redwood unconstrained bond presentation

May 9, 2014

An Unconstrained Approach to Fixed Income

Redwood Unconstrained Bond Fund

Sub-Advisor:

Reams Asset Management Company, LLC (A division of Scout Investments, Inc.)

This material is provided as an educational tool and should not be considered investment advice. Redwood Investments cannot be held responsible for any direct loss resulting from applying any of the information provided in this presentation or from any other source mentioned. The opinions expressed may change as conditions in the market vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Redwood Investments to be reliable. Past performance is no guarantee of future results. There is no guarantee that any investment forecasts made will come to pass.

FOR INVESTMENT PROFESSIONAL USE ONLY. Not for use with the general public.

http://www.redwoodasset.com/

FOR INVESTMENT PROFESSIONAL USE ONLY. Not for use with the general public. 2

Redwood Asset Management

WV

OH

Equity Division Headquartered in Kansas City, MO

Managed assets since 1982

30 investment professionals

Average of 15 years industry experience

19 CFA charter holders and 25 MBAs

Fixed Income Division Based in Columbus, IN

Managed assets since 1981

14 investment professionals

Average of 19 years industry experience

11 CFA charter holders and 8 MBAs

Scout Investments manages more than $31 billion* in equity and fixed income strategies for institutional clients and individual investors.

*As of December 31, 2013

Scout



30 Years of Declining Interest Rates

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

0

2

4

6

8

10

12

14

16

10-Year U.S. Treasury RateJanuary 1984 – December 2013

Inte

res

t R

ate

%

As of December 31, 2013. Source: Federal Reserve, 2013

Context




1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

0

2

4

6

8

10

12

14

16


Inte

res

t R

ate

%


8%

Context




1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

0

2

4

6

8

10

12

14

16


Inte

res

t R

ate

%


Context



“More money has been lost reaching for yield than at the point of a gun.”

–Raymond DeVoe, Jr.

Context



A Different Approach to Fixed Income

Unconstrained

Flexible

Nontraditional

Strategic Income

Go Anywhere

Best Ideas

Multi-sector

Total Return

Solutions



The New “Core” Allocation

Bank

Loan

Corpora

te B

ond

Emer

ging M

arke

ts B

ond

High Y

ield

Bond

Infla

tion-P

rote

cted

Bond

Inte

rmed

iate

Gove

rnm

ent

Inte

rmed

iate

-Ter

m B

ond

Long Gove

rnm

ent

Long-Ter

m B

ond

Multi

sect

or Bond

Nontraditi

onal B

ond

Prefe

rred S

tock

Short Gove

rnm

ent

Short-Ter

m B

ond

Ultras

hort Bond

World

Bond

$(60,000,000,000)

$(40,000,000,000)

$(20,000,000,000)

$-

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

Net Flows (Trailing Year), Morningstar Categories

Source: Morningstar as of December 31, 2013.

Solutions



Unconstrained does not mean . . .

What does Unconstrained mean to Redwood?

Riskier Investing

Equity AllocationShort Sales

Stretching for Yield

Using LeverageUn-Controlled

Un-Principled

Un-Restrained

No limits on sector allocations

Freedom from a benchmark

Flexibility with duration

Ability to invest in best ideas

Stress test/scenario analysis

Forward-looking risk measures

Unconstrained means . . .

Solutions



7.19

0.11

10.98

5.50

1.9

0.030

2

4

6

8

10

12

ABS

Govt

HY Credit

IG Credit

MBS

Non-Dollar

0.38

0.67

0.50

0.73

0.08

-0.13-

0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

ABS

Govt

HY Credit

IG Credit

MBS

Non-Dollar

Reams Unconstrained Composite

Sources of Total Return, Last 12 Months, Percent

Sources of Total Return, 5 Years Annualized, Percent

Solutions



1 mo 3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr0

0.5

1

1.5

2

2.5

3

3.5

4

Duration and Yield-Curve Decision

Goal - Determine whether the bond market is cheap (bullish) or expensive (bearish)

Emphasize real interest rates

Take advantage of yield curve opportunities

Disciplined Investment Process

Inte

rest

Rat

e (%

)

Inflation Avg. 2013

Yield Curveao 4.09.14

Source: http://www.usinflationcalculator.com/inflation/current-inflation-rates/ and US Dept. of treasuryTreasuries

Process

http://www.usinflationcalculator.com/inflation/current-inflation-rates/



Duration and Yield-Curve Decision

Goal - Determine whether the bond market is cheap (bullish) or expensive (bearish)

Emphasize real interest rates

Take advantage of yield curve opportunities


10-Year Real Treasury Interest Rates Percent

-2

-1

0

1

2

3

4

5

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Bearish

Bullish

Neutral

Source: Bloomberg

Inte

rest

Rat

e (%

)

Example:

