By ANDREW BARY | December 7, 2009
With bonds fully priced, it may be time to swap into preferred shares, utility stocks and other investments that produce income but offer protection if interest rates rise. Video: Riding the Rate Roller Coaster
TIRED OF THE PUNY YIELDS ON YOUR BONDS? Worried that interest rates and inflation will rise, clobbering their prices? Now may be the time to start moving into high-yielding stocks, while scaling back fixed-income holdings.
Bonds rode the price roller coaster up as interest rates fell. They could take a scary plunge if rates shoot up.
This means buying utility and telecom stocks, which have lagged behind the overall stock market this year, as well as master limited partnerships focused on the transportation of natural gas and oil-related products. Other alternatives to traditional bonds include bank preferred stock and convertible securities.
In contrast to bond yields, many of which are near multi-decade lows, yields on these alternatives often run in the 5%-to-9% range. The underlying investments also offer the potential for capital gains and rising income to offset inflation. In addition, income from most of these investments now benefits from favorable tax treatment.
Chuck Lieberman, chief investment officer at Advisors Capital Management, a Hasbrouck Heights, N.J., investment advisor, calls this "investing for income with growth. This strategy offers growth of income and principal, in contrast with a fixed-income portfolio." Lieberman is partial to master limited partnerships, high-dividend stocks, preferred shares and convertibles. Another alternative to U.S. bonds is foreign sovereign debt, which offers a hedge against a weakening dollar.
Master limited partnerships could be the past decade's quietest investment success, generating annualized returns of 18%, against 15% for gold and about zilch for the Standard & Poor's 500. While the MLP market has rallied sharply this year, major operators like Kinder Morgan Energy Partners (ticker: KMP), Enterprise Products Partners (EPD) and Boardwalk Pipeline Partners (BWP) still yield 7% to 8% and have good growth prospects.
Bill Gross, the managing director of Pimco, the giant bond manager, wrote recently in his monthly commentary that electric-utility stocks looked attractive. He noted that their dividend yields now exceed those on utility bonds, while offering the added benefit of more favorable tax treatment than bond interest. "Growth in earnings should mimic the U.S. economy as it always has, and importantly, utilities yield 5% to 6%, not 0.01%," Gross wrote, the 0.01% yield referring to the pitifully low yields on money-market funds.
The two major U.S. telecom operators, Verizon Communications (VZ) and AT&T (T), have trailed the S&P this year and their shares yield more than 6%. Preferred stock from Bank of America, Citigroup and Wells Fargo yield 8% to 9%. Those yields are down from the teens at the market's bottom in March, but still look attractive, given the banks' improving balance sheets and a recovering economy.
Many investors view the stock market as a minefield and the bond market as a haven. But at very low yield levels, bonds become dangerous. "If there is a little bit of a bubble somewhere, it's in the bond market," Lieberman says.
The "safest" part of the market, Treasuries, seems to be the most overvalued, and high-grade corporate bonds don't look much better. Treasury yields range from just 0.85% on two-year notes to 4.4% on 30-year bonds, while high-grade corporates generally offer 3% to 5%. Federally backed mortgage securities also look unattractive at 4% yields. These securities are apt to return little or nothing after inflation and taxes.
While investors are apt to have their principal repaid if they hold their bonds until they mature, they will suffer losses if rates rise and they sell prior to maturity. As for investors in bond funds, they typically have no guarantee of getting their money back. And the funds often levy stiff management fees on their holdings.
Vanguard is an exception, but even with the help of low fees, its big mortgage and muni funds don't yield much. Both the $37 billion Vanguard GNMA Fund (VFIIX) and the $26 billion Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) yield about 3%. These funds carry annual expenses of less than one-quarter of a percentage point, roughly a quarter of what their rivals charge. It's tough to justify taking a fee of a percentage point for a fund invested in 3% or 4% securities, but many fund companies do.
Low yields haven't prevented a stampede into bond funds, which have had more than $40billion in net inflows during each of the past three months from risk-averse investors who have been pulling money from domestic stock funds.
The Treasury and mortgage markets look particularly vulnerable because they are being supported by the Federal Reserve's keeping short rates near zero and by its purchases of these securities. The Fed's $1.25 trillion program to buy mortgage securities is due to end March 31.
Essentially, bond investors are giving cheap money to American business, the Treasury, new home buyers and overleveraged homeowners. The game may end badly for bondholders because rates are apt to rise in 2010 and 2011 from what appear to be artificially low levels.
The municipal market, a favorite of individual investors, looks overpriced for maturities of under 10 years, where yields are under 3%, and fairly priced for long-term maturities, where yields are around 5%. To get yields close to 6%, investors must buy dicier debt like that of California.
Many investors are chasing the junk-bond market, but the 50%-plus returns seen there this year will be unattainable in 2010, because yields have dropped to an average of 8% from 20% at the start of 2009. Yields on money-market funds are at or near zero, effectively resulting in a confiscation of investor money after inflation.
Real-estate investment trusts have attracted yield seekers, too. But REITs, up nearly 50% in the past 12 months, are no longer a bargain. Green Street Advisors, a Newport Beach, Calif., advisory firm, recently termed them "pricey," in part on high valuations based on earnings relative to the S&P 500. Public-market values of real estate also are high compared with those in the private market. REIT dividend yields are averaging just 4%, and fundamentals in many sectors, including apartments and office buildings, look weak. Net operating income could fall in 2010 for the second straight year.
With all that in mind, here's a look at some sectors that do provide decent yield alternatives to traditional bonds:
MASTER LIMITED PARTNERSHIPS: This $100 billion group is dominated by companies like Kinder Morgan, Enterprise Products and Magellan Midstream (MMP), which transport natural gas, jet fuel, heating oil, gasoline and other petroleum products.
Despite generating some of the best returns of any asset class in the past decade, MLPs are unfamiliar to most investors. That ought to change, because MLPs now provide 7%-to-8% dividend yields, and much of that income is tax-deferred. Dividend growth could run in the mid- to-high-single-digit range in the coming years, resulting in total annual returns above 10%. Kinder Morgan, one of the largest pipeline MLPs, recently said it will pay $4.40 in distributions in 2010, up 5% from 2009's level. Its shares, at 56, yield 7.8%, based on the expected 2010 distribution.
"Think of an analogy to toll roads," suggests Lieberman. "Pipelines are expensive to build, but operating costs are relatively low, which means they generate outstanding cash flow that services debt and finances sizable distributions to owners." Pipelines are utility-like because their rates often are set by federal regulators.
Pipeline shares were slammed in late 2008 because of concern about reduced access to the capital markets. MLPs rely on equity and debt financing for expansion, as they typically pay out nearly all their annual cash flow in dividends. The fears about market access didn't materialize and the stocks have come roaring back with the Alerian MLP Index (AMZ) up 65% in 2009 (with dividends included).
For many large master limited partnerships, 70% or more of their dividends -- technically distributions -- are tax-deferred. That's because dividends usually are far greater than reported net income, largely as a result of noncash depreciation expenses.
Let's say an MLP pays a $2 annual dividend, 80% of which is tax-deferred. An investor would owe income taxes on only 40 cents of that dividend (but the 40 cents would be taxed at regular-income rates, not the preferential dividend rate). The other $1.60 wouldn't be taxed and instead would reduce the investor's cost. If the investor paid $25 a share for an MLP, the cost basis would be reduced to $23.40. Taxes would be paid on the $1.60 when the shares are sold.
Many investors -- particularly the elderly -- simply hold MLP shares, with the intention of putting them in their estates. This essentially results in permanent tax deferral and a muni-like income stream, if the investor's estate isn't subject to federal inheritance taxes. Taxes on the sale of a long-held MLP can be high because an investor's cost basis can drop toward zero after many years of dividends.
MLPs are best held in taxable accounts: they can cause tax headaches in IRAs and other tax-deferred accounts. Investors need to know that they will get an annual K-1 tax form, not a standard 1099, and that can complicate annual filings. Another wrinkle: MLPs often share annual income gains with general partners, or GPs, some of which are publicly traded. This can limit dividend increases. Magellan Midstream has an advantage because it has combined its limited and general partners, meaning there is no GP to cut into the income allocated to the limited partners.
Utilities: Because they're seen as defensive, utility stocks have trailed the market. The Dow Jones Utilities Average has risen just 4% this year, versus a 22% gain for the S&P 500. But investors are warming to utilities, which rose 3% last week.
Until recently, the sector has been held back by various factors, including reduced power consumption, that have dampened profits at Midwestern utilities like First Energy (FE) and American Electric Power (AEP) that have a lot of industrial customers. Another negative has been the plunge in natural-gas prices, which has reduced the price advantage that nuclear utilities like Exelon (EXC) had over gas-fired rivals.
With bonds fully priced, it may be time to swap into preferred shares, utility stocks and other investment that offer protection if interest rates rise, according to Barron's Associate Editor Andrew Bary.
