Growth vs Value - CFA Institute

[Pages:8]Growth vs Value

or is Fundamental Indexing More Attractive

JUNE 2013

By Vincent Lowry

Key Points:

By overweighting a portfolio toward growth or value at the right time, outperformance of the general market may be achieved. Obviously this is very challenging to achieve.

Studies by industry experts have indicated that small cap value stocks and value have historically outperformed the market as a whole. From these studies it can be concluded that the value premium is pervasive across large, mid, and small cap stocks in the long term.

In recent years, research has shown that economics or fundamental weights of indexes have extracted the best of both worlds in terms of growth and value investing. We believe this represents a potential game changer for investors.

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Growth vs. Value or is Fundamental Indexing More Attractive

During the past 40 years, modern portfolio theory has taught its students that embedded within the equity capital markets are subsets of equities, the obvious subsets are classified as styles and asset classes. The theory generally identifies the styles as: Value, Growth, Large Capitalization, Mid Capitalization and Small Capitalization and asset classes are broader in concept, such as equities fixed income and commodities. The theory promotes the idea that a welldiversified allocation of assets over these subsets of style and size categories will reduce a portfolio's risk and actually increase returns over a full market cycle. However, since returns in the equity market have been well below average over the past 13 years and are projected to continue to produce a lower rate of return than in the past, we thought it would be useful to review the actual history of the various styles and size subsets within in the equity market to determine, if we can achieve greater returns without additional risk.

During the past 30 years, it has been normal practice to develop an optimal mix between value stocks and growth stocks, as well as slight tilts to large, mid and small. The goal is to provide market returns that exceed the broad market with less risk. By overweighting value or growth at the right time, a portfolio may outperform the general market, and with less risk according to this tilting strategy. However, the prosaic reality of this strategy has not worked out very well over the past 20, 30, or even the last 10 years.

Two finance professors from the University of Chicago, Gene Fama and Ken French, along with other industry experts, reviewed equity return data as far back as 1926 and they suggested that several studies of this data revealed that small value stocks and value stocks, in general, outperform the market as a whole. At this point we presume that the readers of this paper have some knowledge of the Fama/French studies over the past several decades. More detailed information can be found at:

Below we compare the past 25 years of returns, as measured by the Russell indices. (We found the Russell 1000 Value and the Russell 1000 Growth to be a series of indexes that have maintained the longest and most easily accessible data segmenting the returns of value stocks versus growth stocks in the U.S. market.)

Zephyr StyleADVISOR

Manager vs Benchmark: Return

January 1979 - June 2013 (not annualized if less than 1 year)

30

Zephyr StyleADVISOR: VTL Associates, LLC

25

Return

20

RevenueShares Large Cap Index

15

RevenueShares Large Cap Index (net)

Russell 1000

Russell 1000 Growth

Russell 1000 Value

S&P 500 10

5

0 YTD

1 year

2 years

3 years

4 years

5 years

Manager vs Benchmark: Return

January 1979 - June 2013 (not annualized if less than 1 year)

1. RevenueShares Large Cap Index

YTD 17.22

RevenueShares Large Cap Index (net)

16.94

Russell 1000

13.91

Russell 1000 Growth

11.80

Russell 1000 Value

15.90

S&P 500

13.82

1 year 27.68 27.07 21.24 17.07 25.32 20.60

2 years 14.76 14.21 12.49 11.27 13.62 12.77

10 years

3 years 20.14 19.56 18.63 18.68 18.51 18.45

15 years

4 years 19.83 19.25 17.77 17.39 18.11 17.43

20 years

5 years 8.86 8.33 7.12 7.47 6.67 7.01

25 years

Analysis Period

10 years 8.94 8.41 7.67 7.40 7.79 7.30

15 years 6.60 6.08 4.61 3.08 5.50 4.24

20 years 10.53 9.99 8.80 7.84 9.22 8.66

25 years 11.41% 10.87% 9.89% 9.23% 10.12% 9.75%

Analysis Period 13.45% 12.90% 11.70% 10.75% 12.26% 11.66%

1. This is the S&P 500 Revenue Weighted.

2

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Zephyr StyleADVISOR Manager vs Benchmark: Return