Process




-Asset Backed Securities

-High Yield Credit

-Treasuries

-Mortgage Backed Securities

-Non Dollar Denominated Bonds

-Investment Grade Credit

-Commercial Mortgage Backed Securities

-Emerging Market Debt

-Treasury Inflation Protected Securities

Sector Decision and Bond Selection

Process




1990

1990

1991

1991

1992

1992

1993

1993

1994

1994

1995

1995

1996

1996

1997

1997

1998

1998

1999

1999

2000

2000

2001

2001

2002

2002

2003

2003

2004

2004

2005

2005

2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

2011

2011

2012

-50

50

150

250

350

450

550

650

IG OAS (L)Source: Bloomberg

Cor

pora

te S

prea

ds

Sector Decision and Bond Selection

Goal - Purchase securities with the opportunity to offer the highest risk-adjusted returns

Focus on sectors offering relative value

Select bonds that have the opportunity to perform well in dynamic interest rate and credit environments

Example:

Process



Our definition of risk:1. Permanent loss of principal

2. Inability to meet investment objectives

Risk Analysis and Management

Typical definition of risk:1. Tracking error

2. Variability around benchmark

AnalyticsExternal and Proprietary Tools

Securities & Sectors

Compliance

Risk-Controlled Unconstrained Portfolio

Process



1. Loss of principal

2. Loss of purchasing power

1983

-01

1984

-12

1986

-11

1988

-10

1990

-09

1992

-08

1994

-07

1996

-06

1998

-05

2000

-04

2002

-03

2004

-02

2006

-01

2007

-12

2009

-11

2011

-10

2013

-09

0

2

4

6

8

10

12

14

16

U.S. 10-Year Treasury RateJanuary 1984 – December 2013

Inte

rest

Rat

e %

The “old” way of bond investing will have predictable results..



For Period Ending March 31, 2014

Composite

Reams Unconstrained Composite Characteristics

Total Market ValueAvg. Portfolio Duration (Years) Avg. Yield to Maturity/Worst (%) Avg. Maturity (Years)Avg. Quality

$5,389 M-2.90.61.3Aa2

Quality Structure (% of Portfolio) Composite Sector Structure (% of Portfolio) Composite

AAA 68.6 Treasury 45.4AA 2.3 Govt Related 0.6A 14.9 Mortgage-Backed 4.5BBB 9.1 Asset-Backed 3.3Below Investment Grade 5.1 Corporate 28.6

Total 100.0 Non US Dollar -2.1Cash & Equivalents 19.7

Total 100.0

Duration Distribution (Years) Composite Maturity Distribution (%) Composite

0 - 1 yr. 0.3 0 - 1 yr. 46.51 - 3 0.6 1 - 3 44.93 - 4 0.1 3 - 5 6.84 - 6 0.2 5 - 7 1.16 - 8 0.0 7 - 10 0.38+ -4.1 10 - 20 0.2

Total -2.9 20+ 0.2Total 100.0


Investment Professional Use Only

Benefit?

Downside!Quality of Security?

Loss of “riskless” investment?

0-1% on this side

2-4% on that side

Chasing Yield


Investment Professional Use Only

ABS

High Yield Credit

Gov’tMB

Non Dollar

Inv Grade Credit

CMBS

Emerging Mkt

Which bridge to take.. or not



Number of years since 1981 that interest rates have changed at least 1.0%: 32 of 32

Number of years since 1981 that interest rates have changed at least 1.5%: 28 of 32

Proof




For Periods Ending March 31, 2014Percent Gain or Loss

Last12

Months

Two Years (annualized)

Three Years (annualized)

Five Years (annualized)

Ten Years (annualized)

Since Inception* (annualized)

Unconstrained Fixed Income Composite

2.23 9.77 10.61 25.71 12.73 11.77

ML LIBOR 3-Month Constant Maturity Index

0.27 0.34 0.35 0.42 2.10 2.80

*Inception Date 8/1/1998

Proof




Source: Data derived from Barclays and Bloomberg

Unconstrained Market Capture (8/1/1998 – 3/31/2014)

131%

153%

112%

100%

72%

58%

34%27%

13%

129%

-37%-

50%

Barclays Aggregate

Barclays Universal

Barclays Corporate

S&P 500

DJ/CS Hedge Fund

Upside Capture

Downside Capture

Proof



0

1

2

10-Year Treasury, Percent

7

6

5

4

3

Note: For the purposes of this illustration, a rising interest rate environment (highlighted in gray) is a period of time during which the 10-Year Treasury rate rose at least 100 basis points.