Regulated utilities, such as American Electric Power (AEP), Duke Energy (DUK), PG&E (PCG), Consolidated Edison (ED) and Southern Co. (SO), trade around 13 times projected 2009 profits and roughly 12 times estimated 2010 net, a discount to the S&P 500. "This is a safe level of valuation, and a lot of bad news already is discounted," says Hugh Wynne, utility analyst at Sanford Bernstein. Wynne, who notes that utility dividend yields average close to 5%, favors laggards such as Exelon and FirstEnergy, as well as PG&E.
PG&E, at 43, trades for 13 times projected 2010 profits of $3.42 a share. The other big California utility, Edison International (EIX), also looks appealing, trading near 35, or 10 times next year's estimated earnings. Bulls argue that the company's regulated utility business is worth almost as much as the stock price and that investors effectively are paying little for its independent power division, Edison Mission Group, whose profits have been hit by weak power prices.
As an alternative to individual stocks, investors can buy the Utilities Select Sector SPDR (XLU), an ETF that trades around 31 and yields 4.1%. Several closed-end funds focus on utilities. One is Cohen & Steers Select Utility (UTF), which at its recent price near 15 -- an 11% discount to its underlying net asset value -- was yielding 6%.
TELECOM SHARES: Verizon and AT&T have perked up lately, although their slight losses this year leave them way behind the market. The telecom business faces greater challenges than electric utilities because Americans continue to cut the cord to wireline phones, eroding a once-lucrative business. Yet both companies remain financially solid, trade for low valuations, carry juicy dividends around 6% and are strong players in the wireless market. Reflecting its control of the country's top wireless operation, Verizon, at 32, trades for about 13 times projected 2010 profits of $2.45 a share. AT&T, at 28, fetches 11 times estimated 2010 cash earnings of $2.50, which exclude about 25 cents of goodwill amortization from acquisitions.
Other high-yielders among big companies include major drug companies Bristol-Myers Squibb (BMY), Merck (MRK) and Eli Lilly (LLY), as well as cigarette makers like Altria Group (MO) and Lorillard (LO). They yield anywhere from 4% to 7%.
PREFERRED STOCK: This market was hit in 2008 by multiple shocks, including the bankruptcy of preferred issuer Lehman Brothers, the banking industry's troubles and the government's surprise decision against protecting preferred shareholders of Fannie Mae and Freddie Mac, when Uncle Sam effectively seized those mortgage agencies. Fannie and Freddie preferred trade for about five cents on the dollar.
After bottoming in March, preferreds have surged, with most yields dropping to 6% to 9%. "Preferred stock is subject to the same inflation problem as bonds," Lieberman says. "But yields are significantly higher. That provides sufficient compensation...for the lack of inflation protection."
Citigroup's trust preferred securities, like its Series C, yield more than 9%. Bank of America's 7.25% Series J preferred trades around 21, for a yield of 8.60%, and Wells Fargo's 7.50% Series L preferred trades near 900 for an 8% yield. The Wells Fargo issue has a face value of $1,000, as opposed to $25 for most preferreds.
JPMorgan's preferred has lower yields, just under 7%, reflecting Wall Street's favorable view of the bank. Many foreign banks have issued preferreds; Lieberman likes Barclays, whose preferred yields about 8.5%. Among REITs, the largest preferred issuer is Public Storage, owner of self-storage facilities. Its preferred yields more than 7% and looks pretty safe, given the company's solid balance sheet.
There are two types of preferred. Regular preferred is a senior form of equity, while trust preferred is junior debt and is senior to regular preferred. Therefore it is safer, but it generally yields less. The advantage of regular preferred is that its payouts are taxed at the preferential dividend rate of 15%, while trust-preferred dividends are taxed as ordinary income.
CONVERTIBLE SECURITIES: These hybrid securities, which can be converted into common shares under preset conditions, were battered in 2008 by a weak stock market, the junk-bond market's collapse and forced sales by leveraged convertible hedge funds. But convertibles have risen sharply this year, with Putnam and Fidelity convertible mutual funds up 50% to 60%. The catalysts: the sharp rally in the shares of the generally more speculative companies that issue converts and the junk market's big gains.
This makes for slimmer picking than in early 2009, when investors could get 10% to 15% yields on reasonably solid converts. Be forewarned: It's tougher to buy converts than preferred stock because many convertible bonds are traded in an over-the-counter market where bid/offer spreads can be wide for individuals buying $25,000 to $100,000 of the securities. Convertible funds are a better bet for most investors.
For those willing to do their own work, converts can be an attractive lower-risk alternative to common stock, while offering much of common's appreciation potential.
The money-losing airline industry has needed to raise capital and their converts carry lower rates than regular debt. Issuers include USAirways Group, UAL (parent of United Airlines), Continental Airlines and JetBlue Airways.
Chip maker Micron Technology has a 1.875% issue trading around 85, yielding 5% with a hefty conversion premium of 50%.
One way to play Ford is via its Series S convertible preferred stock, which trades around 36. Ford stopped paying dividends on that issue this year, but some investors are betting the reviving auto maker may resume the payout in 2010 and give investors unpaid dividends of more than $1.50 a share. If Ford resumes the $3.25 annual dividend, the yield would be 9%. The car maker must pay the preferred dividend if it wants to resume a common dividend.
In sum, while hardly anything is as cheap or attractive as it was earlier this year, MLPs, utility stocks, preferred and converts offer appealing alternatives to increasingly unattractive bonds.
Thursday, December 24, 2009
Tuesday, November 24, 2009
Are Bonds the riskiest portion of your portfolio?
Bonds have long been the backbone of the safer, or more conservative, portion of an investment portfolio, and many bond-owning mutual funds have been stellar performers this year. But now bonds are looking riskier. As of November 19, 2009, the yield on ten-year Treasury bonds is 3.3%. The 30-year is not much better, just under 4.2%. The only way investing in those bonds makes sense is if you are convinced inflation will remain low for an extended period of time. Interest rates are so low that they’re more likely to go up than down, and that could undermine bond prices. Not to mention a serious rise in consumer prices which could mean those invested in bonds could lose money. *
Inflation-protected government bonds (TIPS) are expensive too. The five-year offers a real yield of just 0.8%, and even twenty-year TIPS, which are usually a better deal, are only paying out 2% over inflation. *
It's easy to see how this happened. After the trauma of last fall, everyone's been pouring their money into bonds. If you want to sell a bond before the term is up, its price will be determined by supply and demand in the market, and that’s largely governed by changes in prevailing interest rates. Rising rates drive bond values down, falling ones push them up.
Keep in mind that a hold-to-maturity strategy does not eliminate all risk. If rates rise substantially, you can be stuck with an unpleasant choice between sticking with your stingy older bond until it matures, or selling it at a loss to invest in a new bond that’s more generous. Interest rates are currently at an all time low with only one place to go from here…up.
So with short, intermediate, and long-term bonds currently suffering from interest rate, inflation, and market risk, where can investors turn to find the yield they are accustomed to seeing in their portfolio?
We believe Master Limited Partnerships (MLP’s), which are publically traded partnerships on the NYSE and generally involved in the energy sector, are a superior option for income investors. As with any stock listed on a major exchange, information on price trends, charts, bid/ask spread and other data needed for sound investing decisions is far more available than with bonds.
MLP’s can offer investors an attractive expected total return via a high tax advantaged yield plus growth in distributions which have exceeded inflation in every year since 1998. Even during the low yield environment we are currently experiencing, many MLP’s offer a tax advantaged yield between 6%-11%. MLP’s offer separate risks than those found in fixed income securities such as Treasury bonds and FDIC-insured CD’s. Generally MLP assets should be long-lived, generate predictable and stable cash flows and have minimal commodity price risk, but distributions are not guaranteed, and some smaller MLP’s are thinly traded. Each of the energy MLP sub-sectors has its own dynamics, with some more exposed to energy prices, spot rates, and weather risks than others.
In conclusion, MLP’s combine qualities of both bonds and stocks, such as tax advantaged high yield, stepped up cost basis, and daily liquidity. We believe given the current interest rate environment that MLP’s may be a more appropriate risk adjusted investment than other means of income such as bonds and CD’s. Not all MLP’s are created equal, and investors should consult with their investment and tax advisers to determine whether MLP’s are suitable for their circumstances. We consider ourselves experts with regards to MLP’s as we have close to 10 years experience managing the assets in clients’ accounts.
*Financial Quotes provided by Bloomberg
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. Due to the legal structure, tax implications, and tax filings, Master Limited Partnerships (MLP’s), may not be appropriate for certain types of accounts.
Inflation-protected government bonds (TIPS) are expensive too. The five-year offers a real yield of just 0.8%, and even twenty-year TIPS, which are usually a better deal, are only paying out 2% over inflation. *
It's easy to see how this happened. After the trauma of last fall, everyone's been pouring their money into bonds. If you want to sell a bond before the term is up, its price will be determined by supply and demand in the market, and that’s largely governed by changes in prevailing interest rates. Rising rates drive bond values down, falling ones push them up.
