Review key aspects of our approach to portfolio management and present some details on how we research equity managers, manage fixed income portfolios, and source direct real estate investments.

1. INVESTOR UPDATE
2013
Park Street Financial Group
Park Street Financial Group (PSF) is a private, objective, Registered Investment Advisor which manages
CONTENTS portfolios of public equities, fixed income, and commercial real estate for both individual and
institutional investors. We focus on strategy, investment selection, and holistic reporting to support
Our Approach the decision making process.
Asset Classes
Passive v Active Investing In this Investor Update I wanted to review a few of the key aspects of our approach to portfolio management and present
some details on how we research equity managers, manage fixed income portfolios, and source direct real estate investments.
Finding Good Managers
Fixed Income Portfolios
Our Approach
Real Estate Investments
PSF’s approach to portfolio management is modeled after top university endowment management
practices. We take a long-term, methodical approach to investing and believe this will yield more
consistent results. We do not invest in hot stocks nor do we attempt to time the market. Comparatively
we are kind of boring when standing beside stock jockeys or the hot hedge fund of the day. Historical
analysis tends to support a long-term strategy overwhelmingly. In a study by Charles Ellis1 he says that
market timing represents a loosing strategy.
“There is no evidence of any large institutions having anything like consistent ability to get in when the market is low and
get out when the market is high. Attempts to switch between stocks and bonds, or between stocks and cash, in anticipation
of market moves have been unsuccessful much more often than they have been successful.”
Three basic tenets form the foundation of our investing strategy. First, we believe smart diversification
helps reduce risk and achieve more consistent returns. Second, although we are skeptical of active
management, we will employ active managers where we believe the chance for market outperformance
is good and when our research surfaces exceptional skill. Finally, we will default to passive investing
when we have the option and when good managers can’t be found.
Asset Classes
Separating investments into different asset classes and studying their relationships is one of the key tools
that sophisticated investors use. It enables us to better leverage market knowledge to improve portfolio
performance and reduce risk. A few examples of different asset classes are bonds, stocks, and real
estate. We separate them into classes because as groups they behave differently from each other as
economic conditions change. Figure 1 shows a list of the major
asset classes we use along with their expected real returns and
standard deviations. Real returns are adjusted for inflation. Asset Real Standard
Class Return Deviation
History is used to help understand the relationship between
asset classes and determine if classes are correlated in any way. Absolute 6.0% 10%
Return
If two classes are positively correlated with each other then we
can expect them to move in the same direction together. If they Domestic 6.0% 20%
are negatively correlated then we can expect them to react Equity
inversely, from each other, to changes in economic conditions. Fixed
Of course between theses two extremes is zero correlation 2.0% 10%
Income
which says, when one asset class moves we can’t make any
assumption about how the other class will move. Emerging 8.0% 25%
Equity
This is very valuable knowledge indeed. Imagine we want to Real
invest in two investments for a long term however, they are very 6.0% 14%
Assets
volatile. They could gain or loose 20% of their value in any
Private
given year. If we combine them into a portfolio and they are Equity 11% 28%
negatively correlated then their movements will have a
canceling effect on each other. That is, the movement of the Figure 1. Asset Classes and their
expected returns and standard
portfolio will be a lot smoother (i.e. less volatile) than either one deviations.
of the individual investments.
1 Charles D. Ellis, “Winning the Loser’s Game” Timeless Strategies for Successful Investing, 3d ed.

2. INVESTOR UPDATE
2013
Correlations between asset classes are expressed through correlation
U.S. Fixed Emerging Absolute Private Real
values which are calculated using historical data. Savvy investors Equity Income Equity Return Equity Assets
have learned that relying purely on history to help forecast the
future is only so good. So to improve the effectiveness of using U.S. 1.00
Equity
correlations as a tool we modify correlation values to reflect our
assumptions of future economic, political, and market conditions. Fixed 1.00
Income
For example, many investors believe as Emerging Markets become
more developed they will tend to become more positively correlated Emerging 1.00
with the developed world. This will in turn reduce some of the Equity
benefit of diversifying across Emerging Markets and will tend to
Absolute
drive up the expected volatility (aka risk) of a portfolio. Return
1.00
The table in Figure 2 shows our assumptions of changes in Private
Equity 1.00
expected correlation between different asset classes. Red, up
pointing arrows indicate that we expect asset class pairs to become Real 1.00
more positively correlated. Down facing green arrows indicate the Assets
pair is expected to become less positively correlated.
Figure 2. Expected changes in correlation between different asset
class pairs. Data provided by Yale Investment Management Office.
