliged to distribute portfolio gains to shareholders.
Information on Vanguard ETFs is provided strictly for illustrative purposes and should not be deemed an offer to sell or a solicitation of an offer to buy shares of any funds, other than iShares ETFs, that are described in this material.
Percentage of funds that paid capital gains in 2016
50% 7%
Mutual Funds* Average ETFs

23. Summary
Risk is able to be Managed!
Apply Planning Principals & Financial Tools to
assist in the process.

24. Thank You
Douglas Birnie, Managing Director
Dbirnie@piedmontwa.com