Keep in mind that a hold-to-maturity strategy does not eliminate all risk. If rates rise substantially, you can be stuck with an unpleasant choice between sticking with your stingy older bond until it matures, or selling it at a loss to invest in a new bond that’s more generous. Interest rates are currently at an all time low with only one place to go from here…up.
So with short, intermediate, and long-term bonds currently suffering from interest rate, inflation, and market risk, where can investors turn to find the yield they are accustomed to seeing in their portfolio?
We believe Master Limited Partnerships (MLP’s), which are publically traded partnerships on the NYSE and generally involved in the energy sector, are a superior option for income investors. As with any stock listed on a major exchange, information on price trends, charts, bid/ask spread and other data needed for sound investing decisions is far more available than with bonds.
MLP’s can offer investors an attractive expected total return via a high tax advantaged yield plus growth in distributions which have exceeded inflation in every year since 1998. Even during the low yield environment we are currently experiencing, many MLP’s offer a tax advantaged yield between 6%-11%. MLP’s offer separate risks than those found in fixed income securities such as Treasury bonds and FDIC-insured CD’s. Generally MLP assets should be long-lived, generate predictable and stable cash flows and have minimal commodity price risk, but distributions are not guaranteed, and some smaller MLP’s are thinly traded. Each of the energy MLP sub-sectors has its own dynamics, with some more exposed to energy prices, spot rates, and weather risks than others.
In conclusion, MLP’s combine qualities of both bonds and stocks, such as tax advantaged high yield, stepped up cost basis, and daily liquidity. We believe given the current interest rate environment that MLP’s may be a more appropriate risk adjusted investment than other means of income such as bonds and CD’s. Not all MLP’s are created equal, and investors should consult with their investment and tax advisers to determine whether MLP’s are suitable for their circumstances. We consider ourselves experts with regards to MLP’s as we have close to 10 years experience managing the assets in clients’ accounts.
*Financial Quotes provided by Bloomberg
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice. Due to the legal structure, tax implications, and tax filings, Master Limited Partnerships (MLP’s), may not be appropriate for certain types of accounts.
Thursday, October 22, 2009
Master Limited Partnerships – The What, Why, How and Where
Master Limited Partnerships (MLP’s) are limited by US Code to only apply to enterprises that engage in certain businesses, mostly pertaining to the use of natural resources, such as petroleum and natural gas extraction and transportation. They combine the tax advantages of a partnership and higher dividend yields with the day to day tradability of common stocks.
MLP’s consist of a general partner who manages the operations and limited partners who own the rest of the units for the partnership. Unlike corporations MLP’s are not subject to double taxation.
Their stocks are called units, while their dividends are called distributions. The units are very easy to buy and sell, as they trade just like any other stock on NYSE, Nasdaq and AMEX.
MLP’s mail individualized K-1 tax forms to each unit holder in late February or early March of each year that specifies the tax treatment of the prior year's payouts. A portion of their payouts can be tax-deferred, and it is subtracted from ones cost basis. When you sell your units, some of the gain that comes from certain deductions such as depreciation expense will be taxed as ordinary income. Further, most MLP’s enjoy a pass through taxation of their income to partners, which avoid double taxation of earnings.
The majority of Master Limited Partnerships engage in the transportation and storage of natural resources such as refined petroleum products and natural gas.
Thus MLP’s typically enjoy toll-road business models. Thus:
● They do not take title to the commodities transported
● Are mostly indifferent to fluctuations in commodity prices because they are paid to transport not produce commodities
● They do not have significant credit risk as commodity prices balloon.
● MLP’s receive a fixed fee for moving a product over a certain distance through their pipelines
Other qualities that enable these stable enterprises to keep increasing their dividends over time include:
● Long Useful Lives of their assets
● Fees are indexed to inflation, which provides an inflation hedge
● Most MLP’s have a near monopoly in their area
● There is a high cost of entry and thus there is virtually no competition
● Most MLP’s have the ability to grow their cash flow base, so they could relatively outperform in a rising interest rate environment.
The benchmark for Master Limited Partnerships, the Alerian MLP Index, has enjoyed above average annual total returns of 11.90% from 1995 to 2008. Part of the strong performance could be attributed to the above average distribution yields that most MLP’s enjoy, coupled with strong growth in distributions. Master limited partnerships generate predictable and growing cash flows, which are somewhat immune to commodities price volatility and overall economic conditions.
L&S Advisors has a particular expertise with regards to MLP’s and is just one example of the strategies and tactics that we share with our clients specific to risk management.
Due to the legal structure, tax implications, and tax filings, Master Limited Partnerships (MLP’s), may not be suitable for certain types of accounts.
MLP’s consist of a general partner who manages the operations and limited partners who own the rest of the units for the partnership. Unlike corporations MLP’s are not subject to double taxation.
Their stocks are called units, while their dividends are called distributions. The units are very easy to buy and sell, as they trade just like any other stock on NYSE, Nasdaq and AMEX.
MLP’s mail individualized K-1 tax forms to each unit holder in late February or early March of each year that specifies the tax treatment of the prior year's payouts. A portion of their payouts can be tax-deferred, and it is subtracted from ones cost basis. When you sell your units, some of the gain that comes from certain deductions such as depreciation expense will be taxed as ordinary income. Further, most MLP’s enjoy a pass through taxation of their income to partners, which avoid double taxation of earnings.
The majority of Master Limited Partnerships engage in the transportation and storage of natural resources such as refined petroleum products and natural gas.
Thus MLP’s typically enjoy toll-road business models. Thus:
● They do not take title to the commodities transported
● Are mostly indifferent to fluctuations in commodity prices because they are paid to transport not produce commodities
● They do not have significant credit risk as commodity prices balloon.
● MLP’s receive a fixed fee for moving a product over a certain distance through their pipelines
Other qualities that enable these stable enterprises to keep increasing their dividends over time include:
● Long Useful Lives of their assets
● Fees are indexed to inflation, which provides an inflation hedge
● Most MLP’s have a near monopoly in their area
● There is a high cost of entry and thus there is virtually no competition
● Most MLP’s have the ability to grow their cash flow base, so they could relatively outperform in a rising interest rate environment.
The benchmark for Master Limited Partnerships, the Alerian MLP Index, has enjoyed above average annual total returns of 11.90% from 1995 to 2008. Part of the strong performance could be attributed to the above average distribution yields that most MLP’s enjoy, coupled with strong growth in distributions. Master limited partnerships generate predictable and growing cash flows, which are somewhat immune to commodities price volatility and overall economic conditions.
L&S Advisors has a particular expertise with regards to MLP’s and is just one example of the strategies and tactics that we share with our clients specific to risk management.
Due to the legal structure, tax implications, and tax filings, Master Limited Partnerships (MLP’s), may not be suitable for certain types of accounts.
Monday, October 19, 2009
L&S Advisors Outlook:Summer/Fall
Acorn Fund founder, Ralph Wanger has thoughtful words on the subject of RISK which bear repeating:
“Zebras have the same problem as institutional portfolio managers. First, both seek profits. For portfolio managers, above-average performance; for zebras, fresh grass. Secondly, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions. Third, both move in herds. They look alike, think alike, and stick close together.
If you are a zebra and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best for there the grass is fresh while the middle sees only grass which is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better. On the other hand -- or other hoof -- there comes a time when lions approach. The outside zebras end up as lion lunch, and the skinny zebras in the middle of the pack may eat less well but they are still alive.”
That said, from a tactical standpoint, risk-control can be almost as important as being positioned properly when it comes to seeking superior investment returns. If one has not lost too much capital, even if wrongly positioned, an investment manager can be well-positioned when he gets back in sync with the markets.
When the history of our time is written many will disagree about this “Great Recession’s” place but everyone will agree that it has deeply shattered long held beliefs about the functioning of the stock and bond markets. It has been one year since the weekend that shook the foundations of Wall Street and of the global financial system – when Lehman Brothers collapsed, Merrill Lynch vanished as an independent entity and AIG was taken over by the U.S. government.
In light of that, we believe it is important to briefly summarize where we’ve been this year, where we are today and our investment philosophy for the period ahead.
Where have we been?
Six months ago, in early March, it truly did feel like the world might be coming to an end – talk of a return to a Great Depression-like economy dominated the media. Understandably, fear was rampant and stocks responded to these nightmarish scenarios by hitting the lowest levels in years with financials especially hard hit.
Although no one knew it at the time, it now appears that turned out to be the bottom. Since then, the financial markets have moved back from the precipice.
Two years ago the market was characterized by rampant optimism. The U.S. market had hit a new high in October of 2007 and any concerns were set aside as minor annoyances.
By contrast, six months ago the market was overwhelmed by absolute pessimism – there was no sign of hope anywhere.
Recently the August Business Week ran a cover story called the “The Case for Optimism.” The premise is that beyond the issues facing the global economy there are many underlying positives that give cause for optimism as we look out two, three years, or beyond.
Where are we going tomorrow?
