Quarterly Report

Quarter One

December 31, 2011

2011 was not an easy year for investors. Investors in a Buy & Hold strategy had more ups and downs than a typical rollercoaster. Hanlon clients benefitted from our Tactical Asset Allocation strategies and experienced considerably less volatility than the major domestic and international equity indices. By being a Hanlon client, you should have experienced a lot fewer sleepless nights during the year. Late in the second quarter of 2011 our research predicted troubled investing times ahead, so we allocated most accounts defensively by investing in money market funds in mid-June. We wrote in our second quarter report, dated June 30, 2011, that “The upcoming third quarter is typically a sluggish trading quarter and we remain prepared for the prospect of continued volatility”. That forecast proved to be accurate and we positioned portfolios even more conservatively as the third quarter developed, with most accounts moving 100% into money markets.

After investing conservatively for most of the third quarter, avoiding what turned out to be treacherous markets, our research identified improved market conditions and we began to move from money market funds to equity and bond investments in mid-to-late October. Client accounts remain fully invested today but with a tilt towards caution. These Tactical moves did not necessarily result in improved returns versus Buy and Hold in 2011, but they did reduce volatility, and therefore improved risk-adjusted returns, providing you with less anxiety. Later in this Report I will explain what a “risk-adjusted return” means to you and the merits of Tactical Asset Allocation versus Buy and Hold.

The stock market’s behavior in 2011 can best be summed up by noting two anomalies:

The S&P 500 Index started the year at 1257 and ended the year at 1257, with the actual return being -0.003%. The S&P 500 Index has never had such a small calendar year price change – basically zero change without including dividends. Major international equity markets fared much worse, with returns ranging from -5% to -22%. In 2011 we kept your account exposure limited in international equities and its associated downside. (Please note that if you are in our Managed Income Allocation you never have any exposure to equities, domestic or international).
As shown on the next page in Chart 1 and Table 1, the S&P 500 Index experienced thirteen countertrend moves of approximately 7% or greater, with the average absolute move equal to 9.33%. In our review of the historic activity of the S&P 500 Index we could not find a similar high countertrend volatility period. Essentially, every five weeks or so in the calendar year 2011, the stock market decided to reverse course and head in the opposite direction by an average of greater than 9%. We expect this to subside in 2012.

Chart 1 - 2011 S&P 500 Index / 13 Countertrend Moves of Approximately 7% or Greater

Table 1 - 2011 S&P 500 Index / 13 Countertrend Moves of Approximately 7% or Greater

	Start Date	End Date	% Move	# of Days
1	12/31/2010	02/18/2011	6.79%	49
2	02/18/2011	03/16/2011	-6.41%	26
3	03/16/2011	04/29/2011	8.49%	44
4	04/29/2011	06/15/2011	-7.20%	47
5	06/15/2011	07/07/2011	6.94%	22
6	07/07/2011	08/08/2011	-17.27%	32
7	08/08/2011	08/15/2011	7.60%	7
8	08/15/2011	08/19/2011	-6.72%	4
9	08/19/2011	08/31/2011	8.49%	12
10	08/31/2011	10/03/2011	-9.82%	33
11	10/03/2011	10/28/2011	16.91%	25
12	10/28/2011	11/25/2011	-9.84%	28
13	11/25/2011	12/07/2011	8.83%	12

Average Number of Days between Each Countertrend Move = 26 days

Average Absolute Percentage Countertrend Move = 9.33%

Risk-Adjusted Returns

Investors and their advisors have one ultimate goal - to achieve acceptable risk-adjusted returns. The term risk-adjusted consists of two components. One is the total return and the other is the risk that you have to assume to achieve that total return. Total return is the net of gains, losses, income and expenses. The risk that the investor has to assume is typically measured as the volatility of the portfolio. The volatility is calculated and reported by various methods. Two of the most common investment industry methods are standard deviation and beta. Standard deviation defines a “standard” or “normal” movement around the average. The larger the standard deviation, the more volatile a portfolio. Beta measures the movement of a portfolio and describes how it relates to the movement of another portfolio, security, or index. Beta is very often used to discuss a portfolio’s movement as to how it relates to the S&P 500 Index.

At Hanlon, we find standard deviation and beta to be of some merit but we also believe the typical investor measures risk by maximum drawdown. Maximum drawdown is the measure of the maximum drop in account value from the highest peak to the lowest bottom, before reversing course again, over the entire account history. We believe that the most important element to achieving solid risk-adjusted returns is avoiding large maximum drawdowns. Not only does the math work in the investor’s favor, but providing some counter-measures to large drawdowns, and avoiding the resultant negative psychological impact on the investor, is equally as important.

Because maximum drawdown is not widely accepted by many in the financial industry the merits of moving portfolios to 100% money market funds occasionally is also not widely accepted. Tactical Asset Allocation strategies applied to portfolios can be an incredibly valuable method of achieving improved long-term, risk-adjusted returns.