Returns in Rising Rate Environments

Source: Bloomberg

Percent Gain or Loss*10/1/1998 - 11/1/2001 - 6/1/2003 - 7/1/2005 - 1/1/2009 - 9/1/2010 - 8/1/2012 -

1/31/2000 3/31/2002 5/31/2004 6/30/2006 12/31/2009 3/31/2011 12/31/2013

Unconstrained Composite 17.66 1.74 15.85 6.83 76.62 12.96 14.06

Barclays U.S. Aggregate Index (0.81) (1.91) (0.44) (0.81) 5.93 (0.77) (1.62)

Difference 18.47 3.65 16.29 7.64 70.69 13.73 15.68

* Returns are cumulative for each time period

Proof



Reams Unconstrained Correlation Matrix

Source: Barclays and Bloomberg

Barcla

ys A

ggre

gate

Barcla

ys U

nive

rsal

Barcla

ys C

orpo

rate

S&P

500

Dow Jo

nes /C

redit

Suiss

e Hed

ge

Fund Rea

ms Unc

onst

rain

ed

Monthly data for the period 8/1998 through 3/2014

Barclays Aggregate 1.00 0.97 0.84 -0.090.01

0.09

Barclays Universal 1.00 0.90 0.070.17

0.24

Barclays Corporate 1.00 0.200.30

0.39

S&P 500 1.00 0.57 0.63

Dow Jones / Credit Suisse Hedge Fund 1.00 0.42

Reams Unconstrained 1.00

Proof



Manager thoughts:

“Active risk all the time is not active management.”

“Cash equals stored value.”

“We don’t gorge at the yield trough.”

“Fed has pushed investors into the deep end of the pool.”

“Principal change trumps yield.”

“Now is the time to build bond portfolios for total return rather than income.”

Sum



The Redwood Unconstrained Bond Fund

Experienced management team More than 30 years of investment experience A combined 99 years of investment experience Managed portfolios in falling and rising rate environments

Disciplined investment process Consistent investment process seeks opportunities across all sectors Flexibility and ability to react quickly to changing environments

Focus on risk management Defines risk as permanent loss of principal View volatility as a key driver of performance

Sum



Long - track record

Small - assets

Pure - unconstrained

Spread - hunters vs. yield chasers

Features

Sum



Performance - rising rates, lowering rates, flat rates

Non Correlating - compliments portfolios

Traditional - with little to 0 em, leverage, stocks, non dollar

Benefits

Sum



Complement to core fixed income allocations

Core plus reallocation

Fixed income allocation

Appendix: Implementing Unconstrained

Unconstrained

Money Market

Equity

Core Plus

Core

Unconstrained

Money Market

Equity

Core

Unconstrained

Money Market

Equity

*Hypothetical Allocations

Sum



Key takeaways for you and your clients:

The traditional approach to fixed income has worked well for 30 years but . . .

− The fixed income strategies of yesteryear may not be the best approach today.

Today’s market environment requires a nontraditional approach

− Look for pockets of opportunity without benchmark constraints

Choose an investment manager with the right skill set

− Risk management, disciplined investment process and experience matters


Sum




Now is the time..

to review your client’s investment goals and determine if a different approach to fixed income

may be needed.

Sum




Purchase Options

Corporate Class (Taxable Accounts)

Front-End RAM 125

Fee-Based RAM 126

Mutual Fund Trust (Non-Taxable Accounts)

Front-End RAM 127

Fee-Based RAM 128

Mutual Fund Trust USD

Front-End RAM 130

Fee-Based RAM 131

Sum



The information and opinions expressed herein are current as of this document date and Redwood Asset Management Inc. assumes no obligation to provide updates or advise on further developments. Any reference should not be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of the portfolio of any Redwood investment fund is or will be invested. Commissions, trailing commissions, management fees and expenses may all be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Redwood, Redwood Asset Management, Needs Based Investing and the Redwood Asset Management Inc. tree logo are trademarks of Redwood Asset Management Inc.

Important Notes



Reams Unconstrained Product

Objective

To maximize risk-adjusted total return by systematically pursuing relative value opportunities throughout all sectors of the fixed income market.

Performance Benchmark

Merrill Lynch LIBOR 3-Month Constant Maturity Index

Guidelines

Average portfolio duration shall be within a range of -3 to 8 years. No restriction on individual holdings.

No limit on the ratings of individual securities.

No single credit industry shall exceed 25% of the portfolio at purchase.

Emerging market securities shall not exceed 30% of the portfolio at purchase. Non-U.S. dollar holdings shall not exceed 30% of the portfolio at purchase, including positions

hedged and unhedged.

The use of futures, forwards, options and swaps, including credit default swaps, is permitted. Such instruments shall not be used for speculative purposes. The product does not use borrowing to create leverage.

Sum



0

20

40

60

80

100

2008

2009

20102011

Investment Grade

2012

2013

2014

High Yield

0.0

20.0

40.0

60.0

80.0

100.0

2008

20092010

2011

20122013

Cash & Equivalents

2014

Treasury & Agency

Historically, sector exposures have generally been within the following ranges:

Investment Grade Credit: 0 - 50% High Yield Credit: 0 - 75% Government/Agency: 0 - 50% Mortgage-Backed: 0 - 50%

Reams Unconstrained Product

Corporate Exposure, Percent of Portfolio

Liquidity Exposure, Percent of Portfolio

Asset-Backed: 0 - 25% Emerging Markets: 0 - 5% Non-Dollar: 0 - 10% Bank Loans: 0 - 15%

Sum


redwood unconstrained bond presentation

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