2nd Vote Advisers, LLC

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1. What is 2nd Vote Advisers, LLC (“2VA”)?

2VA is a registered investment adviser that offers investment products based on a proud history of corporate activism. 2VA licenses its scoring methodology from 2ndVote Research, Inc. (“2ndVote Research”), which has a proprietary scoring methodology that is used to score the 1,500 largest companies in the U.S. These scores, or ratings, have influenced corporate behavior for nearly a decade. 2VA’s premise is that ownership is just the first step: a company’s score on a single conservative issue, such as the 2nd Amendment, allows 2VA to find common ground with management. 2VA then works on other issues libertarians and conservatives care about to persuade companies and bring their score to a neutral rating.

Without 2VA as a counterweight to existing asset managers, a progressive ESG agenda will continue to gain influence and market share. Conservative and Libertarian Investors can rest assured that 2VA will never vote proxies in support of ESG shareholder initiatives that diminish returns or offend their values. Rather, 2VA will encourage those companies in which the firm invests to “get back to neutral” on all ESG issues and to focus on profits and shareholder value. 2VA strives to reverse the ESG investing and stakeholder capitalism trend and to give investors who are not progressive a voice.

2VA’s focus is on profitability over politics: the companies in which the firm invests may not advocate for the social issue associated with a particular fund, but there will be none that censor or restrict that issue.

2VA also constructs and distributes indexes using a combination of its scoring methodology together with a macro economic model based on Federal Reserve (“Fed”) monetary policy to deliver consistent superior risk adjusted returns. The indexes serve as the basis for financial products including Exchange Traded Funds (“ETFs”), separately managed accounts and other index linked products.

2. What is the story behind 2VA?

2VA was created to put into action through investments and shareholder activism the guiding principles of 2ndVote Research, the organization founded by Dr. David Black and former congressman Diane Black. That includes defending traditional Judeo-Christian values and the traditional American standards. It also means defunding radical progressive, anti-Judeo-Christian organizations.

2VA’s mission is to stop companies and other organizations from funding the attack on traditional American values. Dr. Black created a scoring system based on the following information: (1) direct and indirect corporate donations, (2) activities and stated policies from these companies, (3) documented sponsorships for various political and advocacy-related events, (4) corporate leadership, activity and donations, and (5) lobbying spent for or against various issues on the federal and state levels. This information is used to score each company on a scale of 1.00 to 5.00 on various issues. 2ndVote Research scoring scale is as follows:

a. 1.00 Liberal: Demonstrates strong or direct monetary and/or advocacy support for liberal values and organizations.

b. 2.00 Lean liberal: Demonstrates moderate or indirect monetary and/or advocacy support for liberal values and organizations.

c. 3.00 Neutral: Absence of any social/political advocacy or monetary support, or otherwise no information was found.

d. 4.00: Lean conservative: Demonstrates moderate or indirect monetary and/or advocacy support for conservative and libertarian values and organizations.

e. 5.00: Demonstrates strong or direct monetary and/or advocacy support for conservative and libertarian values and organizations.

The issues scored include life, basic freedoms, 2nd Amendment, education, environment and border security/immigration.

The scoring system is used as inputs into the various 2VA indexes.

3. What is 2VA’s investment philosophy?

2VA’s investment philosophy is based on being fully invested and ideally allocated in the prevailing economic environment while strategically reallocating when the forecast environment changes. The population of companies used to determine each reallocation is scored by 2ndVote Research to meet the objectives of the particular index portfolio and those scores are reviewed at least annually. Reallocations are made by overweighting securities that are best positioned to perform in the newly identified economic environment while eliminating exposure to those securities that are likely to underperform.

4. What are 2VA’s core beliefs or guiding principles that inform its investment decision making process?

The 2VA’s underlying investment strategy is premised on the notion that macroeconomic conditions exert a powerful influence on security risk and returns. It is a macroeconomic approach that relies specifically on Federal Reserve monetary policy through its actions on key interest rate measures. We believe the impact of Federal Reserve monetary policy is so powerful that failing to consider is likely to result in the systematic mispricing of securities. By way of example, research has shown that a strategy that follows Federal Reserve monetary policy can benefit by identifying small, out-of-favor stocks when the Fed is employing an expansive monetary policy while, conversely, hurting those same stocks in a restrictive regime.

