Accessing Time-Tested Institutional Strategies*

Alternatives are becoming a more important part of the investing landscape. After the financial crisis, many investors turned to alternatives as a way to help manage risk in the event of another crash and to diversify their stock and bond portfolios. The PowerShares Multi-Strategy Alternative Portfolio (LALT) seeks to provide a solution to meet this need.

LALT is the first-of-its kind multi-strategy exchange-traded fund (ETF) that seeks a positive total return with low correlation to the broader securities market by combining five unique risk premia Benchmark Strategies.

Increased Risks in Bonds and Equities

Against a backdrop of an aging bull market, historically low bond yields, the unwinding of unprecedented Fed intervention, and expectations of greater volatility ahead, investors are asking themselves about alternatives they can incorporate into their portfolio to potentially help provide consistent returns and lower correlation to the market.

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Source: Bloomberg L.P., as of April 30, 2014

US Aggregate Bonds are represented by the BofA Merrill Lynch US Corporate, Government & Mortgage Index; S&P 500 Volatility is measured by average daily rolling 3-year volatility numbers. Past performance is not indicative of future results.

The Importance of Preserving Assets

The financial crisis reminded investors of an important financial truism. The bigger the portfolio drawdown, the more it takes to make up for lost ground. By mitigating the magnitude of drawdowns, investors may be more likely to have the emotional wherewithal to stick to their financial plan. By reducing the volatility of returns, the likelihood of achieving long-term goals may increase.

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For illustrative purposes only and not specific to any product.

Incorporating Alternatives into an Investment Portfolio

The case for utilizing uncorrelated strategies to build well diversified portfolios is well supported by academic literature.1 While balanced growth can be pursued with a traditional 60/40 approach, it may be further enhanced by implementing an allocation to alternatives whose strategy supports volatility management. As seen in the illustration below, as the allocation to alternatives increased, returns increased while volatility declined, which resulted in improved sharpe ratios. The uncorrelated nature of alternatives also mitigated the magnitude of the maximum drawdown.

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Source: Bloomberg, L.P. from 1990-2013. Alternatives represented by the HFRI Macro (Total) Index. Equity represented by the S&P 500 Index. Fixed Income represented by the Barclays US Aggregate Index. For illustrative purposes only and not specific to any product. An Investor cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges. Past performance does not guarantee future results.

1 Sources: Thomas Schneeweis, "Alternative Investments in the Institutional Portfolio," updated Summer 2000; CME Group "Managed Futures: Portfolio Diversification Opportunities, Potential for enhanced returns and lowered overall volatility," August 2012

The concept behind the PowerShares Multi-Strategy Alternative Portfolio is simple - allocate across alternative risk premia index strategies based upon historical index volatility trends with the objective of generating a positive total return with low correlation to the broader securities market.

Currently, the Benchmark consists of five Indexes. Each Index was developed by Morgan Stanley & Co., LLC (Benchmark Agent) and has live history. According to the allocation rules as defined by the Benchmark, the Fund uses a risk-weighted method by allocating notional exposure to each Index based on a weighting equal to the inverse of its trailing 12 month volatility, with the most volatile Indexes receiving the lowest weights.

As illustrated below, the Morgan Stanley Volatility Term Premium Index has three times the volatility of the other four Indexes, and thus is allocated only 7% of the Benchmark's weight. The Benchmark's historical allocation to any Index has ranged from 5% to 30%, and may limit an allocation to any Index to 30% of the Benchmark. The weightings are rebalanced quarterly.

Index Benchmark Weight
as of Sept. 30, 2014
12-Month
Volatility
MS Enhanced Forward Rate Bias USD 27% 3.47%
MS US Target Equity Alpha 24% 3.87%
MS Enhanced Currency Carry Optimized 21% 4.34%
MS SmartInvest Alpha 20% 4.68%
MS Volatility Term Premium 8% 11.96%

Sources: Morgan Stanley, Bloomberg L.P., from Oct. 10, 2012 to Sept. 30, 2014

The PowerShares Multi-Strategy Alternative Portfolio is an actively managed ETF that seeks a positive total return with low correlation to the broader securities market. LALT accesses non-traditional risk premia through the implementation of a multi-strategy investment approach that invests across asset classes in equities, currencies, interest rates and equity volatility markets.

About the Fund's Investment Approach

  • A multi-strategy investment approach across asset classes seeks to lower a traditional investment portfolio's risk profile
  • The use of long and short techniques designed to provide flexibility in down markets
  • Rules-based alternative beta strategy offered at a lower cost than a hedge-fund strategy1
  • Intraday liquidity & transparency1
  • No K-1; issues 1099
  • 0.96% total expense ratio2

About the Benchmark

The Morgan Stanley Multi-Strategy Alternative Index (the Benchmark) was developed by the Sales & Trading Division of the Institutional Securities Group of Morgan Stanley and includes a combination of quantitative, rules-based strategies (Benchmark Strategies) aimed to capture non-traditional risk premia across equities, rates, currencies and volatility markets. The Benchmark Strategies may be categorized into three types: Quantitative/Stylistic Strategies, Volatility Risk Premium Strategies and Carry Strategies. Currently, the Benchmark consists of five Indexes. Each Index was developed by Morgan Stanley & Co. LLC (the Benchmark Agent) and has live history.

