David C. Wright, Managing Director

Sierra Investment Management, Inc.

and the Sierra Mutual Funds

National Advisors Trust Conference

Las Vegas May 2013

BUY & HOLD vs.

TACTICAL STRATEGIES

NAT Vegas 0513

2

TOP EMERGING THEMES FOR 2013

The investment industry is increasingly focusing on

Risk mitigation – clients are tired of the rollercoaster and have lost faith in the old theories

“Alternative Investing” – especially “Absolute Return” – for the same reasons

“SECULAR” BULLS & BEARS Latest 113 years

Stocks can be productive for long periods – and then NOT productive – but always volatile (risky)

CYCLES – RISK ON,

THEN RISK OFF,

THEN REPEAT

5

“Behavioral Finance” now plays an important part in the emerging new investment theories

THE “RISK ON/RISK OFF” CYCLE

“SECULAR” BULLS & BEARS Latest 113 years

Let’s take a quick look at the cycles within the 1965-1982 secular Bear Market

BIG RALLIES OCCUR EVEN DURING EXTENDED SECULAR

BEAR MARKETS

A “Secular” Bear Market: The Dow first touched

1000 in 1965 – 17 years later, the Dow was at

764!

1/66-8/82: CYCLICAL RALLIES DURING

EXTENDED (“SECULAR”) BEAR MARKETS

Circles: a 32-month rally of 66.6%, 1970-73,

and a 22-month rally of 75%, 1974-76

Major cycles within the current secular Bear Market – how will your clients react to another

down cycle?

RECENT STOCK MARKET CYCLES

Latest 16 years Now

>+138%!

PROJECTED ASSET CLASS RETURNS

Next seven years, after 2.5% inflation

GMO’s LT outlook for the S&P is not attractive! Our own shorter-term outlook is: “trouble ahead”!

David C. Wright, Managing Director

Sierra Investment Management, Inc.

and the Sierra Mutual Funds

CFA Institute

Chicago, Illinois May 2012

The Ongoing (R)evolution

in Investment Theory

CFA Institute 0512

RE-THINKING ASSET ALLOCATION – and “BUY AND HOLD”

“BUY AND HOPE”

Can you name any Wall Street firm that has EVER used a buy-and-hold approach in its own multi-billion $ “proprietary” accounts?

B&H has been a convenient, self-serving paradigm for brokers and the mutual fund industry – and it has destroyed the retirement finances of tens of millions of Americans

B&H ignores the impact of risk on real people

HOLDING PERIODS FOR STOCKS

Latest 89 years

How many institutions believe in

“Buy and Hold”? Should you?

Average is now less than 12

months

Average was 6-8

years, 40 years ago

HOLDING PERIODS FOR STOCKS

Latest 89 years

How many institutions honestly believe in

“Buy and Hold”? Should you?

The most recent average is TWO

MONTHS!

Average was 6-8

years, 40 years ago

SOME ISSUES WITH BUY-AND-HOLD

The downside can be substantial

One can go a decade or more

without any gain

Too much focus on one Asset

Class – U.S. equities – leads

one to not pay attention to other

profitable uptrends and new

opportunities

$6.50-

6.00-

5.50-

5.00-

4.50-

4.00-

3.50-

3.00-

-6.50

-6.00

-5.50

-5.00

-4.50

-4.00

-3.50

-3.00

2007 2008 2009 2010 2011

“TRAILING STOPS” One example

Sierra uses trailing stops to limit the impact of a sustained decline in any holding

Moving Average

(blue)

Northeast Investors Trust (red)

to 4/27/11

Sell

THE RISE OF “ALTERNATIVE INVESTING”

Institutional investors (and others)

became greedy for higher returns –

through 2000

Starting about 2001, institutional

investors became dissatisfied with the

results of traditional models

The hedge fund industry, then the mutual

fund industry responded, plus ETFs

Many of the new products and strategies

have names driven by marketing appeal

BASICS OF “ALTERNATIVE INVESTING”

Allocate among more Asset Classes – e.g., Permanent Portfolio Fund

“Tactical allocation” and “strategic allocation”: Change the allocation according to some discipline

A wide range of “alternative strategies” – e.g., managed futures, long-short, market neutral, “strategic income”, “Absolute Return” – are dominant themes today

BUY-AND-HOLD and STATIC ASSET ALLOCATION

A static asset allocation (pie chart) is

a version of Buy and Hold

A static allocation to investment

managers can result in the same

Are there times in the market cycle

to take on risk, and times to reduce

risk?