Most smart beta and single factor-based strategies are static in nature and will be “in-favor” in the example above in one Federal Reserve environment and then become “out-of-favor” in another environment. The 2VA investment methodology is dynamic and adjusts portfolio allocations to include only those securities, in their appropriate weights, that will perform optimally in the then current Fed environment. This is specifically achieved through the use of certain financial metrics for securities that are most sensitive to the prevailing monetary regime. Using this process, security selection results in portfolios that perform best under each of the three alternative monetary environments classified under the strategy: Expansive, restrictive and indeterminate.

This core approach provides the basis for each 2VA index. From here, securities that score the highest on the macroeconomic thesis are combined with the specific 2ndVote Research scores relevant to the objective of the index. For example, the 2VA American Freedoms Index would include only those companies that scored highest on the 2ndVote Research American Freedoms score in combination with those companies that scored highest on the macroeconomic thesis.

5. Has 2VA’s investment philosophy changed over time?

2VA’s investment strategy has remained relatively stable over time. It is effectively a strategy that naturally adapts to the current Fed monetary policy regime and the 2ndVote Research scoring system is routinely reviewed but changes would be incremental and not materially alter the index portfolios over time. The research that underpins the macroeconomic portion of the model was developed over 30 years ago and includes peer-reviewed research that was published in many prestigious academic

journals. This research is extensive and exhaustive in identifying the monetary regimes and the specific firm metrics that have the most impact on security price movements within those regimes. It is possible that over time, one or more firm metrics are uncovered through ongoing research and that prove material enough to be included into the model. Conversely, it is also possible that an existing metric be removed if it no longer shows relevance.

6. What makes 2VA’s investment philosophy unique and distinguishes it from smart beta, factor-based and other types of investment strategies?

The 2VA index strategy is unique in the marketplace in that it combines a macroeconomic thesis to security valuation and selection in combination with an 2ndVote Research’s scoring system. It is an active investment strategy captured in an index structure. With smart beta and factor-based index themes being very in vogue over the past few years. 2VA’s approach is very different from other indexes because its dynamic model is designed to adjust to macroeconomic conditions over time as opposed to either being “in favor” or “out-of-favor” as is in the case with will factor and smart beta strategies. There is no timing element to the 2VA process. Ironically, much of the in favor and out-of-favor performance of the aforementioned strategies is directly attributable to the monetary environment according to academic studies. The 2VA approach has the flexibility to adjust security selection so that optimal performance is able to be achieved all market environments and across all market cycles.

7. What is the starting universe for the 2nd Vote Advisers family of US equity indexes?

The largest 1,500 U.S. stocks serve as the basis for creating the 2VA indexes and is the population that is scored by 2ndVote Research. The universe of stocks could easily be expanded to include smaller companies once those companies are scored by 2ndVote Research and receive macroeconomic scores as well.

8. What is the process for selecting and weighting securities?

The 2VA indexes are created by combining two sets of scores, one based on 2ndVote Research’s scores and the other based on macroeconomic scores. The macroeconomic scores start with an identification of Federal Reserve monetary environments —expansive, restrictive and indeterminate. The monetary policy measures focus on actual shifts in policy stance versus transitory changes in interest rates. Simultaneously, the starting stock universe for each index is scored on 12 firm metrics. However, the application of the firm metrics is not the same across the three monetary regimes. This is because some firm metrics are more important in a particular monetary environment and may have little or no impact in another environment. Thus, the firm metrics are weighted based on the current environment. Extensive and published research has verified that stock returns are consistently sensitive within an identified monetary regime supporting the economic rationale for each of the 12 firm metrics. Following this procedure, all the stocks in the starting population are ranked by their macroeconomic score. Stocks that are illiquid and or do not have sufficient data to support the 12 firm metrics are eliminated from consideration. The macroeconomic scored population is then rank ordered and combined with the 2ndVote Research scores to choose the optimal index portfolio in terms of size and objective. For example, if the index objective were to be ESG Neutral and the index portfolio would only have 50 stocks, then those stocks that scored “3”or neutral, across all six issues, would be chosen from the 50 stocks with the highest macroeconomic scores. In all cases, a rigorous approach is taken to consider such things as survivorships bias, look-ahead bias and selection bias.

