Q:  Can you give a brief overview of the firm? A : Strategic Capital Alternatives is an SEC registered investment advisory firm founded in April 2010 with total assets under management around $350 million. SCA is managed by two partners Gary Price and Ron Robertson and I with a team of 11 senior investment personnel. Q:  What is your investment strategy? What differentiates you from others in the marketplace? A : Our investment strategy is based upon a three dimensional investment methodology. The three-dimensional approach involves incorporating traditional equities and all the asset classes in equities, traditional asset allocation to fixed income, and incorporating a substantial amount into nontraditional non-correlated assets made up of several categories. Based upon the client’s risk levels we decide how much we can go in equities, bonds or alternatives. We run a manager of manager’s portfolio so we screen a universe of other equity managers, looking for expertise in specific asset classes and identify a money manager in that space. One thing that differentiates us is we don’t invest in a mutual fund or a separate account that they are running elsewhere, but create a custom mandate with managers and create and manage a separate account that is unique to us where we would mandate them to give us their top 10 to 15 individual stocks in that space and we would take ownership of those 15 recommendations and trade them with our own proprietary trading desk into the other strategies. So, we are basically building a custom manager-of-manager mandate with a high level of conviction and concentration. Our custom portfolio will have allocation based on what we like in the marketplace and depending on that we will select the top ideas of fund managers we work with. So, if we like small cap companies we will increase allocation to these companies and if we like large caps than we will shift allocation to best ideas from the managers we work with. Our returns will differ from the managers’ overall portfolio because of the fact that we are creating a custom mandate with our own trading specifications. Q:  How many managers do you generally work with? How do you weight manager ideas? A : The typical number tends to be between five and seven. We are traditionally allocating to large cap growth and value, mid cap or small cap manager and international manager and also a dividend manager who does nothing but invest in dividend growth. We definitely make a tactical overweight or underweight to each category so today we have a 25% weighting of the equity bucket in dividend growth stocks of solid companies that have great balance sheets and are continuing to grow their dividend over time. We also have a normal weight in the small or midcap section that might be 10% or 15% and more at times. Q:  What drives your allocation decisions? A : We are looking at a theme-driven approach and because we are manager of managers it is really focusing on the macro strategy. We are looking at the world and the global economic landscape. We don’t prescribe too much to momentum and trend following but definitely lean towards the fundamentals like the balance sheet with a straightforward approach to selecting why we would be overweight or underweight in an area in the marketplace. We have an investment committee-driven process and it is a consensus view of the group in terms of why we want to go overweight in a certain category versus another. Q:  What is your bond investing strategy? A : We definitely have a well diversified fixed income strategy that is run in-house. We have a three-person team on the bond desk that bring in the ideas to the overall investment committee and on a week-by-week basis tell where the soft spots and opportunities in the bond market are. We have about 30% core exposure to names that are in the Barclays Capital Aggregate Bond Index and about 70% of our portfolio is opportunistic meaning we are looking for areas that are going to give us the returns that people have come to expect from fixed income but we will have to go and find places to get that return that are not traditional. To this end, we look to overweight and underweight areas across fixed income from high yield to emerging market debt to international bonds. Q:  Are you looking to benefit from the yield curve or are you generally neutral on the yield curve? A : We are much more macro focused on the overall bond market environment and looking for categories more than the yield curve where we think there are opportunities. There will be times when we look at the value of corporate bonds versus high yield versus Treasuries and see which one is more undervalued or overvalued than the other and make an overweight decision to that category. But we are also adding a tremendous amount of value at the security selection level because we use almost predominantly individual bond positions in our client separate accounts where we are adding value by picking a very good security within that thematic approach to which part of the bond market we want to be in. We have utilized exchange-traded funds and some use of bonds when there is a category that we want to allocate to but it is hard to find individual securities that meet that need. It is a combination of a tactical decision for some of those obscure markets versus more security selection for the traditional fixed income markets. Q:  Do you invest in floating rate bonds or municipal bonds? A : We absolutely do. As a matter of fact, we would call floating rate bonds or mortgage-backed securities as opportunistic decisions where there are going to be times where the risk and reward in those categories make so much more sense than just being in traditional corporate