A CLASSIC EXAMPLE OF SUCCESSFUL

“TACTICAL ALLOCATION”

260- 240- 220- 200- 180- 160- 140- 120- 100- 80-

-260 -240 -220 -200 -180 -160 -140 -120 -100 - 80

Same end result, but a far bumpier ride – at least, for Buy and Hold investors

“JUNK BONDS” vs. TREASURIES Recent 10 years

2001 2003 2005 2007 2009 2011

to 9/9/11

PIMCo Long-Term U.S. Gov’t – up

130%

Fidelity Adv. High Income –up

140%!

260- 240- 220- 200- 180- 160- 140- 120- 100- 80-

-260 -240 -220 -200 -180 -160 -140 -120 -100 - 80

Let’s examine this phase of the “risk taking/risk aversion” cycle

“JUNK BONDS” vs. TREASURIES Recent 10 years

2001 2003 2005 2007 2009 2011

PIMCo Long-Term U.S. Gov’t

Fidelity Adv. High Income

to 9/9/11

250-

225-

200-

175-

150-

125-

100-

-250

-225

-200

-175

-150

-125

-100

2003 2005 2007

3.2% compounded in Treasuries vs. 22.7% in High

Yield Corporate Bonds, with a skillful manager

A “TIME” FOR JUNK BONDS during the recovery phase, 9/02-6/07

PIMCo Long-Term U.S. Gov’t – up 14.2%

Fidelity Adv. High Income – up 161%!

260- 240- 220- 200- 180- 160- 140- 120- 100- 80-

-260 -240 -220 -200 -180 -160 -140 -120 -100 - 80

to 9/9/11

2001 2003 2005 2007 2009 2011

Now the opposite part of the cycle – June 2007-February 2009

THE “RISK” CYCLE REVERSES High-grade outperforms high yield

Fidelity Adv. High Income

PIMCo Long-Term U.S. Gov’t

130-

120-

110-

100-

90-

80-

70-

60-

50-

-130

-120

-110

-100

- 90

- 80

- 70

- 60

- 50 2007 2008

High-yield bonds have more correlation

to stocks than to Treasury bonds

Fidelity Adv. High Inc.

“RISK ASSETS” PEAKED IN 2007 -- time to move to safer Asset Classes – like

now?

PIMCo Long-Term U.S. Gov’t

6/12/07 to 12/19/08

225-

200-

175-

150-

125-

100-

75-

-225

-200

-175

-150

-125

-100

- 75 2009 2010 2011

Score: Risk-taking +126.6%, “safety” +3.6%

Fidelity Adv. High Inc.

WHEN THE CYCLE TURNED AGAIN

after the March 2009 “Global Fear Bottom” 12/19/08 to 2/8/11

PIMCo Long-Term U.S. Gov’t

130-

120-

110-

100-

90-

-130

-120

-110

-100

- 90

PIMCo Long-Term U.S. Gov’t

(green)

During 2011, many non-U.S. market participants gradually lost appetite for risk

THE “RISK” CYCLE TURNED AGAIN

Seven great months to be in high-grade!

to 10/4/11

2011

Fidelity Advisor High Income Adv. (red)

130-

-

120-

-

110-

-

100-

-

90-

-130

-

-120

-

-110

-

-100

-

- 90

PIMCo Long-Term U.S. Gov’t

(green)

Although many global Risk-On asset classes peaked months ago (or more) – HYCB not yet

THE CURRENT “RISK-ON” CYCLE

Mid-2011 to the present

to 4/17/13

2011 2012 2013

Fidelity Advisor High Income Adv. (red)

THE BIRTH OF “ABSOLUTE RETURN”

First goal – to mitigate volatility

and downside risk

Second goal – to achieve

satisfying average returns

Hmm – sounds strangely like

what conservative clients have

been seeking for a long time?

Thanks!

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