ASSET CLASS CLASS INDEX ETF Passive versus Active Investing
TICKER
Domestic Equity
Passive investing in a market means to invest in a broad
Large Cap Equity basket of securities which represent that entire market and only
US Large Core Passive Russell 1000 IWB
trade when a security is no longer considered a member of that
market. Passive Investing means you are not trying to guess the
US Large Value Active Russell 1000 Value IWB
winners or losers or trying to time when to buy or when to sell.
US Large Growth Active Russell 1000 Growth IWF
ETFs (Exchange Traded Funds) are the most common passive
Small Cap Equity
investment. They are are basket securities, commonly run by a
US Small Cap Russell 2000 IWM
computer, which simply follow market indexes. ETFs are very
US Small Cap Value Russell 2000 efficient, low cost instruments. Today there are thousands of
US Small Cap Growth Russell 2000 them and at least one for every index which tracks publicly
Micro Cap Equity traded markets.
US Micro Cap Russell Micro Cap IWC
Foreign Equity Figure 3 shows the ticker symbol for each ETF we use. Each
Developed Int’l Equity ETF tracks some index. For example, IWB tracks the Russell
Developed Lg Cap MSCI ACWI ex. US ACWX 1000 index. SPY tracks the S&P 500 index.
Developed All Cap MSCI ACWI ex. US Active investment management means a person is making
Developed Small Cap FTSE Developed Sm Cap ex. US IFSM the investment decisions and is typically trying to outperform an
Emerging Markets index. The investment manager relies on research and
Emerging Markets MSCI Emerging Markets EEM experience to make decisions on what and when to buy and
Fixed Income then when to sell.
Fixed Income
Taxable Fixed Income BarCap Intermediate Govt./Credit GVI When we have the option of a passive vehicle for an asset class
Cash
and we choose an active manager then we are expecting that
Absolute Return
manager to do better than the passive vehicle. Essentially, there
Absolute Return
is an implicit mandate on that manager to outperform the asset
class as a whole. We are expecting him/her to provide enough
Absolute Return S&P 500 SPY
additional value to cover his costs and give us some excess
Hedged Equity
return. In our final analysis we are looking for strong indicators
Hedged Equity
which support a managers ability to meet or exceed that
Hedged Equity S&P 500 SPY
mandate. If we don’t find that support we choose a passive
Real Assets
route.
Real Assets
Real Estate Cohen & Steers Realty Majors ICF
Finding Good Managers
Figure 3. Filters applied to Emerging Markets managers.
There are literally thousands of money managers of publicly
traded securities. Managers range from small one or two person
shops to large teams of analysts. Some are very focused
whereas others may diversify across asset types. Filtering

3. INVESTOR UPDATE
2013
through this ever expanding, changing pool of managers
can be very time consuming and nerve racking without a Filter Metric Description
quantitative based process and good tools.
Ratio of excess return divided by the variability
Our process has two stages. The first stage produces an
of the portfolio. Excess return is equal to the
“A” list of managers for each asset class. We start with a portfolio return minus the return on a short term
pool of 29,000+ public funds, segregate them by Sharpe Ratio > 40%
risk free bond like a 6 month US Treasury. In
investment focus and strategy and then begin to apply short its the return generated by taking on risk
filters. The filters are designed to eliminate the low divided by the risk measured as volatility.
quality managers. Figure 4 shows some of the metrics
we use to filter Emerging Markets managers.
Ratio of Managers Return to a market
Sharpe Ratio - is a measure of how much additional benchmark during periods of rising markets.
Upside Capture
return an investment has been generating for the > 100% Measures a managers performance in up
Ratio (5 Yr)
amount of measured volatility. For riskier investments markets. Greater than 100% means the
manager returned more than the asset class.
like Emerging Markets stocks the Sharpe Ratio tends to
average lower than for riskier investment types. We like
this ratio because it shows good market intelligence. Ratio of Managers Return to a market
Managers who can generate equal or more return and benchmark during declining periods. Measures
do that with less risk tend to be smarter and execute Downside Capture < 100% a managers performance in up markets. Greater
Ratio (5 Yr)
better than the rest. than 100% means the manager returned more
than the asset class.
Upside and Downside Capture Ratio - compares a
manager to his benchmark in both up and down Figure 4. Filters applied to Emerging Markets managers.
markets. For us to invest with a manager we look for him
to perform better than the benchmark in up markets
which means his capture ratio should exceed 100% of the
market. In down markets we look for managers to not loose as much and therefore drop less than 100% of the market.
