How to Use Merit's Services with Your Clients
PLAN A. We supply the signals; you execute the trades. Under the terms of our Solicitation Agreement, you remit to Merit 20% of the net management fees you collect from those accounts you manage with our service. We issue the signals early in the day, within a couple of hours after the market opens. This gives you plenty of time to enter your trades on the same day we enter trades for our retail accounts.
PLAN B. You have your client execute Merit's asset management agreement. As Third Party Adviser on your client accounts, Merit executes all trades, reports quarterly to the client, collects advisory fees from the custodian and remits 50% of the fees to your Registered Investment Adviser. In addition, Merit prepares an annual performance report for each client. Our practice is to never initiate a contact with any of your clients. If one of them should call us, we will call you, rather than return the call to your client. As to deciding which fund to buy on a given signal, our practice is rotate an account among a group 4 to 5 high yield funds over a 12-month period. This practice helps us comply with the funds' exchange policies.
ABOUT MERIT'S HIGH YIELD BOND MODEL. It is a trend following system. We use the Lipper HY Index as a proxy for the high yield bond market. We chart its price on a daily basis. We calculate and apply 2 indicators to the Lipper chart. Both indicators must confirm a new signal before we will execute it. You can expect to see each signal executed in two stages: On Day 1, we move 50% of each account. On Day 2, which is usually the next day, we move the remaining 50%. This practice materially inc reases our high yield capacity and, at the same time, has a minimal effect on long-term performance. To aid you in fund selection, we will supply you with a list of funds that have exchange policies that can accommodate the frequency of our yield signals. We update the list of funds periodically to reflect any changes in the funds' exchange policies. As to the frequency of signals, we have experienced as few as 2 round turns in a year, and as many as 6. Over the past 10 years, the average has been 4.5.
ABOUT MERIT'S MULTI-SECTOR BOND MODEL. Like our high yield model, it is a trend following system. Our proxy for this market is the Lipper Multi-Sector Bond Index, which tracks 30 funds. In the summer of 2010, we "discovered," so to speak, this sector of the fixed-income market. We were looking for additional capacity for fixed-income accounts. When we examined the portfolio of the typical multi-sector fund, we found that 25 to 40% of its portfolio was in high yield bonds. We also observed that this component causes the daily price of the fund to trend much like high yield funds do. When we back tested our high yield model on several multi-sector funds, we were able to generate annual returns that matched or exceeded what we were seeing from high yields. In addition, we found that our model traded the multi-sectors with about the same frequency as high yields, even though the signals did not always come on the same day. We began live trading in multi-sector bond funds in September of 2010. Unlike high yields, the multi-sector bond fund universe is dominated by a small group of better performing funds. As a result, the execution of our signals for this service is more rigid. To help ensure the best possible performance from this service, we rotate among a select group of 4 to 5 funds with each successive Buy signal. This way, the funds allow larger positions and a particular fund sees a given account only once every 6 to 9 months.
Returns from our investment strategies are NOT BANK GUARANTEED, NOT FDIC INSURED and MAY LOSE MONEY. Before you invest in any fund, obtain a prospectus and study it carefully. Please see additional disclosures.