ABCS

David M. Dabora, CFA has over 30 years of investment experience and is the Founder, Managing Partner & Portfolio Manager of Alpha Blue, LLC | Alpha Blue Capital L.P. | Alpha Blue Capital Management LP providing Fundamental Research & Value-Focused Investment Management, since inception in 2010. Located in the San Francisco Bay Area City of Greenbrae in Marin County, California. He is the portfolio manager & architect of the ABCS-Alpha Blue Capital US Small-Mid Cap Dynamic ETF Strategy and the Alpha Blue Alternative Equity Strategy.

ABCS is a pioneering Dynamic Active Equity ETF that invests in a portfolio of Small & Mid Cap individual stocks with attractive Valuation, sound Fundamentals, Quality & positive business Momentum (V,F,Q,M) characteristics with the flexibility to integrate Vanguard Small & Mid Cap passive CRSP equity index ETFs focusing on the less efficient, bottom 30% of stocks by market weight of the US stock market.

ABCS’s portfolio of Small & Mid Cap Individual stocks represents 25%-100% portfolio weighting of the total 50-150 holdings and Small & Mid Cap passive equity index ETFs range from 0%-75% weighting with 0-6 holdings. At launch, ABCS held 100 stocks and 4 Vanguard Small & Mid Cap passive CRSP index ETFs representing approximately a 65% and 35% weighting in the portfolio, respectively.

The investment objective of ABCS is long term capital appreciation with targeted annualized alpha¹& investment performance of 1%-3% in excess of broad Small and/or Mid Cap Index ETF returns over a full market cycle with the opportunity to outperform the Larger Cap broader US market’s returns. A summary of key overall Portfolio targets and guidelines are as follows:

• Total number of Stocks: 50-150
• Weight of Stock Portfolio: 25%-100%
• Maximum Weight of a Stock: 5%
• Total number of Vanguard ETFs: 0-6
• Weight of ETF Holdings: 0%-75%
• Maximum Weight of an ETF: 25%
• Benchmark: Bloomberg US 2500 (Small-Mid) Index
• Annualized Alpha: 1%-3% over full market cycle
• Annual Portfolio Turnover: 10%-40%
• Active Share: 50%-80%
• Standard Deviation of Returns: In line with broad Small and/or Mid Cap Index ETFs

Level 1 – Valuation: Traditional Valuation Measures, Enterprise Value² Valuation Measures, Peer & Market Comparisons, Intrinsic Valuation | Margin of Safety & Other Valuation Measures that take into account Growth & Profitability.

Level 2 -Fundamentals | Wide-Narrow Moat: Strategy & Competitive Position, Profitability, Growth, Intangibles, Financial & Balance Sheet Strength, ESG and other Fundamental Analysis considerations to evaluate overall Quality | Assess long to short term prospects for sustained competitive advantage.

Level 3 – Business Momentum | Momentum & Catalysts: Business Improvement through increased revenue, earnings & other measures of improving operating performance while meeting or exceeding expectations. And/or positive stock specific Catalysts that may lead to sustained Price Momentum & outperformance versus the market. Consider potential Price Momentum Velocity probabilities along with % upside to Target Price.

Level 4 – Target Price & Weighting in Benchmark: Determine Target Price: Base Case % Upside and also estimate Best & Bear Case Targets. Assess stock specific weight within the Benchmark and consider the position size degree of overweight or underweight active share based on given specific risks & conviction.

Within the “4-Levels” – The following 6 key types of risk are inherently and/or directly assessed and taken under consideration as part of the ongoing Buy|Hold|Sell decision process as well as the position size within the portfolio:

• Business Risk – External/Operational Threats that may prevent a company from achieving its goals.
• Financial Risk – Not being able to meet financial obligations including credit risk and loss of profits.
• Valuation Risk – Uncertainty of the Value of investment both in variability and magnitude.
• Earnings Risk – Uncertainty of Earnings expectations being met both in variability and magnitude.
• Liquidity Risk – How easily a security can be bought or sold in the market and converted to cash.
• Volatility Risk – Volatility of the price of a security as a result of a change in an investment/risk factor.

• Internal & External Investment Universe Screening on Value, Fundamentals, Quality, Momentum Factors (V,F,Q,M) & Other Criteria
• Fundamental Analysis & Investment Research (Internal & External)
• Define Target Price | Intrinsic Value with Sell Discipline related to success in achieving Target Price or weakening or reversal of any of the “4-Levels” resulting in a Hold|Trim|Sell Decision.
• Individual Stock Position Sizing & Portfolio Construction based on % Upside to Target Price, Valuation, Quality & Growth, Momentum, Risk Assessment, Conviction, Active Share and Liquidity resulting in ongoing Buy|Add|Hold|Trim|Sell Decisions.
• Portfolio Monitoring & Management of Individual Securities & Maintain Favorable Total Portfolio Characteristics.
• Disciplined Risk Management through the “4-Levels” of Stock Selection, Assessment of Stock Specific Risks, Diversification Guidelines, Individual Stock Position Sizing and Sell Discipline.