“A” List 2
Figure 5 below shows a small sample of an A-List of managers. This list helps us contrast an investment with its benchmark. For each
metric a value is given for the investment and for the benchmark. The Trailing Return columns show which one returned more the
investment or the benchmark. If the investment did better then the value is positive. If the benchmark outperformed the investment
Manager Analysis A-List Annual Returns Trailing Returns
Investment Ticker Return Return Return Std. Dev Std. Dev 2011 2010 2009 2008 2007 2011 2010 2009 2008 2007
Symbol (YTD) (3Yr) (5Yr) (3Yr) (5Yr)
Emerging Markets
Eaton Vance Parametric EITEX 13.6 6.5 (0.1) 19.7 27.2 (18.1) 23.3 68.2 (51.0) 40.2 0.8 6.8 (0.7) (2.1) 7.0
iShares MSCI Emerging EEM 10.3 3.9 (1.7) 24.3 30.3 (18.8) 16.5 68.9 (48.9) 33.1
Fixed Income
PIMCO Total Return PTTRX 9.1 7.7 8.9 3.4 4.3 4.2 8.8 13.8 4.8 9.1 (1.8) 3.4 11.9 (3.4)
iShares Barclays Interm GVI 3.1 4.8 5.6 2.4 4.2 6.0 5.5 2.0 8.2 -
Figure 5. A-List example of managers for Emerging Markets and Fixed Income asset groups. Trailing returns shows differences with the
benchmark ETF for each asset class.
then the value is shown in red. For example, PIMCO Total Return fund outperformed its benchmark in 2009 by 11.9 more percentage
points and underperformed by 3.4 less percentage points in the previous year.
Each quarter we update the A-List with new managers who have surfaced from the first stage of filtering (typically each asset class will
have one to five managers in the A-List). We then look for how well our select manager is performing relative to the benchmark and
the other managers. This is where we make investment decisions, whether to continue with a manager or to replace him with another
manager or with an ETF for the asset class. The decision is mostly quantitative driven however, its also balanced against capital gains
tax implications and whether we believe a manager will recover lost ground over the next six to twelve months.
2 Each quarters refined A-List can be downloaded from our website.

4. INVESTOR UPDATE
2013
Fixed Income Portfolios
For some institutional and individual clients PSF manages low risk fixed income portfolios A Few Key Points on CDs
in separate accounts 3. This practice focuses on strategies which maximize return while
We only buy CDs issued by FDIC
meeting the policy driven risk mandates of treasury cash equivalent accounts, reserve
insured banks
funds, foundations, endowments, and some trust accounts. We use “traditional” CDs which have
Fixed income investments like certificates of deposit (CDs), treasuries, municipal bonds, fixed interest rates.
In order to maximize FDIC insurance
and corporate bonds typically pay a dividend and then return the principal at maturity. As
we stay under the $250K FDIC
with all investments there is risk. All fixed income investments decline in value as interest insurance limit per insured bank.
rates rise. Therefore, the risk is in selling when rates are rising rather than holding to
maturity. In addition, they all have loss of principal risk except for those which are secured
by the Federal Government namely CDs and treasuries. As is evident in the markets today
even U.S State municipalities can default on debt.
Our practice focuses on strategies which meet a “preservation of principal” policy requirement. This restricts our investments to
“traditional” CDs and U.S. treasuries. However, even with a limited selection of investments, higher returns can still be engineered by
spreading investments over longer maturities. We call this “maturity laddering” and its an effective strategy when cash requirements
are well understood. Following is a fixed income laddering example which demonstrates this point.
Condominium Reserve Fund - Strategy
1YR CD 2YR CD 3YR CD 4YR CD 5YR CD Bank Invested
Invested $200,000 $200,000 $200,000 $300,000 $300,000 GE MONEY BANK $154,175
Yield Range .72% - .845% .97%-1.1% 1.31%-1.48% 1.62%-1.73% 1.88%-2.29% GOLDMAN SACHS BK $196,453
GE CAP FINL INC $181,706
Client: Condominium Reserve Fund. $147,145
GE CAPITAL RETAIL BK
Fund: $1.4 million ALLY BK $47,931
DISCOVER BANK $168,343
Results: Using laddering we achieved a 1.47% annualized return versus the .25% return they had
been receiving in a money market fund. AMER EXP CENT BK $51,426
MORTON CMNTY $8,568
Strategy: Based on the results of a current reserve study we determined the annual cash
requirements for capital expenditures over the next 5 years. We then laddered the investments REPUBLIC BANK $10,589
across CDs with maturities ranging from 1 to 5 years in the amounts shown above. BARCLAYS BANK NA $48,521
For this account we purchased over 1000 small CDs. It sounds like a lot but the yield on smaller BMW NA $52,607
denominated CDs is typically slightly higher than for the larger ones. And there are no transaction
OHIO VALLEY BANK $8,322
fees.
LEHMAN COML BANK $37,306
Note: While 1.47% is not a lot of return it is six times what was being achieved. Using this strategy
MIDFIRST BANK $11,314
over time through different interest rate regimes does maximize return while not compromising
principal. CAPITAL ONE $95,917
Real Estate Investments
A strategic focus of our group is sourcing and managing indirect and direct investments in commercial real estate for both capital
growth and income needs 4. We focus on finding, building relationships with, and ultimately investing in highly skilled real estate
developers. Finding such developers with the solid financial practices we seek is very hard indeed. Most are small private companies
who do not advertise themselves.
