Emerging Markets and our Dynamic Hedging Strategy

Investing in emerging markets has the potential to generate high returns and also bring potential diversification benefits. Our case for emerging markets is justified by four principal causes:

  • · Emerging markets (EM) possess a high rate of growth of GDP relative to developed countries
  • · Emerging markets are expected to be an increasing percentage of global GDP Emerging markets return on equity is attractive
  • · Due to future age & wealth demographics, developed markets may be unable to provide equity rates of return US investors have come to expect

Yet despite the many reasons for investing in emerging markets, our research has shown that emerging markets exhibit higher volatility than their developed country counterparts and have increased losses during crisis markets. This trend has continued during the past two years. During 2008, emerging markets lost 53.3% compared with a loss of 43.4% in the MSCI EAFE index*. As of December 31, 2009, emerging markets had gained 74.5% during 2009 relative to a gain of 27.75% in developed countries.

As a consequence of increased emerging markets volatility, as well as a high correlation with developed country markets, the addition of emerging markets to portfolios predictably increases volatility. The characteristics of high volatility, coupled with the possibility of high returns, make EM ideal for risk amelioration strategies. The objective of our emerging markets strategy is to provide investors access to emerging markets while reducing the risk of significant loss. By doing so, we allow investors access to this potentially lucrative market while attempting not to increase overall portfolio risk.

Our Strategy and Fund Performance

Our dynamic hedging system enters and exits markets based entirely on asset class price movements. When prices are rising, the system is fully invested in equities and we attempt to replicate the MSCI Emerging Markets Index. At every point during a rising market our system maintains an exit point at some percent below the market at which we will exit. As prices rise, the exit level “rolls up” at a rate that correlates roughly to the rate of increase of index prices.

From the Fund launch on May 15, 2009 through early November 2009, the parameters for a sale out of the index were never met. Our Fund remained fully invested for this period. In early November of 2009 we reduced our exposure to the index slightly only to restore it to 100% a few market days later. We remained long until late January when we reduced our exposure to MSCI Emerging Markets index to 0%. In early March of 2010, we restored our participation in the index to 100% and remained long for the rest of the period covered in this letter (April 30th).

Several factors have affected Fund performance relative to the MSCI Emerging Markets Index. The Fund underperformed the index during the first day after the launch as it was scaling up to be fully invested in the index. Also, the Fund attempts to participate in index performance by employing an index replication strategy. Index participation may vary from the index due to a difference in the performance of these instruments relative to the underlying index. Obviously, our performance will differ significantly when we reduce our exposure based on our risk management strategy.

Our Outlook

Since market bottom of October of 2008 through the end of April 2010, the MSCI Emerging Markets index** increased nearly 125%. In our experience, big market gains increase the possibility that the market will fall and vice versa. However, there are also instances when markets have continued to advance for long periods after significant increases. Our system affords us the ability to stay committed to emerging markets as long as they are rising and to exit once they turn lower and meet our parameters for a sale.

Disclosure
Prior performance is no guarantee of future results and there can be no assurance, and individuals should not assume, that future performance of any of the portfolios referenced will be comparable to past performance.

There can be no assurance that Toews will achieve its performance objectives.

This document refers to the performance of the majority of Toews portfolios to illustrate the effect of Toews management on US and intl. stocks and high yield bonds. Performance of individual accounts varied based on the client’s investment risk profile and their specific investment funds. For your individual account performance, please refer to the enclosed quarterly statement or the quarterly statement recently sent you. In addition, not all model portfolios were referenced in this letter. It is not, nor is it intended to be, a comprehensive accounting of Toews asset management. There are other portfolios that Toews manages that performed differently than what is referenced in this letter.

This article may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

This article is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice. Please contact your investment adviser, accountant, and/or attorney for advice appropriate to your specific situation.

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