Dividends from net investment income, if any, are declared and paid either quarterly or monthly, depending on the Fund. For Funds on a quarterly dividend payment cycle, the dividend ex-date is generally the third Friday of each March, June, September and December, payable the last business day of the month. For Funds on a monthly dividend payment cycle, the dividend ex-date is generally the 15th of each month, payable the last business day of the month.
The fund distributes its net realized capital gains, if any, to shareholders annually. Prior to paying a distribution of net investment income, the fund has the ability to invest cash generated from investment income into additional securities or money market instruments.
Distributions in cash may be reinvested automatically in additional whole shares of the fund only if the broker through whom you purchased shares makes such option available. Shareholders of the fund may contact their broker to determine the availability and costs of the service and the details of participation. Brokers may require shareholders to adhere to specific procedures and timetables. If this service is available and used, dividend distributions of both income and realized gains will be automatically reinvested in additional whole shares of the fund purchased in the secondary market.Taxes on Distributions
In general, your distributions are subject to federal income tax when they are paid, whether you take them in cash or reinvest them in the Fund. Dividends paid out of the Fund’s income and net short-term gains, if any, are taxable as ordinary income. Distributions of net long-term capital gains, if any, in excess of net short-term capital losses are taxable as long-term capital gains, regardless of how long you have held the Shares. Dividends from net investment income, if any, are declared and paid quarterly. The Fund may also pay a special distribution at the end of the calendar year to comply with federal tax requirements.
Under the provisions of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the “2003 Tax Act”), long-term capital gains tax rates have generally been reduced for individuals to a maximum of 15% for taxable years beginning before January 1, 2009. In addition, some ordinary dividends declared and paid by the Fund to individual shareholders may qualify for taxation at the lower reduced tax rates applicable to long-term capital gains, provided that holding period and other requirements are met by the Fund and the shareholder.
Distributions in excess of the Fund’s current and accumulated earnings and profits are treated as a tax-free return of capital to the extent of your basis in the Shares, and as capital gain thereafter. A distribution will reduce the Fund’s net asset value per Share and may be taxable to you as ordinary income or capital gain even though, from an investment standpoint, the distribution may constitute a return of capital.
By law, the Fund must withhold a percentage of your distributions and proceeds if you have not provided a taxpayer identification number or social security number. The backup withholding rate is currently 28%.
Increased Risks in Bonds and Equities
Against a backdrop of an aging bull market, historically low bond yields, the unwinding of unprecedented Fed intervention, investors are asking themselves about alternatives they can incorporate into their portfolio to potentially help provide consistent returns and lower correlation to the market.
Source: Bloomberg L.P., as of March 31, 2015
US Aggregate Bonds are represented by the BofA Merrill Lynch US Corporate, Government & Mortgage Index. Yield is represented by Yield To Worst. Risk is represented by modified adjusted duration. S&P 500 Volatility is measured by average daily rolling three-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.
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.
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 and the Morgan Stanley Enhanced Currency Carry Optimized Index have three times the volatility of the other three Indexes, and thus is allocated only 8% 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.
as of March 31, 2015
|MS Enhanced Forward Rate Bias USD||30%||4.16%|
|MS US Target Equity Alpha||23%||5.92%|
|MS Enhanced Currency Carry Optimized||8%||15.58%|
|MS SmartInvest Alpha||28%||4.74%|
|MS Volatility Term Premium||8%||16.25%|
Sources: Morgan Stanley, Bloomberg L.P., Weights as of March 31, 2015. 12 month volatility measured by the annualized standard deviation of returns from Oct. 10, 2012 to March 31, 2015.
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
- 0.95% 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:
- Low correlation - Each Index underlying the Benchmark has low to negative correlation relative to equities, bonds and one another.3
- Low volatility - Three of the five indexes underlying the Benchmark have had considerably lower volatility than stocks.3
- Reduced drawdown - The Indexes underlying the Benchmark had significantly better drawdown characteristics than stocks.
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 Feb. 28, 2016 which resulted in the total net operating expense of 0.95%. The Fund also includes Acquired Fund Fees and Expenses of 0.05%.
3 Source: Bloomberg L.P. from Oct. 10, 2012 to March 31,2015