Special Note on the Meritage Yield-Focus Equity Strategy

In contrast to strongly positive returns during the past twelve months for the Meritage Value and Growth Equity strategies, the Yield-Focus strategy has experienced a tough year. Yield equity strategies in general, and our differentiated Yield-Focus strategy specifically, reached a very strong multi-year relative performance peak approximately one year ago. Simply stated, the basic reason for the divergence over the past year relates to the available market opportunities for each specific strategy.

No excuses, but as a perspective, our Value and Growth strategies were up approximately 8% and 11%, respectively for the June 30 year. Their specific benchmark style indices were ahead by 4.1% (Value) and 10.6% (Growth). Good opportunities
for selection existed for both strategies during the past year. Th e Yield-Focus strategy, however, was down by approximately 6.0% while its benchmark style index (the Zacks Multi-Asset Income Total Return Index) declined by a whopping 14.4%.

It was little consolation that our selection process in Yield-Focus was significantly better than the style benchmark for the year, given the very sharp decline in yield type opportunities.

More specifically, the key sources of high quality equity yield have been under pressure since last summer, notably the Energy and MLP sectors (due to a huge oil price decline), the Telecom and Utilities sectors (due to fears of rising interest rates aft er rates reached generational lows), the REIT sector (fears of poor economic conditions coupled with fears of rising rates), and international yield stocks (negatively impacted by a very strong U.S. dollar increase compared to foreign currencies) whose countries continue to struggle with recessionary, deflation type economic conditions. Also, importantly, the prior years’ substantial success of yield strategies compared to the general market lift ed valuations on yield oriented securities in many cases to excessive levels.

Our selection and rebalancing activities began to harvest significant gains in higher priced securities early in 2014, especially focused in the Energy and Financial sectors. Ever since, we have been gradually moving our selections to the most valuable, higher quality long-term yield franchises available worldwide. As is the nature of our process, we are using this style market decline as a significant opportunity to refresh the portfolio’s investments and improve the liquidity and quality of the individual securities for the future. Currently the strategy has a revitalized annual cash yield of 5.5%, well up
from its third quarter 2014 generational low of 4.9%.

As indicated in our Quarterly Investment Update, we don’t expect any big change in the investment environment worldwide from what we have experienced recently. It is still dominated by below-average, deflationary growth, and, in general, equity valuations are continuing to stretch. In our view this argues for a continuation of abnormally low interest rates, and low expected general equity returns, over the next several years. In our opinion, this will continue to be a very attractive longer term environment for the Yield-Focus strategy, once past the current adjustment.