March 2008 - June 2013 (not annualized if less than 1 year) 30

25

Zephyr StyleADVISOR: VTL Associates, LLC

Return

20

15

RevenueShares Large Cap (NAV) RevenueShares Large Cap (MKT)

RevenueShares Large Cap Index

S&P 500

10

5

0 YTD

1 year

2 years

Manager vs Benchmark: Return

March 2008 - June 2013 (not annualized if less than 1 year)

YTD

RevenueShares Large Cap (NAV)

16.91%

RevenueShares Large Cap (MKT)

17.11%

RevenueShares Large Cap Index

17.22%

S&P 500

13.82%

3 years

1 year 26.98% 27.26% 27.68% 20.60%

4 years

2 years 14.14% 14.17% 14.76% 12.77%

5 years Since Inception

3 years 19.49% 19.62% 20.14% 18.45%

4 years 19.17% 19.21% 19.83% 17.43%

5 years 8.20% 8.16% 8.86% 7.01%

Since Inception 6.30% 6.25% 6.89% 5.92%

The returns of the RevenueShares Large Cap Index prior to 12/30/05 represent hypothetical pre-inception index performance (PIP) to illustrate how the index may have performed had it been in existence for the time period prior to 12/30/05. The inception date of the index is 12/30/05. PIP data results are based on criteria applied retroactively with the benefit of hindsight and knowledge of factors that may have positively affected its performance, and cannot account for all financial risk that may affect the actually performance of the ETP. Actual performance of the ETP may vary significantly from the PIP data. The inception date of the ETP is 2/22/08, thus, the first full month of returns began 3/1/08. The management fee for this fund is 0.49%. The RevenueShares Large Cap index "net" represents the index returns net of the management fee.

Notice that the value index outperforms growth and core indexes over long periods of time. (In the example chart on page 2). This should not surprise anyone familiar with the Fama/French research. We do not consider the value premium an anomaly, but rather it is persistent and pervasive across large, mid and small cap stocks. Notice in the example chart, the value outperformance permeates through the mid and small cap subsets of the U.S. equity market over very long periods of time. It is generally accepted by researchers that when a pattern of behavior is persistent and pervasive over time, then it is not an anomaly or novelty, but rather a principal. Based on this research, we believe that value investing is superior to growth over time. However, the surprise in the charts is the hypothetical revenue weighted indexes. They not only outperformed growth and core indexes, but provided considerable outperformance over value as well. We believe fundamental indexing should be taken more seriously than it has been. At VTL Associates, we believe the weighting factors of revenue/sales applied to a known capitalization index, such as the S&P, may provide investors with a more attractive index strategy than capitalization weighted index based on our research.

3

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Zephyr StyleADVISOR Manager vs Benchmark: Return

July 1991 - June 2013 (not annualized if less than 1 year)

30

25

Zephyr StyleADVISOR: VTL Associates, LLC

Return

20

RevenueShares Mid Cap Index

15

RevenueShares Mid Cap Index (net)

Russell Midcap

Russell Midcap Growth

Russell Midcap Value

10

S&P MidCap 400

5

0 YTD

1 year

2 years

Manager vs Benchmark: Return July 1991 - June 2013 (not annualized if less than 1 year)

3 years

4 years

5 years

10 years

15 years

20 years

Analysis Period

2.

RevenueShares Mid Cap Index

YTD 18.77

1 year 29.71

2 years 13.01

3 years 21.11

4 years 21.80

5 years 11.79

10 years 12.48

15 years 10.94

RevenueShares Mid Cap Index (net)

18.46

29.02

12.41

20.47

21.16

11.19

11.88

10.35

Russell Midcap

15.45

25.41

11.06

19.53

20.91

8.28

10.65

8.16

Russell Midcap Growth

14.70

22.88

9.18

19.53

19.97

7.61

9.94

6.29

Russell Midcap Value

16.10

27.65

12.77

19.53

21.81

8.87

10.92

8.59

S&P MidCap 400

14.59

25.18

10.57

19.45

20.79

8.91

10.74

9.53

20 years 14.24 13.63 10.70 9.20 11.08 11.69

Analysis Period 14.80% 14.18% 11.57% 9.74% 12.21% 12.48%

2. This is the S&P 400 Revenue Weighted.

Zephyr StyleADVISOR Manager vs Benchmark: Return

March 2008 - June 2013 (not annualized if less than 1 year) 30

25

20

Return

15

10

5

0 YTD

1 year

2 years

Manager vs Benchmark: Return

March 2008 - June 2013 (not annualized if less than 1 year)