Today, we see the market as difficult to understand. Many investors can be characterized as extremely nervous. Although the market has been performing well, there are many underlying economic indicators that are extremely negative. One of our favorite economists, David Rosenberg, recently wrote “The current and prospective level of employment and wages suggest that there remains at least $5 trillion more of deleveraging in the consumer sector.” And “although the combination of dramatic fiscal and monetary stimulus and pledges of even more largesse is absolutely generating a high degree of excitement in the stock market, …the question remains one of sustainability and what the economy really looks like without all this medication.”
We are always skeptical of rallies that are purely premised on technicals and liquidity but bereft of a solid economic foundation. The growth we have seen globally, and in the U.S.A. in particular, is because of unprecedented government stimulus. There is little organically in the economy to get us excited. One of our major challenges in managing your portfolio is to make judgments on the controlling of risk and the distinction between the direction of the economy and the direction of the market. A favorite market axiom is “don’t fight the tape” meaning you do not want to be in the way of a market that is going in a different direction than your market call.
One of the critical elements in assessing the markets today is the yin and yang of inflation vs. deflation and the interaction of the dollar. In an inflationary environment, the sectors that we would want to emphasize in our portfolios would be natural resources, commodities, materials, gold, and tech stocks. If the dollar continues to be weak, and it appears that will be the case for the foreseeable future, these sectors along with consumer staples should appreciate. On the other hand, we might not want to hold those sectors in a deflationary environment unless we have a weak dollar along with deflation. A deflationary atmosphere and a strong dollar (flight to safety) would cause us to liquidate our portfolios and have a large cash position, probably invested in treasuries. Again, according to Rosenberg, “The name of the game has been trying to garner solid equity like returns without having to unduly expose ourselves to the vagaries of the stock market, which as we know in the past decades, is highly volatile, vulnerable to sharp and sudden setbacks….” In other words “risk management transcends everything” and we have to apply diversified strategies that involve capital preservation and income orientation.
We are very alert to what Bill Gross of PIMCO calls the “new normal” – which is his term for a sustained period of annual growth of about 2%, much slower than we have been used to, as Americans adjust to a world where credit and jobs are less plentiful.
At L & S our focus continues to be on “Absolute Return”. Absolute return of a portfolio has as its goal the production of returns superior to cash and doing it with as little volatility and general market risk as possible. Yet we try to have no preconceived notions of which asset class to be invested in even if that asset class is cash. While this quarter’s performance was excellent as compared to the general market indices, what we believe to be significant is our risk management controls in order to get those returns.
“Zebras have the same problem as institutional portfolio managers. First, both seek profits. For portfolio managers, above-average performance; for zebras, fresh grass. Secondly, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions. Third, both move in herds. They look alike, think alike, and stick close together.
If you are a zebra and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best for there the grass is fresh while the middle sees only grass which is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better. On the other hand -- or other hoof -- there comes a time when lions approach. The outside zebras end up as lion lunch, and the skinny zebras in the middle of the pack may eat less well but they are still alive.”
That said, from a tactical standpoint, risk-control can be almost as important as being positioned properly when it comes to seeking superior investment returns. If one has not lost too much capital, even if wrongly positioned, an investment manager can be well-positioned when he gets back in sync with the markets.
When the history of our time is written many will disagree about this “Great Recession’s” place but everyone will agree that it has deeply shattered long held beliefs about the functioning of the stock and bond markets. It has been one year since the weekend that shook the foundations of Wall Street and of the global financial system – when Lehman Brothers collapsed, Merrill Lynch vanished as an independent entity and AIG was taken over by the U.S. government.
In light of that, we believe it is important to briefly summarize where we’ve been this year, where we are today and our investment philosophy for the period ahead.
Where have we been?
Six months ago, in early March, it truly did feel like the world might be coming to an end – talk of a return to a Great Depression-like economy dominated the media. Understandably, fear was rampant and stocks responded to these nightmarish scenarios by hitting the lowest levels in years with financials especially hard hit.
Although no one knew it at the time, it now appears that turned out to be the bottom. Since then, the financial markets have moved back from the precipice.
Two years ago the market was characterized by rampant optimism. The U.S. market had hit a new high in October of 2007 and any concerns were set aside as minor annoyances.
By contrast, six months ago the market was overwhelmed by absolute pessimism – there was no sign of hope anywhere.
Recently the August Business Week ran a cover story called the “The Case for Optimism.” The premise is that beyond the issues facing the global economy there are many underlying positives that give cause for optimism as we look out two, three years, or beyond.
Where are we going tomorrow?
Today, we see the market as difficult to understand. Many investors can be characterized as extremely nervous. Although the market has been performing well, there are many underlying economic indicators that are extremely negative. One of our favorite economists, David Rosenberg, recently wrote “The current and prospective level of employment and wages suggest that there remains at least $5 trillion more of deleveraging in the consumer sector.” And “although the combination of dramatic fiscal and monetary stimulus and pledges of even more largesse is absolutely generating a high degree of excitement in the stock market, …the question remains one of sustainability and what the economy really looks like without all this medication.”
We are always skeptical of rallies that are purely premised on technicals and liquidity but bereft of a solid economic foundation. The growth we have seen globally, and in the U.S.A. in particular, is because of unprecedented government stimulus. There is little organically in the economy to get us excited. One of our major challenges in managing your portfolio is to make judgments on the controlling of risk and the distinction between the direction of the economy and the direction of the market. A favorite market axiom is “don’t fight the tape” meaning you do not want to be in the way of a market that is going in a different direction than your market call.
One of the critical elements in assessing the markets today is the yin and yang of inflation vs. deflation and the interaction of the dollar. In an inflationary environment, the sectors that we would want to emphasize in our portfolios would be natural resources, commodities, materials, gold, and tech stocks. If the dollar continues to be weak, and it appears that will be the case for the foreseeable future, these sectors along with consumer staples should appreciate. On the other hand, we might not want to hold those sectors in a deflationary environment unless we have a weak dollar along with deflation. A deflationary atmosphere and a strong dollar (flight to safety) would cause us to liquidate our portfolios and have a large cash position, probably invested in treasuries. Again, according to Rosenberg, “The name of the game has been trying to garner solid equity like returns without having to unduly expose ourselves to the vagaries of the stock market, which as we know in the past decades, is highly volatile, vulnerable to sharp and sudden setbacks….” In other words “risk management transcends everything” and we have to apply diversified strategies that involve capital preservation and income orientation.
We are very alert to what Bill Gross of PIMCO calls the “new normal” – which is his term for a sustained period of annual growth of about 2%, much slower than we have been used to, as Americans adjust to a world where credit and jobs are less plentiful.
At L & S our focus continues to be on “Absolute Return”. Absolute return of a portfolio has as its goal the production of returns superior to cash and doing it with as little volatility and general market risk as possible. Yet we try to have no preconceived notions of which asset class to be invested in even if that asset class is cash. While this quarter’s performance was excellent as compared to the general market indices, what we believe to be significant is our risk management controls in order to get those returns.
Friday, October 9, 2009
An Interview with Sy Lippman & Rick Scott, Co-Founding Partners of L&S Advisors, Inc.
The following is an interview conducted with Sy Lippman & Rick Scott, co-founding partners of L&S Advisors, Inc. Sy & Rick have successfully managed portfolios for high-net-worth clients for over 30 years. In this interview they share some insight as to what distinguishes L&S and the philosophy that sets them apart from other asset managers.
Q: Could you explain why you believe risk management transcends everything?
SL: The impact of a bear market on a stock portfolio can be devastating to individual investors. It can take investors years to recover their losses. We believe preservation of assets during bear markets is the key to maintaining wealth.
When the market goes up, the truth is, just about anybody can make money. Managing prosperity is easy. What clients need is an advisor who can manage adversity, and not just stem losses. To battle adversity, an advisor needs to try to anticipate when things are going to implode.
Q: How do you define "Absolute return" and what impact does this have on an investor?
RS: There are several definitions of absolute return, but first one must understand the definition of relative return, which is simply the return of your portfolio relative to a given index benchmark. Absolute return does not use a specific benchmark. My firm defines absolute return as achieving positive results in absolutely any market condition, using absolutely any investment.
Within a relative return portfolio, if the benchmark index is down 40% and your account is down 35%, you essentially beat your benchmark by 5%, yet at the end of the day, you are still down 35%?
At L&S Advisors, we are obsessed with the pursuit of achieving positive performance for our clients in any given market condition.
Q: What are some of the issues with an over diversified portfolio?
RS: The primary objective at L&S Advisors is to achieve superior investment returns for our clients, not to track certain market indices. We believe that some money managers that fail to beat the performance of the S&P 500 due so because they emphasize diversification in the interest of minimizing risk. As a result investors end up with an over-diversified portfolio, resulting in mediocre performance, as the profitable companies make up too small a portion of the portfolio to have a significant impact. In the end, because clients hold so many positions, they end up with a very expensive exchange traded fund (ETF).
We adjust our portfolio exposure to pursue the best ideas wherever we see them, and limit our portfolios to only those ideas.