9. How do you ensure accuracy of source data used in compilation of 2nd Vote Advisers’ indexes?

All data used by 2ndVote Research, including source data, are carefully checked and analyzed for accuracy. Wherever possible, source data is cross checked against redundant databases for consistency

and accuracy. The thorough and rigorous research standards that are employed throughout the data compilation, maintenance and calculation process ensure the highest degree of accuracy in the 2VA indexes and supporting data. All index performance data is independently verified by a recognized third party calculation agent.

10. Describe internal guidelines and constraints used to manage investment risk of the strategy.

The 2VA indexes are based on two sets of scores. One set is dependent on 12 firm metrics that are weighted in different proportions in any one of the three monetary policy environments. The other set of scores are based on ESG issues as rated by 2ndVote Research. By combining the scores, the various indexes have a wide range of financial characteristics. Tests on style concentration have shown that the indexes are broadly diversified across risk factors and industries. While there are liquidity considerations in building the index portfolios, they are otherwise free of any constraints on sector, company or industry weightings. This provides a baseline index portfolio that can easily be adjusted based on client and product preferences and requirements.

11. How do you monitor and manage index portfolios to the 2VA model?

2VA’s index strategies are all rules-based, transparent and replicable and follow a detail methodology that is documented, and evolves over time as is necessary. The very nature of the methodology means that the twelve firm metrics are constantly monitored and evaluated as is the macroeconomic environment through Fed monetary policy regimes. The 2ndVote scoring system is also reviewed at least annually to ensure that qualitative and quantitative inputs continue to accurate and relevant.

12. Does the 2VA index strategy tactically change its factor weighting scheme?

The 2ndVote Advisers’ underlying macroeconomic model is dynamic and multidimensional in that it adjusts its exposures based on the monetary environment in combination with twelve firm metrics. The firm metrics are not applied equally in each environment so, in effect, it’s as if there were three separate models that work together through each Fed policy regime. This process is unlike factor and smart beta strategies that are static and require the investor to employ market timing decisions on when to use or not use those exposures. Also, 2VA’s indexes are not subject to explicit factor weightings. The strategy uses a bottom-up approach and is built on individual security selection.

13. How do you decide whether to include or remove a metric or make other changes to your model?

The 2VA indexes are based on an active strategy that follows a rules-based, transparent and replicable methodology. The macroeconomic model relies on Fed monetary policy has been researched for over 30 years. 2ndVote Research’s scoring system has been researched for over ten years. While there may be minor adjustments to the strategy, there will not be any major changes to the methodology in the future. Research on the strategy is ongoing and it is possible that a firm metric may change, be added, or dropped and the 2ndVote Research scoring may be refined at some point, but any such adjustments would be thoroughly researched prior to implementation. Such changes would also undergo rigorous back testing to ensure continued efficacy of the model.

14. Can the strategy be customized? Which aspects are customizable?

The 2VA’s strategy is readily customizable. Clients have the ability to impose constraints in any number of manners, as well as make adjustments as to the size of the index portfolio. Different index-linked products may require different liquidity constraints. Since the strategy scores a base population, the scores can be used as an overlay on any existing portfolio, indexed or active.

15. What are the appropriate benchmarks for the 2ndVote Advisers’ indexes?

There are a number of 2VA indexes covering a wide variety of ESG and non ESG issues. The indexes are also unique in nature and would most appropriately be benchmarked against standard ESG benchmarks such as the KLD 400. The market value coverage for the 2VA indexes would also be a consideration. For example, an index that covers large and mid-cap stocks might best be measured against a standard market benchmark such as the Russell 1000.

16. Which factor style (tilts) does the 2VA strategy have relative to the benchmarks?

2VA’s macroeconomic approach is based on a combination of 12 firm metrics that are applied in different proportions within each of three Fed monetary policy environments. The vast majority of performance is attributable to individual stock selection and any factor exposures are conditional based on the monetary environment and these change in every environment. 2VA’s investment strategy is style and factor agnostic relative to any benchmark.