YTD

RevenueShares Mid Cap (NAV)

18.39

3 years

1 year 28.94

4 years

2 years 11.95

RevenueShares Mid Cap (MKT)

19.42

29.78

12.30

S&P MidCap 400

14.59

25.18

10.57

Zephyr StyleADVISOR: VTL Associates, LLC

RevenueShares Mid Cap (NAV) RevenueShares Mid Cap (MKT) S&P MidCap 400

5 years Since Inception

3 years 20.15 20.41 19.45

4 years 20.88 21.01 20.79

5 years 11.08

Since Inception 10.31

11.38

10.33

8.91

9.20

4

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The returns of the RevenueShares Mid Cap Index prior to 12/30/05 represent hypothetical pre-inception index performance (PIP) to illustrate how the index may have performed had it been in existence for the time period prior to 12/30/05. The inception date of the index is 12/30/05. PIP data results are based on criteria applied retroactively with the benefit of hindsight and knowledge of factors that may have positively affected its performance, and cannot account for all financial risk that may affect the actually performance of the ETP. Actual performance of the ETP may vary significantly from the PIP data. The inception date of the ETP is 2/22/08, thus, the first full month of returns began 3/1/08. The management fee for this fund is 0.54%. The RevenueShares Mid Cap index "net" represents the index returns net of the management fee.

Zephyr StyleADVISOR

Manager vs Benchmark: Return

January 1998 - June 2013 (not annualized if less than 1 year)

35

Zephyr StyleADVISOR: VTL Associates, LLC

30

25

Return

20

RevenueShares Small Cap Index

RevenueShares Small Cap Index (net)

Russell 2000

15

Russell 2000 Growth

Russell 2000 Value

S&P SmallCap 600

10

5

0 YTD

1 year

2 years

Manager vs Benchmark: Return January 1998 - June 2013 (not annualized if less than 1 year)

3 RevenueShares Small Cap Index

YTD 17.17

RevenueShares Small Cap Index (net)

16.86

Russell 2000

15.86

Russell 2000 Growth

17.44

Russell 2000 Value

14.39

S&P SmallCap 600

16.19

3 years

4 years

5 years

10 years

15 years

Analysis Period

1 year 32.85 32.15 24.21 23.67 24.77 25.18

2 years 14.64 14.03 10.28 9.69 10.89 12.68

3 years 21.72 21.07 18.67 19.97 17.33 20.27

4 years 23.22 22.57 19.37 19.46 19.22 21.10

5 years 15.16 14.55 8.77 8.89 8.59 9.95

10 years 14.64 14.03 9.53 9.62 9.30 10.77

15 years 11.46 10.87 6.60 4.79 7.84 8.37

Analysis Period 11.64 11.04 6.71 4.99 7.88 8.50

3. This is the S&P 600 Revenue Weighted.

VTL is of the opinion that expected investment returns will increase over time by developing asset allocation models that rely more on fundamental weighting less on the broad based market capitalization weighted indexes and growth indexes. The value bias continues as a persistent and viable investment strategy that has consistently affected equity returns for nearly 90 years, but now we believe fundamental weighting by revenues exceeds core, value and growth.

In recent years, research has discovered a methodology that extracts, in our opinion, the best of both worlds. They are economic weightings, such as revenue, net income, cash flow, and dividends, which have all shown to outperform capitalizations in backtested research. The development of economic weightings is a potential game changer for the investor. In the included charts, we have included the returns of the S&P 500, S&P 400 and S&P 600 revenue weighted indexes versus the major capitalization weighted indexes. It is our view that by reweighting the S&P capitalization indexes by an economic factor such as revenue/sales, an investor can extract the benefits of growth stocks, as well as the benefits of the value premium.

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Again, this new weighting methodology is more than a phenomenon; it is, in our opinion, a consistent and pervasive factor in developing attractive returns versus the capitalization weighted indexes.