Q: How is a Registered Investment Advisor different than a Broker/Dealer?
SL: Does it seem appropriate for a client to be "advised" by someone selling products and earning commissions? No. Therefore, at L&S Advisors, there is no brokerage, no products to sell, no commissions or additional hidden compensation. We would also advise clients to choose advisors free of conflicts of interest, which we avoid. We are fee only. There are no bank, brokerage, insurance or estate plans. It's right there in our ADV-our SEC filing-and we provide it to every client. We focus all of our efforts on providing investment counsel to our clients, which we believe is a full time job.
Q: What effect has the recent market volatility had on investors' decision-making processes?
RS: After realizing the effects of the recent 2008/2009 market turmoil, many investors have taken what we believe are inappropriate actions at an inopportune time, and in hindsight probably wished they had planned accordingly for the global economic downturn we are now faced with. Many investors seem quick to say they have a "trusted advisor" whom they rely on to give them sound financial advice, yet some still found their portfolios decimated at the end of 2008. What we think is worse, is that a number of advisors may have been smart enough to see the turmoil coming, but unfortunately were constrained as to what they could do to try to protect client assets.
Q: How has L&S Advisors navigated the volatile markets of 2008 and 2009?
SL: Towards the end of 2007 we noticed that structural changes within certain sectors of the stock and bond markets were taking place, as well as a weakening credit market. During the summer of 2008, it was obvious to us that the worst had not yet materialized in the markets, and that this bear market was vastly different from recent bear markets. As a result, we prepared our portfolios for deterioration in all forms of credit, as well as the potential negative impacts on the broader economy.
Due to the size of our organization, we were able to be nimble and react quickly to the deteriorating market conditions. As a result, we made the tactical decision to move a significant allocation to cash, and kept it there through the first quarter of 2009.
Q: Is a buy-and-hold strategy still a viable approach to investing?
RS: Looking at the past decade of the Dow Jones Industrial Average, I believe it is clear that the traditional buy-and-hold school of thought is considerably less effective. In short, the game has changed.
The Philosophy of asset allocations and buying companies with stable fundamentals and historic returns has been challenged.
Today's changing environment forces us to modernize our approach and strategies. The market now moves faster than it ever has. Anyone who sits and waits could simply miss the potential opportunities. To outperform the market, an advisor must think tactically.
At the same time that we are actively managing risk within our clients' portfolios, we are seeking investment opportunities across global capital markets.
We respond to market conditions and quickly revise strategies, because one must employ tactical allocations as opposed to the static approaches of the major brokerage and investment houses.
Q: What is tactical diversification and is it just a fancy term for "Market timing"?
SL: This is now the longest recession since the 1930's. We're not overly concerned, however, as a recession doesn't typically end until four to six months after the final bear market low is in place. The point is that it's not our goal to "pick the market bottom," which is obvious only in 20/20 hindsight. We need to recognize good buying opportunities and attractive valuations, and start to adjust allocations according to the level of risk we see going forward.
We define tactical diversification as making swift concentrated purchases when we see an opportunity present itself. Our strategy allows us the flexibility within portfolio construction to consider all sectors globally, and emphasize investments in healthy industries with specific stocks and avoid those where we see trouble on the horizon. Our investment strategies lack any global, sector, or capitalization restrictions, and as a result we believe we can excel in a variety of market conditions without timing the market.
Q: Could you explain why you believe risk management transcends everything?
SL: The impact of a bear market on a stock portfolio can be devastating to individual investors. It can take investors years to recover their losses. We believe preservation of assets during bear markets is the key to maintaining wealth.
When the market goes up, the truth is, just about anybody can make money. Managing prosperity is easy. What clients need is an advisor who can manage adversity, and not just stem losses. To battle adversity, an advisor needs to try to anticipate when things are going to implode.
Q: How do you define "Absolute return" and what impact does this have on an investor?
RS: There are several definitions of absolute return, but first one must understand the definition of relative return, which is simply the return of your portfolio relative to a given index benchmark. Absolute return does not use a specific benchmark. My firm defines absolute return as achieving positive results in absolutely any market condition, using absolutely any investment.
Within a relative return portfolio, if the benchmark index is down 40% and your account is down 35%, you essentially beat your benchmark by 5%, yet at the end of the day, you are still down 35%?
At L&S Advisors, we are obsessed with the pursuit of achieving positive performance for our clients in any given market condition.
Q: What are some of the issues with an over diversified portfolio?
RS: The primary objective at L&S Advisors is to achieve superior investment returns for our clients, not to track certain market indices. We believe that some money managers that fail to beat the performance of the S&P 500 due so because they emphasize diversification in the interest of minimizing risk. As a result investors end up with an over-diversified portfolio, resulting in mediocre performance, as the profitable companies make up too small a portion of the portfolio to have a significant impact. In the end, because clients hold so many positions, they end up with a very expensive exchange traded fund (ETF).
We adjust our portfolio exposure to pursue the best ideas wherever we see them, and limit our portfolios to only those ideas.
Q: How is a Registered Investment Advisor different than a Broker/Dealer?
SL: Does it seem appropriate for a client to be "advised" by someone selling products and earning commissions? No. Therefore, at L&S Advisors, there is no brokerage, no products to sell, no commissions or additional hidden compensation. We would also advise clients to choose advisors free of conflicts of interest, which we avoid. We are fee only. There are no bank, brokerage, insurance or estate plans. It's right there in our ADV-our SEC filing-and we provide it to every client. We focus all of our efforts on providing investment counsel to our clients, which we believe is a full time job.
Q: What effect has the recent market volatility had on investors' decision-making processes?
RS: After realizing the effects of the recent 2008/2009 market turmoil, many investors have taken what we believe are inappropriate actions at an inopportune time, and in hindsight probably wished they had planned accordingly for the global economic downturn we are now faced with. Many investors seem quick to say they have a "trusted advisor" whom they rely on to give them sound financial advice, yet some still found their portfolios decimated at the end of 2008. What we think is worse, is that a number of advisors may have been smart enough to see the turmoil coming, but unfortunately were constrained as to what they could do to try to protect client assets.
Q: How has L&S Advisors navigated the volatile markets of 2008 and 2009?
SL: Towards the end of 2007 we noticed that structural changes within certain sectors of the stock and bond markets were taking place, as well as a weakening credit market. During the summer of 2008, it was obvious to us that the worst had not yet materialized in the markets, and that this bear market was vastly different from recent bear markets. As a result, we prepared our portfolios for deterioration in all forms of credit, as well as the potential negative impacts on the broader economy.
Due to the size of our organization, we were able to be nimble and react quickly to the deteriorating market conditions. As a result, we made the tactical decision to move a significant allocation to cash, and kept it there through the first quarter of 2009.
Q: Is a buy-and-hold strategy still a viable approach to investing?
RS: Looking at the past decade of the Dow Jones Industrial Average, I believe it is clear that the traditional buy-and-hold school of thought is considerably less effective. In short, the game has changed.
The Philosophy of asset allocations and buying companies with stable fundamentals and historic returns has been challenged.
Today's changing environment forces us to modernize our approach and strategies. The market now moves faster than it ever has. Anyone who sits and waits could simply miss the potential opportunities. To outperform the market, an advisor must think tactically.
At the same time that we are actively managing risk within our clients' portfolios, we are seeking investment opportunities across global capital markets.
We respond to market conditions and quickly revise strategies, because one must employ tactical allocations as opposed to the static approaches of the major brokerage and investment houses.
Q: What is tactical diversification and is it just a fancy term for "Market timing"?
SL: This is now the longest recession since the 1930's. We're not overly concerned, however, as a recession doesn't typically end until four to six months after the final bear market low is in place. The point is that it's not our goal to "pick the market bottom," which is obvious only in 20/20 hindsight. We need to recognize good buying opportunities and attractive valuations, and start to adjust allocations according to the level of risk we see going forward.
We define tactical diversification as making swift concentrated purchases when we see an opportunity present itself. Our strategy allows us the flexibility within portfolio construction to consider all sectors globally, and emphasize investments in healthy industries with specific stocks and avoid those where we see trouble on the horizon. Our investment strategies lack any global, sector, or capitalization restrictions, and as a result we believe we can excel in a variety of market conditions without timing the market.
Wednesday, August 12, 2009
How Conflicts of Interest in the Investment Industry can Impact You
A power struggle is brewing within the regulatory bodies and Congress. The issue concerns the very important question of how investors get their financial advice. On one side are agents of banks, brokerage firms, insurance companies, and independent advisors who have a sales license to sell securities or insurance. On the other side are Financial Planners or Registered Investment Advisors (RIA) who often work for themselves or small boutique firms such as L&S Advisors.
Brokers are regulated in their sales functions both by the Securities & Exchange Commission (SEC) and by the Financial Industry Regulatory Authority (FINRA), which is funded by the brokerage business itself and conducts audits of its member firms. While we feel there are conflicts with this arrangement, it is not a topic for this discussion. Financial Planners and Registered Investment Advisors are regulated by the individual states or the Securities & Exchange Commission (SEC).