Key to ABCS’s Investment Process efficiency is the Internal & External Investment Universe Screening from multiple sources on Value, Fundamentals, Quality, Momentum (V,F,Q,M) as well as company comparisons within industry screening & other sources. Idea generation also comes from a network of Portfolio Managers, Hedge Fund Managers & Research Analysts within the Investment Management Industry including firms focused on independent fundamental research, the sell side and the buy side. As part of ABCS’s Investment Process, Internal research and validation of procured outside research is the most important part of the Process, resulting in an approach that consistently has both favorable portfolio characteristics (V,F,Q,M) and a high probability for success. Relying on experienced & skilled judgement while seeking an analytical edge rather than emphasizing significant effort to gain an informational edge. Company filings of 10K’s, annual reports, 10Q’s, Websites with Investor presentations, Earnings Releases & Conference Calls as well as direct contact with management, when necessary are the most important sources of information.

The Investment Management industry standard Bloomberg Professional Services is a very important tool to the Investment Process for information, analysis, monitoring and managing the portfolio. Morningstar Direct also has an important portfolio management, analysis & attribution role. Bloomberg US 2500 & US 500 Benchmark/Indexes are provided and licensed from Bloomberg Index Services Limited. They provide an excellent quality, single source for all investment market benchmarks and are highly comparable to those provided by Russell and Standard & Poor’s, respectively.

All Buy|Add|Hold|Trim|Sell decisions, Target Prices and Weightings in the Portfolio are based on the independent analysis & judgment of the focused 1–3-person Portfolio Manager / Analyst Team through the disciplined repeatable process with 30+ year origins that has a high probability of attractive portfolio characteristics and consistent investment performance.

Vanguard Group, headquartered in Malvern, Pennsylvania was founded in 1975 and is owned by its fund holder clients with $8+ trillion in AUM in 2023. Vanguard offers mutual funds & 82 total ETFs of which 32 are US equity index ETFs including the 6 primary Small & Mid Cap CRSP equity index ETFs that are part of ABCS’s Investment Strategy.

2013 – Vanguard changed the Index Provider to their Small, Mid, Large & Total US Market ETFs to CRSP Equity Indexes

CRSP – Center for Research in Stock Prices founded in 1960 is an affiliate of the University of Chicago’s Booth School of Business and provides CRSP Market Indexes.

The CRSP US Equity Index methodology is considered to be the strongest among other prominent index providers by sophisticated investors, academics, and others. Vanguard adopting these indexes in 2013 along with very low expense ratios has brought tremendous growth in AUM and trading volume to these ETFs. The 6 Vanguard Small Cap & Mid Cap CRSP Equity Index ETFs (VB, VBR, VBK, VO, VOE, VOT,) are ideal for ABCS’s Strategy covering the bottom 30% of the US market with nearly no overlap between Small & Mid. The Small Cap CRSP Equity Index covers the 98th to 85th percentile and the Mid Cap CRSP Equity Index covers the 85th to 70th percentile of the total US market by market cap weighting.

The Vanguard Small Cap & Mid Cap CRSP Equity Index ETF tickers, # of stocks, fees and AUM are provided below:

As of 09/30/2024

ABCS-Alpha Blue Capital US Small-Mid Cap Dynamic ETF allows for a Dynamic 0-75% portfolio weighting in the 6 Vanguard Small & Mid Cap CRSP Index ETFs. At the launch of ABCS, the weighting of the ETFs in the portfolio was 35% in 4 of the ETFs as follows: VO: 10%, VOE: 10%, VBR: 10%, VB: 5%. The weighted annual cost to implement this Dynamic Vanguard ETF strategy for ABCS ETF shareholders is 0.02%. Depending on the weighting and the ETFs, the cost can fluctuate from 0.0% to 0.05% with investment performance for ABCS net of these costs and net of the current annual ETF fee of 0.40%.

ABCS-Alpha Blue Capital US Small-Mid Cap Dynamic ETF Strategy benefits from the efficient ETF Structure – Intraday secondary market trading, creation/redemption process and related tax efficiencies. As well as Low Expense Ratio, Value-Focused & Centered Strategy, Disciplined Investment Process & Risk Management, Dynamic Strategic & Tactical Security Selection of Stocks & Passive Equity Index ETFs for Size (Mid Cap & Small Cap) and Style (Blend, Value, Growth).