On the next page in Table 2 is an illustration showing the benefits of Tactical Asset Allocation. In this illustration we compare the hypothetical return and risk (measured as maximum drawdown) that investors would have achieved if they had invested in a Buy and Hold strategy in the S&P 500 Index versus investing in a Tactical Asset Allocation strategy in the S&P 500 Index. The Buy and Hold strategy stays invested in the S&P 500 Index for the entire time period. The Tactical Asset Allocation strategy moves between the S&P 500 Index and a money market fund, triggered by a moving average crossover on the S&P 500 Index.

A moving average takes the prices for a certain number of look-back days, averages them and makes today’s price equal to that average. It "makes smooth" the volatile market price action to give better insight into the trend. The shorter the moving average, the more reactive it is to recent changes in the price of the S&P 500 Index. Table 2 displays the results of a specific strategy using a 50-day moving average and a 200-day moving average against the S&P 500 Index for the twenty three year period beginning 9/1/1988 and ending 12/31/2011. Each time the 50-day moves above the 200-day – indicative of an appreciating market - we buy the S&P 500 Index. Each time the 50-day moves below the 200-day - indicative of a depreciating market - we sell the S&P 500 Index, and invest in a money market fund. This is not the precise method that Hanlon utilizes to manage client accounts, ours is more sophisticated, yet this method illustrates a simple example of the merits of Tactical Asset Allocation; the results can be seen in Table 2 on the next page. Please know these results are not intended to imply any past or future returns. Instead they simply show that there is merit to Tactical Asset Allocation strategies versus Buy and Hold.

Table 2 - S&P 500 Index w/ Dividends / Tactical Asset Allocation using a 50day - 200day Moving Average Crossover versus Buy and Hold / Sept. 1, 1988 to Dec. 31, 2011

Annualized Return

Total Return

Maximum Drawdown

Tactical Strategy¹ 11.14% 1,076% -20%
Buy and Hold Strategy² 9.38% 710% -55%

¹The Tactical Asset Allocation results were achieved with only 16 total trades during this twenty three year period, with the most recent buy of the S&P 500 Index occurring on 12/23/2011. ² Further reviews find that the Buy and Hold strategy not only experienced the very large negative 55% maximum drawdown, but it also had many instances of exceeding the maximum drawdown of negative 20%, which was the single worst maximum drawdown for the Tactical Asset Allocation strategy.

Many investors rely on their portfolios for income. Some even make their portfolios their primary income source. Including an annual distribution rate of 4% in the above comparison would show the benefits of Tactical Asset Allocation as even more attractive compared to Buy and Hold because when the portfolio drops considerably the Buy and Hold Strategy must sell at lower prices to meet the 4% annual distribution needs.

Stocks are not the only asset class that can enjoy the benefits of Tactical Asset Allocation. We perform similar activities with bonds and other asset classes in an attempt to achieve acceptable risk-adjusted returns. Today's investors need this type strategy in their portfolios.

As the New Year begins, this is an opportune time to contact your financial professional and schedule a time to discuss your account(s), personal information and any changes that may have occurred to your time horizon and investment objectives. We remain confident in our abilities to navigate these volatile markets. After such a volatile year in 2011 we look forward to a happy, healthy, profitable and low volatility New Year.

Thank you for the opportunity to be of service.

Thank you,

Sean Hanlon, CFP^®
Chairman, CEO and Chief Investment Officer

This Quarterly Report contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Indices are rebalanced monthly by market capitalization. Standard & Poor’s 500 Index (S&P 500) is an unmanaged index of 500 common stocks traded on the New York Stock Exchange that is widely used as an indicator of market trends. The performance of an index does not reflect any fees and charges associated with individual investments or investment advisory accounts. It is not possible to invest directly in an index. Past performance is not a guarantee of future results. There is no guarantee that the views and opinions expressed in this Quarterly Report will come to pass. Investing in the stock and bond markets involves the risk of gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice. Hanlon Investment Management, Inc. (“Hanlon”) has experienced periods of underperformance in the past and may also in the future. Hanlon is an SEC registered investment adviser with its principal place of business in the State of New Jersey. Hanlon and its representatives are in compliance with the current registration and notice filing requirement imposed upon registered investment advisers by those states in which Hanlon maintains clients. Hanlon may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. This Quarterly Report is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by Hanlon with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Hanlon, please contact Hanlon or refer to the Investment Adviser Public Disclosure web site www.adviserinfo.sec.gov For additional information about Hanlon, including fees and services, send for our disclosure document as set forth on Form ADV from Hanlon using the “contact us” link at www.hanloninvest.com information herein. Please read the disclosure statement carefully before you invest or send money.