The general rules for FINRA brokers state that brokers must recommend only investments that are “suitable” for clients. The question is what does suitable mean? In plain English it means that brokers can sell you any investment they have “reasonable” grounds for believing is suitable for you. Reasonable means information based on your risk tolerance, investing objectives, tax status, and financial position.
Key factors that we see missing from these guidelines are conflict & cost. Let’s say you tell your broker that you want to simplify your stock portfolio into an index fund that is suitable for you. He would be under no obligation to tell you that the annual expenses his firm charges on their fund are 10x higher than an essentially identical fund from, say, Vanguard. Brokers get no commission for recommending Vanguard products.
If brokers had to take cost and conflict of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before selling some of the products that we often see in portfolios today. Today’s standards do not require brokers to act as fiduciaries when making sales recommendations.
Registered Investment Advisers on the other hand are required to act out of a “fiduciary duty”, or the obligation to put their clients’ interests first. Advisers always have a duty to mitigate conflicts of interest when possible and if not possible to disclose in a formal notice the potential conflict.
Part of the fiduciary duty means that the adviser is responsible for taking into consideration the cost of transactions and to recommend the most efficient structure. This is the reason that advisers acting as investment adviser representatives of an RIA cannot receive commissions when making recommendations in that capacity. The receipt of commissions on investments recommended represents a clear conflict of interest, and would hinder the objectivity and impartiality of the adviser. Therefore, an investment adviser representative, when also licensed as a registered representative of a broker-dealer or as an insurance agent, would be required to disclose their conflict of interest to the client at the time of making a recommendation for the sale of a product.
I don’t want to sound too harsh about the role of salesmen. These men & women have a role in the business world. I use a variety of professional salespeople in doing my work and value their comments. However, for the same reason that medical doctors cannot own the pharmacy that fills your prescription, I strongly believe that there should be a separation between investment advice and those who sell financial products.
Brokers are regulated in their sales functions both by the Securities & Exchange Commission (SEC) and by the Financial Industry Regulatory Authority (FINRA), which is funded by the brokerage business itself and conducts audits of its member firms. While we feel there are conflicts with this arrangement, it is not a topic for this discussion. Financial Planners and Registered Investment Advisors are regulated by the individual states or the Securities & Exchange Commission (SEC).
The general rules for FINRA brokers state that brokers must recommend only investments that are “suitable” for clients. The question is what does suitable mean? In plain English it means that brokers can sell you any investment they have “reasonable” grounds for believing is suitable for you. Reasonable means information based on your risk tolerance, investing objectives, tax status, and financial position.
Key factors that we see missing from these guidelines are conflict & cost. Let’s say you tell your broker that you want to simplify your stock portfolio into an index fund that is suitable for you. He would be under no obligation to tell you that the annual expenses his firm charges on their fund are 10x higher than an essentially identical fund from, say, Vanguard. Brokers get no commission for recommending Vanguard products.
If brokers had to take cost and conflict of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before selling some of the products that we often see in portfolios today. Today’s standards do not require brokers to act as fiduciaries when making sales recommendations.
Registered Investment Advisers on the other hand are required to act out of a “fiduciary duty”, or the obligation to put their clients’ interests first. Advisers always have a duty to mitigate conflicts of interest when possible and if not possible to disclose in a formal notice the potential conflict.
Part of the fiduciary duty means that the adviser is responsible for taking into consideration the cost of transactions and to recommend the most efficient structure. This is the reason that advisers acting as investment adviser representatives of an RIA cannot receive commissions when making recommendations in that capacity. The receipt of commissions on investments recommended represents a clear conflict of interest, and would hinder the objectivity and impartiality of the adviser. Therefore, an investment adviser representative, when also licensed as a registered representative of a broker-dealer or as an insurance agent, would be required to disclose their conflict of interest to the client at the time of making a recommendation for the sale of a product.
I don’t want to sound too harsh about the role of salesmen. These men & women have a role in the business world. I use a variety of professional salespeople in doing my work and value their comments. However, for the same reason that medical doctors cannot own the pharmacy that fills your prescription, I strongly believe that there should be a separation between investment advice and those who sell financial products.
Tuesday, July 14, 2009
L&S Advisors Outlook: Spring/Summer
YOGI BERRA SAID “IT’S TOUGH TO MAKE PREDICTIONS, ESPECIALLY ABOUT THE FUTURE”
As we watch the securities market volatility and the uncertainty prevailing in the economy, Yogi’s words take on new meaning. Although the government seems to be working hard to assist the country out of its current economic malaise, what we see in the future is more “uncertainty”. The “uncertainty,” though, could potentially produce numerous investment opportunities, - but in our opinion, the time frame for these investments will be shorter than we would prefer.
Both Bulls and bears generally agree that for stocks to post a significant rally during the second half of this year it will require convincing evidence not only that the U. S. economy’s decline has slowed but that the economy will begin to turn higher by year-end. Corporate profits will need to at least match the forecasts for an upswing to prevail through the rest of the year and to even justify current market values.
Although the markets rallied significantly during the second quarter of 2009 (despite all the attention to the “green shoots”), the global economy faces many formidable challenges. There are many conflicting forecasts for both growth and demand, such as rising unemployment, lower corporate profits, the conflicting direction of commodity prices and increasing budget deficits as well as looming inflation and /or deflation concerns. The run-up in the securities markets since March 9th may mean the good news for the second half is already reflected in stock prices. Many market experts feel that we will see a range bound market for the next few years moving up and down in a relatively narrow sideways band. Under this scenario, we will have to work hard to produce satisfactory returns. We have already begun to do this. Our Client’s have probably noted that we have been more active investors recently. We believe that actively managed stock picking is a necessity in this new market environment. However, while always on the lookout for increased capital and growth appreciation, we continue to hold true to our key principals of preservation of capital and risk management.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
As we watch the securities market volatility and the uncertainty prevailing in the economy, Yogi’s words take on new meaning. Although the government seems to be working hard to assist the country out of its current economic malaise, what we see in the future is more “uncertainty”. The “uncertainty,” though, could potentially produce numerous investment opportunities, - but in our opinion, the time frame for these investments will be shorter than we would prefer.
Both Bulls and bears generally agree that for stocks to post a significant rally during the second half of this year it will require convincing evidence not only that the U. S. economy’s decline has slowed but that the economy will begin to turn higher by year-end. Corporate profits will need to at least match the forecasts for an upswing to prevail through the rest of the year and to even justify current market values.
Although the markets rallied significantly during the second quarter of 2009 (despite all the attention to the “green shoots”), the global economy faces many formidable challenges. There are many conflicting forecasts for both growth and demand, such as rising unemployment, lower corporate profits, the conflicting direction of commodity prices and increasing budget deficits as well as looming inflation and /or deflation concerns. The run-up in the securities markets since March 9th may mean the good news for the second half is already reflected in stock prices. Many market experts feel that we will see a range bound market for the next few years moving up and down in a relatively narrow sideways band. Under this scenario, we will have to work hard to produce satisfactory returns. We have already begun to do this. Our Client’s have probably noted that we have been more active investors recently. We believe that actively managed stock picking is a necessity in this new market environment. However, while always on the lookout for increased capital and growth appreciation, we continue to hold true to our key principals of preservation of capital and risk management.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
Wednesday, June 24, 2009
Does it Matter What Type of Financial Advisor You Work With?
The financial services industry is a very crowded space. With so many “advisors” to choose from, how do you distinguish what type of financial advisor you are working with? How do you know who you can trust with your money? In our experience, many so-called “financial advisors” are nothing more than glorified salespeople with a clever title. The investments they sell have a direct correlation with the compensation they receive. Given those dynamics, what are the odds that you will receive objective advice? Don’t be fooled. The following guide will help you make more informed decisions on how advisors are compensated.
Stockbrokers
Commission-based advice is great, if you’re a broker or brokerage firm. For the investor, however, it’s not always the right solution. In our experience, the products sold through this type of advice have been plagued with high costs and opaque disclosure—the higher the costs of an investment, the worse its performance will be. When a stockbroker is paid based on the products he recommends, his interests may not always be aligned with those of the client. The Broker-Dealer, for which a registered representative (stockbroker) works - unlike a Registered Investment Adviser - has no fiduciary duty to place the client’s interests first. As with any type of advice, inadequate disclosure coupled with conflicts of interest has resulted in a fair number of people who have been victimized by bad advice.
Because the commission-based fee structure of broker-dealers presents the conflicts of interest described above, the SEC requires them to add some variation of the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to inform your financial decisions:
“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”
If this disclaimer appears in agreements you are signing, you should ask questions of your advisor. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest; if it were us, we would be running for the exits here.