We believe ABCS is ideal for taxable and tax-exempt individual investor accounts and ultimately for Family Offices and Institutional Investors as AUM grows that would benefit from greater exposure to the bottom 30% of the US Market by market weight from a diversification and enhanced investment return opportunity. Some Investment applications of ABCS-Alpha Blue Capital US Small-Mid Cap Dynamic ETF are as follows:

• Stand Alone basis for Active/Passive US Small-Mid Cap exposure.
• Part of a US Small-Mid Cap Multi Manager mandate (Active and/or Passive)
• Passive Equity Investors in the S&P 500³ and/ or Total US Market
• US Large Cap biased Active and/or Active/Passive Investors
• Private Equity and/or Private Business Owners.
• Part of a Global Equity Mandate

The evolution of ABCS was a result of 4 separate but related paths over time:

1. The active equity Philosophy, Strategy & Process that began with the development of the Dynamic Equity Fund by a former Partner/colleague in the 1980’s, the Small & Small -Mid Cap strategies developed & managed at Boston Partners beginning in 1995 – validating advantages of a broader Small-Mid Cap mandate and the development of the Alpha Blue Alternative Equity Strategy beginning in 2010 –that formally added Quality (V,F,Q,M) and began investing in Vanguard CRSP Equity Index ETFs.
2. The Fama-French published research work in 1992 & 2015 on Value, Size & Quality.
3. Alpha Architect’s founding in 2010 & ultimately transitioning to also provide an ETF white label service through its EA Series Trust (ETF Architect) beginning in 2014.
4. The evolution of ETFs that began with Vanguard offering an S&P 500 Index mutual fund in 1976, then the first ETF offered in SPY in 1993 also tracking the S&P 500 Index. In 2013 Vanguard transitioning its primary Small & Mid Cap ETFs to track CRSP Equity Indexes and becoming part of ABCS’s investment strategy.

The more complete timeline culminating in ABCS-Alpha Blue Capital US Small-Mid Cap Dynamic ETF being launched in 2023 is as follows:

1960 – Center for Research in Security Prices (CRSP) established by University of Chicago Professors through a grant funded by Merrill Lynch.

1975-1976 – Vanguard founded & launched the first S&P 500 Index Mutual Fund.

1980’s-1995 – Dynamic Equity Fund (DEF) developed for Institutional Investors at The Boston Company Asset Management. As well as an affiliated Equity Hedge Fund with bottom-up security selection: Value, Fundamentals, Momentum (V,F,M).

1992 – Fama French’s 3-Factor Model research work published (University of Chicago) – The Small Cap Factor and Value Factor added to the Market Risk Factor outperforms the Market.

1992 – Vanguard launched Total US Market Mutual Fund – 2013 transitioned to CRSP Index⁴.

1993 – First ever ETF launched (by State Street Global Advisors) S&P 500 Index ETF – SPY.

1995-2022 – Premium Equity, Small & Small-Mid Value Strategies for Institutions at Boston Partners upon Founding.

1998-2022 – Small-Micro Cap Value Mutual Fund (Investor/Institutional Share Classes) launched at Boston Partners.

2000 – iShares launched S&P 500 Index ETF – IVV.

2000-2001 – iShares launched Russell 2000 (IWM), Russell Mid (IWR), Russell 1000 (IWB) ETFs.

2001 – Vanguard launched Total US Market ETF – VTI – 2013 transitioned to CRSP Index.

2004 – iShares launched S&P Total US Market Index ETF – ITOT.

2010-2022 Alpha Blue Capital L.P. | Alpha Blue Alternative Equity Hedge Fund founded while at Boston Partners: Bottom-up Security Selection – Value, Fundamentals, Quality & Momentum (V,F,Q,M).

2010 –  Center for Research in Security Prices (CRSP), an affiliate of the University of Chicago’s Booth School of Business launches newly developed CRSP Equity Indexes – including Value & Growth Indexes.

2012 -2013 – Vanguard Small Cap ETFs (VB, VBR, VBK) & Mid Cap ETFs (VO, VOE, VOT) transitioned to CRSP Equity Index ETFs.

2014 – ETF Architect launches its first ETF on its EA Series Trust ETF platform.

2015 – Fama French 3-Factor research work in 1992 extended to a 5-Factor Model adding Quality Factors. Others followed that the Momentum Factor be considered as well.

2021 – Alpha Blue Alternative Equity Strategy begins investing in Vanguard CRSP Equity Index ETFs.

2022 – Alpha Blue Capital L.P. | Alpha Blue Alternative Equity Strategy spun out to Alpha Blue, LLC.

2023 – ABCS-Alpha Blue Capital US Small-Mid Cap Dynamic ETF launched by Alpha Blue, LLC. Bottom-up security selection: Value, Fundamentals, Quality, Momentum (V,F,Q,M) with the flexibility to integrate Vanguard Small & Mid Cap CRSP Equity Index ETFs.

EA Advisers, based in the Philadelphia area is the adviser for ABCS on their industry leading-value white label ETF platform EA Series Trust (ETF Architect). EA Advisers is also providing quantitative consulting and monthly portfolio characteristics analysis to streamline ABCS’s Active Equity Investment Process and its “4-Levels” of bottom-up stock selection based on Valuation, Fundamentals & Quality, Business Momentum & Catalysts and establishing Target Prices.

Wesley Gray (University of Chicago, PhD Finance)

Jack Vogel (Drexel University, PhD Finance)

Alpha Blue Capital