Considering the significant unfunded liabilities of global pension plans, low interest rate environment and lower GDP growth expectation, we believe it makes sense to utilize revenue weighted indexes for the long run.

Zephyr StyleADVISOR Manager vs Benchmark: Return

March 2008 - June 2013 (not annualized if less than 1 year) 35

30

25

20

Return

15

10

5

0 YTD

1 year

2 years

Manager vs Benchmark: Return

March 2008 - June 2013 (not annualized if less than 1 year)

YTD

RevenueShares Small Cap (NAV)

16.91

3 years

1 year 31.74

4 years

2 years 13.79

RevenueShares Small Cap (MKT)

16.84

31.27

13.68

S&P SmallCap 600

16.19

25.18

12.68

Zephyr StyleADVISOR: VTL Associates, LLC

RevenueShares Small Cap (NAV) RevenueShares Small Cap (MKT) S&P SmallCap 600

5 years Since Inception

3 years 20.81 20.67 20.27

4 years 22.35 22.18 21.10

5 years 13.77

Since Inception 12.21

13.92

11.99

9.95

9.46

The returns of the RevenueShares Small Cap Index prior to 12/30/05 represent hypothetical pre-inception index performance (PIP) to illustrate how the index may have performed had it been in existence for the time period prior to 12/30/05. The inception date of the index is 12/30/05. PIP data results are based on criteria applied retroactively with the benefit of hindsight and knowledge of factors that may have positively affected its performance, and cannot account for all financial risk that may affect the actually performance of the ETP. Actual performance of the ETP may vary significantly from the PIP data. The inception date of the ETP is 2/22/08, thus, the first full month of returns began 3/1/08. The management fee for this fund is 0.54%. The RevenueShares Small Cap index "net" represents the index returns net of the management fee.

6

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VTL Associates / Revenue Weighted Indexes Disclosure - Disclaimer Statement

The RevenueSharesTM indexes are equity indexes developed by VTL Associates, LLC ("VTL"). Except as indicated below, the historical returns contained in the Zephyr StyleADVISOR? reports for the RSTM indexes are hypothetical and do not represent actual returns or performance results for any client account or portfolio.

The Fund's investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus and summary prospectus contain this and other important information about the Fund, and may be obtained by calling 888-854-8181 or visiting . Read the prospectus and summary prospectuses carefully before investing.

An investment in the Funds is subject to investment risk, including the possible loss of principal amount invested. Fund returns may not match the return of their respective Index. The alternative weighting approach employed by the Fund (i.e., using revenues as a weighting measure), while designed to enhance potential returns, may not produce the desired results. The risks associated with each specific fund are detailed in the prospectus and could include factors such as increased volatility, small and mid cap stocks, concentration, nondiversification, financials sector risk, ADR risk, currency exchange risk, foreign market risk, growth style investing risk, portfolio turnover risk, and/ or special risks of exchange-traded funds.

RevenueShares Large Cap IndexTM inception date: March 30, 2006; RevenueShares Mid Cap IndexTM inception date: March 1, 2006; RevenueShares Small Cap IndexTM inception date: August 4, 2006;

RSTM index returns are not indicative of performance when the revenue-weighting methodology is utilized in a managed account. An investor cannot invest directly in an index. The performance results shown are hypothetical and assume that no cash was added to or assets withdrawn from the hypothetical investment and that all dividends, gains and other earnings in the account were reinvested in accordance with index rules. No management fees or brokerage expenses were deducted from the hypothetical performance shown. Indexes do not lend securities, and no revenues from securities lending were added to the performance shown. In addition, the results actual investors might have achieved would be different from those shown here, because of differences in the timing, amounts invested, withdrawals if any, and fees and expenses associated with an investment in the index. The hypothetical performance results contained in Zephyr StyleADVISOR? reports were conducted for the periods ranging from January 1, 1991 through December 31, 2008 for REVWLTTM, REVWMTTM & REVWFINTTM, from January 1, 1998 through December 31, 2008 for REVWSTTM, from January 1, 1999 through December 31, 2008 for REVWLOUTTM and from January 1, 2005 through December 31, 2008.