Fee-Based Advisors
In our opinion, “fee-based” advisors can be just as bad, if not worse, than purely commission-based brokers in terms of the conflicts that exist between the interests of the adviser versus those of the client. We have found that commission-based compensation is sometimes presented as “fee-based” compensation, which is a particularly evil label when used to refer to compensation based on both fees and commissions. In this sense, fee-based advisors have the ability to charge a percentage “based” on the assets they manage, but they may also have the ability to sell you a commission-based product (like an annuity, a load fund or life insurance). “Double dipping”, as it’s known in the industry, while not illegal, we feel is certainly immoral. The broker makes money from both the client and the commission on the product sold. What a guy! Don’t be fooled. We think it’s wise to stay away from advisors peddling investments that charge you front end or back end loads or surrender charges.
Fee-Only Advisors
Fee-only compensation (not to be confused with fee-based) is based on the value of assets managed for the client, not commission driven; in this type of fee structure arrangement, financial advice is generally the only product offered by the firm, and the advisor sits on the same side of the table with the client. The only way the advisor can make more money on your relationship, is to make more money for you.
Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This principle requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. This includes seeking the best investment alternatives with the lowest internal expenses, and one of the best ways of enhancing returns is to control portfolio costs. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors registered with the SEC and various states must adopt a Code of Ethics and all Registered Investment Advisors must fully disclose how they are compensated.
High net worth, high income households can be targets for bad advice. When hiring an advisor, a considerable amount of thought and research should be dedicated to the process. After all, it’s only your money. Here are some things you should ask when engaging a financial professional:
• How are you paid?
• Are your recommendations in any way influenced by compensation?
• What is your investment philosophy?
• Do you have a clean regulatory record?
• How much experience do you have?
Finally, you should also request and review the advisor’s written disclosure statement, Form ADV Part I and II.
Other Considerations
Unlike other professions like accounting or law, the financial industry does not have one standard designation or brand (think CPA and Esquire or J.D.) Instead we have a wide array to choose from. Most financial professionals would agree that the CFP® designation offers a robust, well rounded financial education for financial practitioners and it carries much clout. It encompasses multiple areas of study which include taxation, retirement planning, insurance planning, estate planning, investment planning and case studies. Yet, this does not imply that every CFP® has the same investment philosophy or standard of care in dealing with clients. In fact, the CFP® designation can be held by advisors operating in two very distinct worlds: 1) the traditional brokerage firms/trust companies that may charge commissions or peddle proprietary funds and 2) the fee-only (or fee-based) side of the industry.
In summary, we advocate that a consumer should demand that their advisor sign on as a fiduciary in writing. In our experience, stockbrokers and Registered Representatives (RR) generally do not or will not do this. Conversely, an advisory representative at a Registered Investment Advisor (RIA) is always a fiduciary, and should have no problem signing a fiduciary oath for his client. But, remember that where a representative of an RIA is also an RR, the investor must clearly understand in what capacity the individual is acting, because depending on the context, the individual may not be operating as a fiduciary when giving certain advice. Remember that credentials do not always translate into your success. Bottom line—do your homework before you hire!
Stockbrokers
Commission-based advice is great, if you’re a broker or brokerage firm. For the investor, however, it’s not always the right solution. In our experience, the products sold through this type of advice have been plagued with high costs and opaque disclosure—the higher the costs of an investment, the worse its performance will be. When a stockbroker is paid based on the products he recommends, his interests may not always be aligned with those of the client. The Broker-Dealer, for which a registered representative (stockbroker) works - unlike a Registered Investment Adviser - has no fiduciary duty to place the client’s interests first. As with any type of advice, inadequate disclosure coupled with conflicts of interest has resulted in a fair number of people who have been victimized by bad advice.
Because the commission-based fee structure of broker-dealers presents the conflicts of interest described above, the SEC requires them to add some variation of the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to inform your financial decisions:
“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”
If this disclaimer appears in agreements you are signing, you should ask questions of your advisor. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest; if it were us, we would be running for the exits here.
Fee-Based Advisors
In our opinion, “fee-based” advisors can be just as bad, if not worse, than purely commission-based brokers in terms of the conflicts that exist between the interests of the adviser versus those of the client. We have found that commission-based compensation is sometimes presented as “fee-based” compensation, which is a particularly evil label when used to refer to compensation based on both fees and commissions. In this sense, fee-based advisors have the ability to charge a percentage “based” on the assets they manage, but they may also have the ability to sell you a commission-based product (like an annuity, a load fund or life insurance). “Double dipping”, as it’s known in the industry, while not illegal, we feel is certainly immoral. The broker makes money from both the client and the commission on the product sold. What a guy! Don’t be fooled. We think it’s wise to stay away from advisors peddling investments that charge you front end or back end loads or surrender charges.
Fee-Only Advisors
Fee-only compensation (not to be confused with fee-based) is based on the value of assets managed for the client, not commission driven; in this type of fee structure arrangement, financial advice is generally the only product offered by the firm, and the advisor sits on the same side of the table with the client. The only way the advisor can make more money on your relationship, is to make more money for you.
Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This principle requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. This includes seeking the best investment alternatives with the lowest internal expenses, and one of the best ways of enhancing returns is to control portfolio costs. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors registered with the SEC and various states must adopt a Code of Ethics and all Registered Investment Advisors must fully disclose how they are compensated.
High net worth, high income households can be targets for bad advice. When hiring an advisor, a considerable amount of thought and research should be dedicated to the process. After all, it’s only your money. Here are some things you should ask when engaging a financial professional:
• How are you paid?
• Are your recommendations in any way influenced by compensation?
• What is your investment philosophy?
• Do you have a clean regulatory record?
• How much experience do you have?
Finally, you should also request and review the advisor’s written disclosure statement, Form ADV Part I and II.
Other Considerations
Unlike other professions like accounting or law, the financial industry does not have one standard designation or brand (think CPA and Esquire or J.D.) Instead we have a wide array to choose from. Most financial professionals would agree that the CFP® designation offers a robust, well rounded financial education for financial practitioners and it carries much clout. It encompasses multiple areas of study which include taxation, retirement planning, insurance planning, estate planning, investment planning and case studies. Yet, this does not imply that every CFP® has the same investment philosophy or standard of care in dealing with clients. In fact, the CFP® designation can be held by advisors operating in two very distinct worlds: 1) the traditional brokerage firms/trust companies that may charge commissions or peddle proprietary funds and 2) the fee-only (or fee-based) side of the industry.
In summary, we advocate that a consumer should demand that their advisor sign on as a fiduciary in writing. In our experience, stockbrokers and Registered Representatives (RR) generally do not or will not do this. Conversely, an advisory representative at a Registered Investment Advisor (RIA) is always a fiduciary, and should have no problem signing a fiduciary oath for his client. But, remember that where a representative of an RIA is also an RR, the investor must clearly understand in what capacity the individual is acting, because depending on the context, the individual may not be operating as a fiduciary when giving certain advice. Remember that credentials do not always translate into your success. Bottom line—do your homework before you hire!
Wednesday, June 3, 2009
Why I Recently Left a Major Wirehouse and Why You Should Care!
The consolidation that has taken place within the financial services industry has resulted in a dilution of brand equity and a manic free-for-all by institutions. Banks are gaining brokerage capabilities and vice versa. In the rush to capture market share, many Investment Advisors are focusing on additional estate planning issues, and losing focus of their main objective, to provide sound financial advice. After nine years of working at Smith Barney - Citi Family Office, my company was guilty of just that, trying to be all things to all people, consequently diminishing the overall client experience.
That being said, I have recently left that company to pursue a career with a firm that exclusively provides investment counsel to high net worth clients. Having only one objective, managing client investment portfolios, allows us to concentrate solely on that one objective. What a concept! At L&S Advisors, we do not sell any products, nor are we constrained to any single strategy. Further, we do not hire third party or mutual fund managers to make our investment decisions, thus allowing our clients direct access to the fiduciaries guiding their portfolios.
The strengths of our core philosophy distinguish L&S Advisors from other providers. We adhere to an investment philosophy that ultimately manages risk by allowing flexibility towards the components of the securities markets in which we invest. As a result we can excel in a variety of market conditions, such as the turbulent times we are currently experiencing.
Simply put, if you are troubled with the investment advice or performance you are receiving, or don’t believe your risk management concerns are properly being addressed, I encourage you to send me an email so I can give you a brief introduction to how we may help with your financial challenges. I am confident after a few minutes, you will clearly be able to distinguish our investment philosophy and strategy from other providers, and how it has helped to contribute to our superior risk management and investment performance across several different market cycles in the past.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
That being said, I have recently left that company to pursue a career with a firm that exclusively provides investment counsel to high net worth clients. Having only one objective, managing client investment portfolios, allows us to concentrate solely on that one objective. What a concept! At L&S Advisors, we do not sell any products, nor are we constrained to any single strategy. Further, we do not hire third party or mutual fund managers to make our investment decisions, thus allowing our clients direct access to the fiduciaries guiding their portfolios.
The strengths of our core philosophy distinguish L&S Advisors from other providers. We adhere to an investment philosophy that ultimately manages risk by allowing flexibility towards the components of the securities markets in which we invest. As a result we can excel in a variety of market conditions, such as the turbulent times we are currently experiencing.