17. When would the 2VA’s strategy be expected to be out-of-favor or unrewarded?

2VA’s indexes are based on a strategy that is dynamic in nature. In effect, the index portfolios are adjusted to reflect the “then current” macroeconomic environment, which avoids the static approach that is the basis for many smart beta and factor based strategies. This means that 2VA’s indexes are always “in-favor” and don’t experience extended periods of underperformance. The upside versus downside capture ratios for the 2VA indexes indicates that, over time, the strategy suffers minimal underperformance and extraordinary out-performance. It is not expected that the 2VA indexes will always outperform their benchmarks and certainly will not outperform them over the short term. But, the 2VA indexes exhibit strong out-performance over the long term. The strategy has at its roots academic research that indicates the systematic association between the U.S. economy and stock returns, and that these patterns persist over time. Nonetheless, when major exogenous events occur, such as a pandemic, a major or catastrophic natural disaster, or a terrorist attack, the systematic patterns can be muted or disrupted. The dynamic strategy was developed based on decades of research into the impact of idiosyncratic factors on the relationships between the economy and security prices and the potential for disruption in those patterns over the short term, until normal market conditions return. The same disruptions will affect the strategy until they reverse.

18. What is the typical number of securities in a 2VA index portfolio?

2VA’s investable index portfolios typically hold from 50 to 75 constituents, while the benchmark portfolios may contain several hundred stocks.

19. What causes a rebalance in 2VA index portfolios and what is the frequency of rebalance?

The 2VA indexes do not have a regularly scheduled rebalance process like so many indexes produced by index calculators. The underlying strategy is premised on Federal Reserve monetary policy and its impact on the economy. The policy is determined by changes in key interest rates that signal a shift in policy stance by the Fed. It is only when this happens that a rebalance is triggered. However, there are times when there is no change in the Fed’s position, which it can last for well over a year. Only in such cases, after six months without a change as of June, the 12 firm metrics are reviewed and updated, and a rebalance will happen within a policy regime. The vast majority of rebalances, roughly 90%, reflect changes in the monetary environment and the remainder is because of changes in the firm metrics.

Note that any updates to 2ndVote Research scores are implemented in the various index portfolios at the next macroeconomic or firm matric triggered rebalance.

20. Can other investment firms replicate 2VA’s methodology?

2VA’s methodology is protected proprietary intellectual property. Any organization that would like to create products based on the methodology can license the intellectual property for such use. 2VA has filed for patent and copyright protection for the specific algorithms used in the methodology. 2VA has also filed for trademark and trade name protection for all nomenclature specifically associated and created to identify 2VA’s and 2ndVote Research’s branding and identification.

21. How effective is the 2VA’s methodology in ranking stocks?

Take the 2VA American Freedoms Index (2VA AMF) as an example, the following chart reports the performance of five stock groups comprising the Index universe. The Index universe includes the 900 largest U.S. equities reporting the required scoring data for firm-specific metrics and 2ndVote Research proprietary ratings. The stocks in the universe are ranked based on the 2ndVote Research’s Basic Freedoms scores and macroeconomic model, placed in five groups according to their combined scores and weighted by macroeconomic scores. The ESG neutral well positioned group consists of stocks that are ESG neutral or neutral plus (i.e., a 2ndVote Research Basic Freedoms score of “3” or above) and well positioned for returns based upon firm-specific metrics given prevailing and expected monetary conditions. On the other hand, the stocks in the ESG poorly positioned group are not ESG neutral compliant (i.e., each has a Basic Freedoms score lower than “3”) and are poorly positioned in the expected macroeconomic environment. 2VA AMF Index consists of the top 75 stocks with the highest macroeconomic scores and Basic Freedoms scores.

The chart below provides evidence that the combination of 2ndVote Research scoring and macroeconomic model has a large interaction effect and improves the performance based on the following observations: (1) All five stock groups outperform the Russell 1000, which indicates that weighting by macroeconomic scores is superior to market cap weighting; and (2) the performance in the five groups confirms the efficacy of the 2Vote Research’s ranking methodology. From the bottom group (ESG poorly positioned) to the top group (2VA AMF Index), there is improvement in returns from shifting one scoring component alone to better-scored stocks.

22. Since the 2VA methodology has a strong reliance on Fed policy, how likely is the model to underperform due to poor Fed decision making?

Most of the time, the Fed monetary policy is forward looking and has been remarkably effective. Occasionally, however, Fed actions become reactive (e.g., Lehman collapse, COVID-19 pandemic). We don’t expect the Fed to be forced to respond reactively often. Nevertheless, there will always be outliers, i.e., periods of time where the market does not price securities consistently with the 2ndVote Research scoring methodology.