The Benchmark is designed to offer attractive investment characteristics including:3

  • Low correlation - Each Index underlying the Benchmark has low to negative correlation relative to equities, bonds and one another.
  • Low volatility - The Indexes underlying the Benchmark have had considerably lower volatility than stocks and some have had comparable volatility to bonds.
  • Positive returns each year - Four of the five Indexes have delivered positive returns every year since their inception.
  • Reduced drawdown - Maximum drawdown for four of the Indexes was significantly smaller than stocks and comparable to bonds.

1 Since ordinary brokerage commissions apply for each buy and sell transaction, frequent trading activity may increase the cost of ETFs. ETFs disclose their full portfolio holdings daily. Shares are not individually redeemable and owners of the shares may acquire those shares from the Fund and tender those shares for redemption to the Fund in Creation Unit aggregations only, typically consisting of 50,000 shares.

2 As stated in the Fund's prospectus, the PowerShares Multi-Strategy Alternative Portfolio has a gross expense ratio of 1.00%. However, the Adviser has contractually agreed to waive fees and/or pay certain Fund expenses through at least Aug. 31, 2015 which resulted in the total net operating expense of 0.96%. The Fund also includes Acquired Fund Fees and Expenses of 0.05%.

3 Sources: Morgan Stanley, Bloomberg L.P., from Oct. 10, 2012 to April 30, 2014

* Past performance does not guarantee future results.

The Benchmark is a proprietary index developed and used by Morgan Stanley's Sales & Trading Division. The Benchmark and its components consist of a combination of quantitative, rules-based strategies, some of which have been used for years as benchmarks for products offered to institutional investors. Since the Benchmark's underlying strategies draw returns from different risk sources, combining the strategies may result in further diversification and risk reduction.

Alternative strategies typically are subject to increased risk and loss of principal. Consequently, investments such as exchange-traded funds which focus on alternative strategies are not suitable for all investors.

There are risks involved with investing in ETFs, including possible loss of money. Index-based ETFs are not actively managed. Actively managed ETFs do not necessarily seek to replicate the performance of a specified index. Both index-based and actively managed ETFs are subject to risks similar to stocks, including those related to short selling and margin maintenance. Ordinary brokerage commissions apply.

The Fund is subject to management risk because it is an actively managed portfolio. The investment techniques and risk analysis used by the portfolio managers may not produce the desired results.

The Sub-Adviser uses a rules-based methodology to allocate the Fund's assets in a combination of investment Strategies designed to limit the Fund's risk and volatility. As market dynamics shift over time, these various investment strategies - as well as the rules-based methodology that the Sub-Adviser employs to allocate Fund assets among them - may become outdated or inaccurate. As a result, the Fund may suffer significant losses.

The Fund will enter in futures contracts. Because futures contracts project price levels in the future, market circumstances may cause a discrepancy between the price of the near and distant contract. In the event of adverse price movements, the Fund would be required to make daily cash payments to maintain its required margin. The Fund also must segregate liquid assets or enter into off-setting positions to "cover" open positions in futures contracts. By investing in futures contracts, the Fund also is subject to capacity constraints and liquidity risks.

Certain derivative instruments that involve counterparties subject the Fund to the risk that the counterparty could default on its obligations under the agreement, either through the counterparty's bankruptcy or failure to perform its obligations. In the event of default, the Fund could experience lengthy delays in recovering some or all of its assets or no recovery at all. The Fund's investments in the futures markets also introduce the risk that its futures commission merchant (FCM) would default on an obligation set forth in an agreement between the Fund and the FCM, including the FCM's obligation to return margin posted in connection with the Fund's futures contracts.

The Fund will invest in derivatives and other instruments that may be less liquid than other types of investments. Illiquid investments can be more difficult or more costly to buy, or to sell, compared to other more liquid or active investments, and could have a negative effect on the Fund's ability to achieve its investment objective, resulting in losses to Fund shareholders.

The Fund may invest in foreign currency forward contracts, which may expose the Fund to foreign exchange risk. The factors of supply and demand in the international markets are influenced by factors such as macroeconomic, governmental policy, speculative factors, market sentiment and other political and economic considerations, and may affect the value of the assets of the Fund.

Some Benchmark Strategies attempt to hedge out broader exposure to their respective asset classes by short positions in futures, forwards, individual stocks, or other securities. These hedges may not always be effective, can result in unexpected exposures and potential losses, and may act to magnify losses.

While the Benchmark Strategies are designed to exhibit low correlation to each other and to the broader securities markets, there are no assurances that this low correlation will continue in the future.

Short sales are speculative transactions and involve special risks, including a greater reliance on the Sub-Adviser's ability to accurately anticipate the future value of a security.