3 Within clients diversified investment accounts we also invest in fixed income. However, in those cases the investment is part of a balanced risk/return strategy
that does not typically carry a mandate to preserve principal. Therefore, we pursue a little higher return by investing with select managers like PIMCO. These
managers invest in all different types of bonds like corporates, munis, and other countries government issued bonds.
4As with fixed income, within clients diversified investment accounts we also invest in real estate, typically through REITs or funds of REITs. In these accounts
REITs are used strategically to balance and to diversify.

5. INVESTOR UPDATE
2013
Through creative development and re-marketing efforts skilled developers of real estate can add
significant value to properties resulting in compounded ROI. One of the developers in which we have CONTACT
invested has consistently grown equity at 20% or higher over 20+ years. Because real estate tends to be INFORMATION
driven in large part by local economics a developer's skill comes from significant experience and
relationships in a specific market. A developer’s skills in finance are also a major factor in long term
Park Street Financial Group
success. The root cause of many developer’s failures is bad financial practices.
115 Park Street
When searching for new asset managers we look for developers, Suite 200
Vienna, Virginia 22180
With a solid track record of entrepreneurial investing i.e. acquiring under-valued, under-
performing, un-loved, properties and increasing their valuation through creative, experience Office: +1 703 662 1283
guided, redevelopment and re-marketing efforts. Fax: +1 703 562 8405
Email: info@psfgp.com
Who focus on the Washington D.C. metro area including Northern Virginia and Baltimore, http://www.psfgp.com
Maryland and mainly the primary sub-markets are Arlington, Alexandria, and Vienna Virginia.
Who use leverage conservatively and creatively to enhance investment performance and to enable
sufficient portfolio diversification, mitigating idiosyncratic risk.
Who minimize performance impairment from lease defaults by following a strict tenant due-
diligence process. Tenant due-diligence is essentially a risk/return analysis for each potential tenant
e.g. who has a higher probability of surviving an economic downturn.
Sourcing opportunistic private real estate investments for our clients is a unique part of our practice.
We do this because we believe strongly in the long term potential and inflation mitigating aspects of
the asset class and we believe good, niche focused developers can outperform the market by a
significant margin. However, because of the inefficiencies in commercial real estate and the
complexities in structuring private investments investors must have a long-term focus. Typical
investments take 1 to 2 years to structure and then 5 to 8 years to mature. Below highlights a recent
investment in a redevelopment project located in one of the prime submarkets of Washington, D.C.
Arlington Hotel - Redevelopment
Strategy Value Added - Capital Growth
Property Type Hotel
Location Arlington VA. Prime sub market of D.C.
Min Investment $125,000
Maturity Max 8 years with 2 optional years.
Expected ROI 25% compounded.
Hotel rendering along Wilson Avenue.
Building is designed to step down in the back
Term Closing July 2011
in order to blend better with the adjoining
neighborhood.
This was an entrepreneurial investment in one of the fastest growing regions of the U.S. The parcel and existing
retail space are in a prime spot in Arlington, Virginia located just a short walk from a major metro line, providing
easy access to Washington D.C. and the metro area. The developer had stabilized the existing retail space which
provided sufficient cash flow to cover the existing note. Our investment entered the project during the early
redevelopment stage when significant entitlement work was underway. Entitlement risk was still there which is
typically a risk institutional investors will shun. Because of our deep knowledge of the developer, the project, and
the market we viewed the risk as a lot less significant than others would have.
- Thomas Morris
Managing Director

6. INVESTOR UPDATE
2013
Thomas Morris is an instructor of finance and adjunct professor at George Mason University, an
independent finance consultant, and owner of Park Street Financial Group, a registered investment
advisory based in Vienna, Virginia. Thomas consults on matters of capital formation, investment strategy,
and valuation. He has consulted to high-net-worth individuals, start-up technology companies, asset
managers, and organizations operating as fiduciaries of capital. Through Park Street Financial Group
Thomas manages portfolios for a small group of private investors. A focus of his practice is sourcing,
valuing, and structuring off market real estate investments in prime sub-markets of Washington D.C.
At George Mason University Thomas teaches course work in real estate finance. He has also taught
Financial Planning to graduate medical students at George Washington University and has delivered a
series of courses on investing and risk analysis at the Ollie Osher Institute. Prior to forming Park Street Financial Group Thomas was
a Portfolio Manager with Citigroup Smith Barney where managed portfolios for individual and institutional clients.
Thomas is semi-fluent in German, and holds a Master’s of Quantitative Finance from George Washington University and a Bachelor’s
degree in Physics from Auburn University.