Simply put, if you are troubled with the investment advice or performance you are receiving, or don’t believe your risk management concerns are properly being addressed, I encourage you to send me an email so I can give you a brief introduction to how we may help with your financial challenges. I am confident after a few minutes, you will clearly be able to distinguish our investment philosophy and strategy from other providers, and how it has helped to contribute to our superior risk management and investment performance across several different market cycles in the past.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
Wednesday, May 20, 2009
Top Down Investing or Bottom Up...In the End, We Beleive You Need Both
When it comes to selecting companies to invest in, there has been much debate on the top down and bottom up approaches. With the top down approach, investors typically study the economic trends, and then determine the industries and companies they think are likely to benefit the most. For example, suppose you believe there will be a drop in interest rates. Using the top-down approach, you might determine that the home-building industry would benefit the most from the macroeconomic changes and then limit your search to the companies in that industry. Conversely, bottom up investors typically conduct extensive research on individual companies. As long as they think the company’s prospects look strong, these investors often conclude that the economic, market or industry cycles are of less concern. What constitutes "good prospects," with regards to bottom up investing, is a matter of opinion. Some investors look for earnings growth while others find companies with low P/E ratios attractive. In addition there are numerous other factors that investors could use to evaluate the investment worthiness of a particular company.
The top down and bottom up approaches are two distinct and fundamentally very different methods to investing. There are great advantages and drawbacks to both methodologies, but too much reliance on only one may keep your portfolio from reaching its maximum potential. There are literally tens of thousands of stocks out there to choose from.
Investors can combine the two approaches by applying top down analysis on asset allocation decisions while using a bottom up approach to select the companies they believe fit the requirements of both kinds of research.
The combination of strategies is called Tactical Diversification and may help investors strike an attractive balance between seeking maximum capital appreciation and managing downside risk.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
The top down and bottom up approaches are two distinct and fundamentally very different methods to investing. There are great advantages and drawbacks to both methodologies, but too much reliance on only one may keep your portfolio from reaching its maximum potential. There are literally tens of thousands of stocks out there to choose from.
Investors can combine the two approaches by applying top down analysis on asset allocation decisions while using a bottom up approach to select the companies they believe fit the requirements of both kinds of research.
The combination of strategies is called Tactical Diversification and may help investors strike an attractive balance between seeking maximum capital appreciation and managing downside risk.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
Friday, April 24, 2009
What Happens When Good People Have Bad Ideas?
After realizing the effects of the recent market turmoil, many people have taken inappropriate actions at an inopportune time, and in hindsight wished they had planned accordingly for the global economic downturn we are now faced with. Many people are quick to say they have a “trusted advisor” whom they rely on to give them sound financial advice, yet still found their portfolios decimated at the end of 2008. What is worse, your advisor may have been smart enough to see the turmoil coming, but unfortunately was constrained as to what he could do to try to protect your assets.
In the early ‘90’s, Morningstar introduced a nine square grid that classifies securities by size, (large, mid, or small), along the vertical axis and by characteristics (value, core, and growth) along the horizontal axis, and thus style box diversification was born. Within this framework, Investment Advisors hire “best in class” managers, through mutual funds, third party managers, or exchange traded funds, to represent a particular box. Mangers are expected to invest only in stocks with characteristics fitting that box. In theory, the style box helps the investor construct a diversified portfolio that reduces overall volatility and, hopefully, increases return.
Unfortunately 2008 demonstrated that the style box approach has flaws and failed to shield investors from harm. If the manager/fund the Investment Advisor hires does not beat the index of the specific box he is hired to manage, they will fire him and replace him with another manager/fund. We believe that this approach is flawed in both its underlying assumption, that having money in all of the boxes is the best way to beat the market, and its implementation, that Investment Advisors are going to be able to identify the managers most likely to beat their assigned indexes.
Keeping managers constrained to a specific style box in our opinion actually limits investment performance, erodes purchasing power, and further results in a costly and inefficient portfolio. If investors employ nine traditional style box managers/funds, plus one that specializes in foreign stocks, and each manager/fund owns 50 securities, investors possibly own more than 500 stocks. Take into account the turnover between managers and trading costs, and at the end of the day with more than 500 positions, investors in effect would own a very expensive index fund, where the winners may be too small to have a significant impact on the portfolio.
In seeking to achieve superior returns, we feel that Investment Advisors should be free to roam the entire stock universe in search of opportunities and should not be constrained to one box. Proponents of style box diversification will tell you that from year to year there’s no telling which asset class will be the best performer, therefore portfolio diversification reduces risk by allocating assets across the various boxes. While it may be true that it’s very difficult to select the exact asset class that will perform best during any given year, for anyone willing to dig even slightly below the surface, it’s been very clear as to those that should be avoided. For example, the direction of the U.S. economy has been very clear, yet many fund managers are restricted from actively taking precautions against loses, such as raising cash or limiting exposure to a certain asset class, such as financials.
Warren Buffet, widely considered one of the worlds greatest investors built his wealth by concentrating his exposure, not through diversification. At times, he has held a mere five positions in his entire Berkshire Hathaway equity portfolio. He does not diversify, because with his level of expertise, he feels there is no need to do so. Further, he defines risk as “not knowing what you are doing,” and suggests if you are unsure of yourself, that diversification is the best strategy for you. In our view Investment Advisors that are truly on top of their game should concentrate their positions, as sustainable rewards can be reaped only by those that have the foresight and ability to invest in certain stocks and asset classes well ahead of the curve.
In an effort to achieve superior returns given today’s volatile market conditions, we believe that an Investment Advisor must be free of portfolio restraints or limitations. If economic conditions suggest a move to all cash, an advisor needs to be able to quickly act on that decision. If your advisor wants to hold a concentrated position in a certain sector or stock, we think he should have the ability to do so. The old rules of style box diversification are dead. If your portfolio is over diversified and achieving index type of returns, what are you paying your advisor for?
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
In the early ‘90’s, Morningstar introduced a nine square grid that classifies securities by size, (large, mid, or small), along the vertical axis and by characteristics (value, core, and growth) along the horizontal axis, and thus style box diversification was born. Within this framework, Investment Advisors hire “best in class” managers, through mutual funds, third party managers, or exchange traded funds, to represent a particular box. Mangers are expected to invest only in stocks with characteristics fitting that box. In theory, the style box helps the investor construct a diversified portfolio that reduces overall volatility and, hopefully, increases return.
Unfortunately 2008 demonstrated that the style box approach has flaws and failed to shield investors from harm. If the manager/fund the Investment Advisor hires does not beat the index of the specific box he is hired to manage, they will fire him and replace him with another manager/fund. We believe that this approach is flawed in both its underlying assumption, that having money in all of the boxes is the best way to beat the market, and its implementation, that Investment Advisors are going to be able to identify the managers most likely to beat their assigned indexes.
Keeping managers constrained to a specific style box in our opinion actually limits investment performance, erodes purchasing power, and further results in a costly and inefficient portfolio. If investors employ nine traditional style box managers/funds, plus one that specializes in foreign stocks, and each manager/fund owns 50 securities, investors possibly own more than 500 stocks. Take into account the turnover between managers and trading costs, and at the end of the day with more than 500 positions, investors in effect would own a very expensive index fund, where the winners may be too small to have a significant impact on the portfolio.
In seeking to achieve superior returns, we feel that Investment Advisors should be free to roam the entire stock universe in search of opportunities and should not be constrained to one box. Proponents of style box diversification will tell you that from year to year there’s no telling which asset class will be the best performer, therefore portfolio diversification reduces risk by allocating assets across the various boxes. While it may be true that it’s very difficult to select the exact asset class that will perform best during any given year, for anyone willing to dig even slightly below the surface, it’s been very clear as to those that should be avoided. For example, the direction of the U.S. economy has been very clear, yet many fund managers are restricted from actively taking precautions against loses, such as raising cash or limiting exposure to a certain asset class, such as financials.
Warren Buffet, widely considered one of the worlds greatest investors built his wealth by concentrating his exposure, not through diversification. At times, he has held a mere five positions in his entire Berkshire Hathaway equity portfolio. He does not diversify, because with his level of expertise, he feels there is no need to do so. Further, he defines risk as “not knowing what you are doing,” and suggests if you are unsure of yourself, that diversification is the best strategy for you. In our view Investment Advisors that are truly on top of their game should concentrate their positions, as sustainable rewards can be reaped only by those that have the foresight and ability to invest in certain stocks and asset classes well ahead of the curve.
In an effort to achieve superior returns given today’s volatile market conditions, we believe that an Investment Advisor must be free of portfolio restraints or limitations. If economic conditions suggest a move to all cash, an advisor needs to be able to quickly act on that decision. If your advisor wants to hold a concentrated position in a certain sector or stock, we think he should have the ability to do so. The old rules of style box diversification are dead. If your portfolio is over diversified and achieving index type of returns, what are you paying your advisor for?
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
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