The Fund's exposure to derivatives and other investment techniques, such as short sales, can create a leveraging effect on the portfolio. This leverage will vary over time and may at times be significant, subjecting the Fund to certain risks causing the Fund to be more volatile and may result in the loss of a substantial amount of the Fund's assets. The Fund may have a substantial cash position due to margin and collateral requirements that may limit the Fund's ability to take advantage of other investment opportunities, and the Fund also may have to sell or liquidate a portion of its assets at inopportune times to satisfy these requirements. This may negatively affect the Fund's ability to achieve its investment objective. In addition, the Fund's assets that are used as collateral to secure these transactions may decrease in value while the positions are outstanding, which may force the Fund to use its other assets to increase collateral.

The Fund may invest in US government obligations issued or guaranteed by the US Government, its agencies and instrumentalities, including bills, notes and bonds issued by the US Treasury.

Money market funds are subject to management fees and other expenses, and investments in money market funds will cause the Fund to bear proportionately the costs incurred by the money market funds' operations. It is possible for the Fund to lose money by investing in money market funds.

Investments in fixed-income securities, such as notes and bonds, carry interest rate and credit risk. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. Credit risk is the risk of loss on an investment due to the deterioration of an issuer's financial health.

During periods of reduced market liquidity or in the absence of readily available market quotations for the holdings of the Fund, the ability of the Fund to value its holdings becomes more difficult and the judgment of the Sub-Adviser may play a greater role in the valuation of the Fund's holdings due to reduced availability of reliable objective pricing data.

Equity risk is the risk that the value of equity securities, including common stocks, may fall due to both changes in general economic and political conditions that impact the market as a whole, as well as factors that directly relate to a specific company or its industry.

Because the Fund may invest in other investment companies, it is subject to the risks associated with that investment company and its investment performance may depend on the underlying investment company's performance. The Fund will indirectly pay a proportional share of the investment company's fees and expenses, while continuing to pay its own management fee to the Adviser, resulting in shareholders absorbing duplicate levels of fees.

The Fund currently intends to effect creations and redemptions principally for cash, rather than principally in-kind because of the nature of the Fund's investments. As such, investments in the Fund may be less tax efficient than investments in ETFs that create and redeem in-kind.

The Fund generally will seek to invest in derivative instruments that it believes generates qualifying income. The Fund will seek to limit its non-qualifying income so as to qualify as a RIC. For the Fund to qualify as a RIC, the Fund must meet a qualifying income test each taxable year. Failure to comply with the qualifying income requirements would have significant negative tax consequences to Fund shareholders, including the imposition of a higher tax rate on the Fund and taxes on its distributions to shareholders.

The Fund is considered non-diversified and may be subject to greater risks than a diversified fund.

Investing in securities of small and medium-sized companies may involve greater risk than is customarily associated with investing in large companies.

The Fund's investments in futures contracts will cause it to be deemed to be a commodity pool, thereby subjecting the Fund to regulation under the Commodity Exchange Act and Commodity Futures Trading Commission (CFTC) rules. The Adviser is registered as a Commodity Pool Operator (CPO), and the Fund will be operated in accordance with CFTC rules, as well as the rules that apply to registered investment companies. Registration as a CPO imposes compliance obligations related to additional laws, regulations and enforcement policies, which could increase compliance costs and may affect the operations and financial performance of funds whose adviser is required to register as a CPO.

The Morgan Stanley Multi-Strategy Alternative Index (the "Index") and Morgan Stanley (the "Marks") are the exclusive property of Morgan Stanley & Co. LLC ("Morgan Stanley"), which has contracted with Invesco PowerShares Capital Management LLC to license such Index and Marks. The PowerShares Multi-Strategy Alternative Portfolio is not sponsored, endorsed, sold or promoted by Morgan Stanley or its affiliates. Morgan Stanley and its affiliates make no representation or warranty, express or implied, regarding the advisability of investing in securities generally or in the PowerShares Multi-Strategy Alternative Portfolio particularly or the ability of the Morgan Stanley Multi-Strategy Alternative Index to track general market performance. Neither Morgan Stanley nor its affiliates are responsible for and have not participated in the determination of the prices and amount of the PowerShares Multi-Strategy Alternative Portfolio or the timing of the issuance or sale of the PowerShares Multi-Strategy Alternative Portfolio or in the determination or calculation of the equation by which the PowerShares Multi-Strategy Alternative Portfolio is to be converted into cash. Neither Morgan Stanley nor its affiliates shall have any liability, direct or indirect, for the PowerShares Multi-Strategy Alternative Portfolio, Marks and/or the Index, including any errors or omissions in the calculation thereof.

Invesco Advisers, Inc. is an investment adviser. It provides investment advisory services and does not sell securities. Invesco PowerShares, Invesco Distributors, Inc. and Invesco Advisers, Inc. are indirect, wholly owned subsidiaries of Invesco Ltd.

An investor should consider the Fund's investment objective, risks, charges and expenses carefully before investing. For this and more complete information about the Fund call 800 983 0903 or visit invescopowershares.com for a prospectus. Please read the prospectus carefully before investing.