REVWLTTM, REVWMTTM and REVWSTTM are comprised of the constituent securities underlying the S&P 500? ("S&P 500?"), S&P MidCap 400TM Index ("S&P 400TM"), S&P SmallCap 600TM Index ("S&P 600TM"), respectively, (collectively, "S&P? Indices"). Each underlying security of the RSTM Indexes is assigned a percentage weighting according to each corresponding company's annualized revenues. The constituent securities underlying the RSTM indexes for each calendar year throughout the study periods are based upon those securities underlying the corresponding S&P? Index as of December 31st of each preceding calendar year. VTL utilized Bloomberg Professional? service ("Bloomberg") to gather all revenue data. VTL retained the services of Standard & Poor's?, which was responsible for calculating daily valuations of the RSTM indexes, with daily reinvestment of dividends, throughout the study periods. VTL utilized Wilshire? Cooperative Service to prepare hypothetical performance measurement reports from the daily valuations calculated by Standard & Poor's?. Zephyr StyleADVISOR? was utilized to perform various risk-return and relative return analyses.

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During each calendar year throughout the study periods, the constituent securities underlying the RSTM indexes were added and deleted by Standard & Poor's? and changed to reflect corporate activity among member companies underlying the respective S&P? indices. At the end of each calendar year, the RSTM indexes were reconstituted to reflect the then-current membership of each respective S&P? index and rebalanced (annually or quarterly) to reflect changes to each corresponding company's annualized revenues. The hypothetical historical returns contained in Zephyr StyleADVISOR? reports are for informational purposes only and are not intended to be an offer, solicitation, or recommendation with respect to the purchase or sale of any security or portfolio of securities, or a recommendation of the services supplied by any money management organization or other financial institutions. Although all underlying data, information, and software used by VTL to create the studies herein are believed to be reliable or derived from sources considered to be reliable, their accuracy and completeness cannot be assured. Therefore, VTL disclaims responsibility, financial or otherwise, regarding the accuracy and completeness of all underlying data, information, and software used in performing this study. However, reasonable care has been taken by VTL to ensure that the data and information conveyed by the studies are accurate and complete. The hypothetical historical returns depicted in any reports do not reflect any management fees, transaction costs or other expenses. Performance for periods greater than one year is reported on an annualized basis. Past results are not indicative of future performance. The REVWLTTM, REVWMTTM and REVWSTTM are trademarks owned by, the exclusive property of, and proprietary to VTL Associates, LLC. S&P? shall have no liability for any errors or omissions in calculating the RSTM indexes.

"Standard & Poor's?", "S&P?", "S&P 500?", "S&P MidCap 400TM Index", and"S&P SmallCap 600TM Index", are trademarks of the McGraw-Hill Companies, Inc., and have been licensed for use by VTL Associates, LLC in connection with the construction, maintenance, and management of RevenueSharesTMindexes.

RevenueSharesTM indexes are not sponsored, endorsed, sold or promoted by Standard & Poor's?. Standard & Poor's? makes no representation regarding the advisability of investing in RevenueSharesTM indexes. The performance results are hypothetical and should not be interpreted as indicative of the skill of VTL or interpreted as an indication of actual performance. Actual performance for client accounts may be materially different (and may be lower) than that of the RevenueSharesTM Indexes. The advertised performance results prior to January 1, 2005 were achieved by means of the retroactive application of a model designed with the benefit of hindsight. The performance information prior to January 1, 2005 was compiled after the end of the period depicted and does not represent the investment decisions of VTL. VTL was founded in November 2004 and was not managing money during the entire period according to the strategy depicted. VTL began managing money for the REVWLTTM, REVWMTTM and REVWSTTM strategies on March 30, 2006, March 1TM, 2006 and August 4, 2006, respectively. There are inherent limitations in backtested and model performance results. For example, such results do not represent actual trading and may not reflect the impact that material economic and market factors might have had on the advisor's decision-making if the advisor were actually managing clients' money. As with any investment strategy, there is potential for profit as well as the possibility of loss

No current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the advisor), or product made reference to directly or indirectly, will be profitable or equal to these indexes' past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance, strategy and results of any portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client's investment portfolio. Historical

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