bonds or Treasuries that we will make that decision to overweight to those categories. In addition, we would utilize municipal bonds as an asset class and there are times where the correlation between the leading market and the Treasury market is so opposite that we may buy muni-bonds as an asset class because there is a better risk return opportunity in that category than a taxable bond. Q:  Can you elaborate on your 3 Dimensional investment strategy? A : Our 3 Dimensional investment philosophy is designed to avoid having to time the sharp swings of the markets in order to protect the portfolio during a declining market environment. This is a new frontier of investing that has become popular mainly because of the proliferation of liquid alternative choices in the last few years. The way we implement this 3 Dimensional strategy is we have the SCA Directional Fund (SCADX) and the SCA Absolute Return Fund (SCARX). In the Directional fund we are looking to generate equity like returns that are above the HFRX Equity Hedge Index. In the Absolute Return strategy we are attempting to get much more of a steady 5% to 7% type absolute return regardless of market direction. In our strategies we are making macro asset allocation but we are also looking to invest in the best ideas of fund managers that we work with and also invest in market segments ad in asset classes that are non-correlated. Q:  Can you briefly describe the SCA Directional Fund and the SCA Absolute Return Fund? A : The SCA Directional Fund is meant to be a flexible or more tactical fund in the sense that when markets are going up it is going to be more long than short. The fund is going to have long/short strategies and may be 70% net long or 80% net long in a rising market and only be 40% or 50% net long in a declining market so the underlying managers inside of that portfolio will be actively on a daily or weekly basis adjusting their exposures to the longs and shorts for us. This strategy has about 8% standard deviation yet the goal is to accomplish 70% to 80% of the market upside and capture only 30% to 40% of the market downside over time. The HFRX Equity Hedge Index is the benchmark for the fund. The SCA Absolute Return Fund is market neutral to the extent that it is trying to be less exposed to the overall equity markets and deliver more consistent returns. The benchmark for this fund is the HFRX Global Hedge Fund Index. Q:  How do you build the portfolio? A : We have an optimal model where we have about a third or roughly 33% in stocks, bonds and alternatives respectively. Generally, it is not a neutral fair valued environment so we tweak the weightings up or down from that environment and that decision is the first part of the construction for a balanced investor. For the equity bucket, we target the S&P 500 Index, for the alternative bucket we use two benchmarks – the HFRX Equity Hedge Index and HFRX Global Hedge Fund Index and for fixed income we use the Barclays Capital Aggregate Bond Index as the benchmark. Once we make our top-line allocation decision then we make the category decision and then we have a manager to actually pick the securities but in the portfolio we have in the neighborhood of a total 80 or 90 positions and can be as high as 100 depending on the environment we are in. That ends up being somewhere in the neighborhood of between 0.5% and 3% position sizes. But if a holding becomes a far bigger part of the benchmark at some point we would make a decision to trim that back and we rely on the underlying manager to provide us the insight in order for us to make that decision and for the most part we don’t override that manager’s opinion unless we think it has become a risk to the overall model. Q:  What is your sell discipline? A : On the sell side, we rely on the manager’s opinion as to when it is time to trim or sell a position. Every once in a while every manager is identifying positions that don’t work out or if a position breaches what we feel is an abnormal number then we sell a holding. We would definitely be talking to a manager that is responsible for that holding if it falls 10% or more and there has got to be a good reason for keeping it. On the upside, again we really would rely on the manager. There are no specific price targets and the process is fluid with insights from fund managers. We wouldn’t be terribly trigger happy knowing that we have only 1% or 2% exposure to a specific stock and that no one position is going to take down our model because it is very well diversified across other categories. Q:  How do you define risk? What do you do to manage it? A : The primary reason we run a 3 Dimensional investment portfolio is due to the fact that we think that is the best way to control risk and get the best possible return with the least amount of risk for a portfolio. We control the risk by looking at the portfolio like a big jigsaw puzzle and measure risk through standard deviation. Absolute Return as a category I would say generally has 4% to 6% standard deviation and in our directional strategy that is 8% to 10% and equities with standard deviation as high as 17% and we have bonds at 3% or 4%. We now have four jigsaw pieces that we can put together rather than two to build a more optimal portfolio. We think that’s critical to weed away different categories that have assigned standard deviations and certainly we are running analytical tools on our portfolio on a daily basis where we are looking at the risk-return relationship of each of those pieces or components and that is how we are controlling the risk is by further diversifying than the traditional asset allocation approaches. Moreover, these non-correlated categories lower risk in the portfolio.