Issue link: https://resources.envestnet.com/i/1527492
14 | Envestnet | PMC Investment Methodology Guide FOR ONE-ON-ONE USE WITH A CLIENT'S FINANCIAL ADVISOR ONLY The framework of our existing passive ETF/Index product ranking methodology informs our factor-based ETF product ranking methodology, whose main ranking dimensions of cost, liquidity, and performance each have several sub-dimensions. Every product is ranked on each of these sub-dimensions, with the final product ranking being a weighted average of these sub-dimensions. The performance dimension for regular ETFs is measured by TE to the underlying index. The main change that we make in evaluating factor- based ETFs is in how we calculate performance. We use TE as one of the subcomponents of performance (similar to the regular ETF ranking methodology), but add two more: risk- adjusted performance and exposure to a particular risk factor. Finally, the top 30 percent of the products in each peer group receives the "Approved-Quantitative" research status, and they retain it until they fall below the 50th percentile. This spread between the approval percentile and the percentile at which the "Approved" status is dropped reduces the turnover in the list of approved products. Qualitative Approval PMC's Q-Score is the primary approval process for style-based investments. PMC also provides thorough qualitative research which seeks to identify high-conviction strategies within a variety of asset classes. The managed account strategies, mutual funds, liquid alternatives, active ETFs (including strategic beta) and fund strategist portfolios approved via this process receive the research status of "Approved-Qualitative" on the platform. PMC's qualitative research process assumes that market inefficiencies exist and can be exploited by active management over time. True outperformance, however, is difficult to achieve and even more difficult to sustain. Distinguishing between generating "alpha"—defined as the positive contribution to performance that is attributable to a manager's decisions rather than market movement or specific factor exposures—and luck requires an understanding of a manager's investment thesis and competitive advantage. This additional due diligence helps assure advisors that the managers they deploy on their clients' behalf have been thoroughly vetted by a team of experienced analysts. The comprehensive process includes various quantitative analyses, including on-site visits and assessments of managers' ability to execute their strategies. Our due diligence seeks to: • deliver comprehensive, unbiased coverage of asset classes and strategies; • identify managers who have the potential to outperform their benchmarks on a risk-adjusted basis over a full market cycle; • maintain the integrity of asset allocations through appropriate manager recommendations; and • provide advisors with timely communications, forward- looking opinions, and actionable recommendations. Liquid Alternatives Mutual Funds PMC believes alternative investments can improve a portfolio's risk/return profile. Although mutual funds with daily liquidity that employ Quality Investment Managers Extensive Monitoring Team Appraisal Multi-Factor Evaluation Manager Sourcing 4 3 2 1 Qualitative Research Process PMC provides upfront selection and ongoing due diligence on managed account strategies, mutual funds, liquid alternatives, ETFs, and fund strategist portfolios. While different investment vehicles demand unique due diligence requirements, all of PMC's qualitative evaluations and recommendations are based on a consistent process.