Mission [Possible]:

Changing the Probability of Winning for Active Investors

Westwood (WW) has developed a new, innovative and simple fee framework available to eligible investors on our high-conviction LargeCap Select strategy. This framework, called Westwood Sensible Fees™, embraces the core principles of evaluating pure manager skill, addressing the low cost of indexing and protecting investors using risk-based fees — all with the goal of changing the probability of winning in an efficient asset class and reversing the historical precedent set in the industry by giving the asset owner the asymmetric advantage.

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An industry first, WW IR Sensible Fees™ solve the fee problem by creating a simple structure with a pure zero or transparent low base fee for beta exposure plus a linear fee, directly linked to risk-adjusted outperformance only when it is earned, by using information ratio (IR).

IR is a measurement of excess return and the active risk taken relative to a specific benchmark. A positive IR indicates that positive excess returns were achieved over the measurement period while also taken into account the level of active risk used to beat the benchmark.

  • Combines a risk-adjusted fee to measure the true value of active management with a pure-zero or low-index-like base fee for beta
  • Integrates built-in guardrails for investors that deter asset managers from taking unnecessary or uncompensated risks to earn performance fees
  • Aligns fees to both the efficiency of our investment decisions and risk-adjusted returns
  • Ensures the asset owner only pays a low nominal fee for beta, when the manager matches or underperforms the benchmark
  • Utilizes a maximum fee cap

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For the most frugal investors who need alpha to reach their return goals, we offer WW Zero-Based Sensible Fees™. We believe this solves the fee problem by creating a simple structure with a zero-base fee that is cheaper than most index and ETF products plus a linear fee, directly linked to risk-adjusted outperformance only when pure alpha is earned.

  • Integrates built-in guardrails for investors that deter asset managers from taking unnecessary or uncompensated market risks in lieu of pure stock selection to earn fees
  • Combines an alpha-based fee directly linked to the true value of active management with a pure-zero fee for beta generation
  • Delivers the majority of value-added return to the investor
  • Utilizes a maximum fee cap
  • Guarantees that the asset owner pays nothing when the manager matches or underperforms the benchmark

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Solving the Fee Issue

As a high-performing equity market environment lifted most stocks over the last decade, the value proposition for active management in efficient asset classes such as U.S. Large Cap has been scrutinized by both institutional and retail investors alike.

Low active share, otherwise known as “closet indexing,” high turnover and lofty management fees all contributed to a trend of marginal performance results for active products relative to benchmarks. In response, many investors have chosen to reduce their allocations to active managers and increase passive holdings, particularly in efficient asset classes.

According to eVestment, just 27% and 34% of institutional Large Cap strategies have outperformed their benchmarks over a five- and 10-year period, respectively1. Performance net of fees for retail investors was even worse for mutual funds, which only saw 19% and 22% outperformance for the same five- and 10-year periods2, according to Morningstar Direct. As a result, mutual fund investors in these strategies paid a staggering $100 billion in expenses to underperforming asset managers over the last 10 calendar years.3

1 Data compiled from eVestment as of 12/31/2018 using the following Universes: US Large Cap Core (vs the Russell 1000 Index), US Large Cap Value (vs the Russell 1000 Value Index) and US Large Cap Growth (vs the Russell 1000 Growth Index). Outperformance percentages based on net of fees performance. The US Large Cap institutional universe combines all reported strategies within the underlying core, growth and value style universes.

2 Data compiled from Morningstar Direct as of 12/31/2018 using the following Categories: US Large Cap Blend (vs the Russell 1000 Index), US Large Cap Value (vs the Russell 1000 Value Index) and US Large Cap Growth (vs the Russell 1000 Growth Index). Outperformance percentages based on net of fees performance. The US Large Cap mutual fund universe combines all reported strategies within their underlying blend, growth and value style categories.

3 Mutual fund data compiled from Morningstar Direct as of 12/31/2018 using the following mutual fund categories: US Large Cap Blend (vs the Russell 1000 Index), US Large Cap Value (vs the Russell 1000 Value Index) and US Large Cap Growth (vs the Russell 1000 Growth Index). Performance evaluation based on net of fees performance during each calendar year from 2009 – 2018. Total fees for each fund calculated using the Annual Report Net Expense Ratio and Net Assets as of each calendar year end. Funds in the data set are based on current constituents as of February 2019 and using historical data.

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