As the chart below indicates, from 2011 to 2020, the 2VA AMF Index beat the Russell 1000 every calendar year. There were extremely large positive alphas throughout that period, and the 2VA strategy outperformed substantially when the systematic patterns that the strategy is built around are unimpeded. Even when Fed policy is implemented, less effectively or idiosyncratic factors disrupt model expectations, the 2VA strategy can still avoid significant underperformance. During all monetary environments, the strategy favors firms of high quality, and thus, underperformance is expected to be limited even when unexpected developments occur.

23. What type of investor, aggressive or conservative, does the 2VA strategy match most closely?

Given the dynamic nature of the 2VA strategy and its emphasis on various firm metrics, the strategy is equally appealing to both aggressive and conservative investors. The table below shows the 2VA AMF Index capture ratios vs. other indexes. The 2VA strategy is extremely effective in capturing upside market moves, reporting an upside capture ratio of 129% (for Russell 1000). Comparing to other major factor indexes, the 2VA AMF Index provides the most appealing upside captures to investors interested in taking advantage of strong stock market performance. On the other hand, as shown in the table, the 2VA strategy also provides comparable downside capture (91% for Russell 1000) and can limit downside performance when market suffers. The smart beta indexes with lower downside captures than the 2VA AMF Index requires investors to give up strong upside capture aspirations.

24. Does the performance of the 2VA indexes suffer when monetary conditions are not clearly signaled (i.e., during indeterminate periods)?

No, as the table below shows, both the mean (3.63%) and median (2.50%) alpha is positive for the 11 indeterminate periods observed between October 2010 to June 2021 for the 2ndVote Advisers AMF Index. In fact, the average and median alpha for indeterminate periods is higher than for expansive periods. Other points to note:

  • Mean and median alphas over the 23 monetary periods are 4.73% and 2.50%, respectively
    • 2VA AMF Index consistently outperforms, with a relatively high incidence of large alphas (positive skewness)
    • Return distribution is highly positively skewed during restrictive environments
    • Return distribution is more symmetric during indeterminate periods
  • Average duration of a monetary period is 5.6 months, but has ranged from 2 to 33 months
    • Indeterminate periods are generally the shortest
  • Largest positive alphas have generally occurred during restrictive periods and during periods of greater duration

25. Do short term periods of underperformance suggest a weakness in the strategy?

Historically, the drivers of short-term underperformance of the 2VA Indexes have been primarily idiosyncratic factors (e.g., credit crisis, trade tensions with China, COVID-19 pandemic) and do not represent an inherent weakness in the strategy. The strategy relies on the unique combination of 2ndVote Research’s scoring methodology and the dynamic macroeconomic model, which confirms that there are systematic monetary-policy-related return patterns between stocks with certain features. Markets, however, do not always perform predictably or rationally and there are other short-term drivers of returns not captured in the 2VA’s methodology (nor in any model).

 

Index performance over the past 11 years and research over longer time frames (20 years+) confirm that the methodology outperforms over time. To provide additional context for longer term performance, the following table illustrates the percentage of time 2VA AMF Index rolling average return outperforms the Russell 1000 across different periods. The table shows that the approach is particularly effective over longer investment horizons (i.e., 3 years+).

Disclaimer

This document is provided for information purposes only and is intended for use by institutional and professional investors. The information presented herein prior to the index launch date of June 17, 2021 is based on the same methodology in effect when the index was officially launched. For prior periods, the information and data presented regarding the index assumes that the same evaluation of companies existed in all prior periods as it did on the index launch date and, among other things, does not take into account current business, market or financial conditions. 2VA receives compensation in connection with licensing its indices to clients and for providing custom advisory services. The performance results presented do not reflect the deduction of 2VA’s management fees or other customary expenses that may be incurred in the management of a client’s account. The performance results are not GIPS compliant. Past performance is not an indication or guarantee of future results. 2VA makes no representation or warranty, express or implied as to the ability of the index to accurately represent any asset class or market sector that it purports to represent. This document does not constitute an offer of any services or product. All information provided by 2VA is general in nature and not tailored to the needs of any person, entity or third-party. It is not possible to invest directly in an index. 2VA is an investment adviser registered with the Securities and Exchange Commission. Registration does not indicate any level of skill or training. For more information on any of our services please visit www.2ndvotefunds.com. This document is confidential. Redistribution or reproduction in whole or in part of this document is prohibited.