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January 15, 2013
Michael J. Oyster, CFAManaging Principal / Portfolio Strategist
FLATTENING YOUR INVESTMENT PORTFOLIO
FUND EVALUATION GROUP, LLC
Confidential Not For Redistribution2©2012 Fund Evaluation Group, LLC
MANAGED OPPORTUNITIES
FEG Managed Portfolios
Moderate Growth Portfolio (70/30)
Balanced Growth Portfolio (60/40)
Balanced Portfolio (50/50)
Income and Growth Portfolio (40/60)
Capital Preservation Portfolio (20/80)
Equity Portfolio
Fixed Income Portfolio
Real Assets Portfolio1
Diversifying Strategies Portfolio1
1 Subject to availability
Benefits
•Combination of ETF and mutual fund holdings
•Dynamic asset allocation
•Low portfolio costs
•10 year performance track record
•Minimum account generally $50,000
Confidential Not For Redistribution3©2012 Fund Evaluation Group, LLC
History
• Over 24 years of client service since 1988
• Approximately $33 billion* in client assets under advisement
• Employee owned, with broad equity ownership
• Monetary compensation derived solely from clients
FUND EVALUATION GROUP, LLC PROFILE
*As of June 30, 2012
Confidential Not For Redistribution4©2012 Fund Evaluation Group, LLC
Institutional Clients
FEG CLIENTS AND SERVICES
Financial Advisors
Consulting Services
Outsourced CIO
Managed Portfolios
Alternative InvestmentStrategies
Research Services Endowment Alliance Program
Confidential Not For Redistribution5©2012 Fund Evaluation Group, LLC
INVESTMENT PHILOSOPHY
FEG’s Investment Philosophy
• Investment decisions should be made with a long-term perspective
• Portfolios should be constructed to help achieve diversification by global risk factors
• Valuation considerations should drive investment decisions
• Skillful active management has the potential to add value
Confidential Not For Redistribution6©2012 Fund Evaluation Group, LLC
FEG seeks to add value by utilizing active and passive solutions for both asset allocation and manager selection.
INVESTMENT OVERVIEW
Outperformance
ACTI
VE
Global Diversification
Global Diversification
Dynamic AllocationDynamic
AllocationActive
ManagersActive
Managers
IndexStrategies
IndexStrategies
PASS
IVE
ALLOCATION POLICY
MANAGER SELECTION
Risk ManagementLow Cost
Confidential Not For Redistribution7©2012 Fund Evaluation Group, LLC
PORTFOLIO DESIGN - GLOBAL DIVERSIFICATION
Dynamic AllocationDynamic
AllocationActive
ManagersActive
Managers
IndexStrategies
IndexStrategies
Global Diversification
Global Diversification
• Portfolios should be constructed to help achieve diversification by global risk factors
• Broad based view of asset allocation, with investments falling into one of four asset categories
Asset Categories Role RiskGlobal Equity Total Return
Stock MarketDeclines
Global Fixed Income and Credit Deflation Protectionand Total Return
Rising Rates and/or Credit Downgrades
Real Assets Inflation Protectionand Total Return Deflation
Diversifying Strategies Diversification and Total Return Active Management
Confidential Not For Redistribution8©2012 Fund Evaluation Group, LLC
CORE AND CATEGORY PORTFOLIOS
GLOBAL EQUITYGLOBAL EQUITY GLOBAL FIXED INCOME AND CREDIT
GLOBAL FIXED INCOME AND CREDIT REAL ASSETS*REAL ASSETS* DIVERSIFYING
STRATEGIES*DIVERSIFYING STRATEGIES*
Income & Growth40/60
Balanced50/50
Moderate Growth70/30
Capital Preservation
20/80
Equity Fixed Income
Real Assets
Diversifying Strategies
Category Portfolios
Core Portfolios
*Subject to availability
Confidential Not For Redistribution9©2012 Fund Evaluation Group, LLC
PORTFOLIO DESIGN - INDEX STRATEGIES
Dynamic AllocationDynamic
AllocationActive
ManagersActive
Managers
Global Diversification
Global Diversification
IndexStrategies
IndexStrategies
Index strategies are used where:
• It can be difficult for active management to outperform over long periods of time
• There is a significant cost savings to gaining beta exposure
• ETFs or index funds can help provide targeted asset classes/ styles
FEG’s philosophy incorporates passive and active strategies in different aspects of portfolio construction. We utilize passive solutions in the broad policy allocation to help provide low-cost global diversification while drawing upon active strategies to dynamically allocate between asset classes.
Confidential Not For Redistribution10©2012 Fund Evaluation Group, LLC
PORTFOLIO DESIGN - ACTIVE MANAGERS
Global Diversification
Global Diversification
IndexStrategies
IndexStrategies
Dynamic Allocation
Active Managers
Active Managers
FEG seeks to identify managers with:• Experienced personnel• Sound investment philosophy• Demonstrated ability to outperform
Six-Tenet Manager Review Process
Conviction strong belief in the investment philosophy; willing to put investment decisions ahead of business decisions; invests alongside of clients, aligning interests
Consistency stability of organizational structure, composition of the investment professionals, and the investment philosophy and process
Pragmatism understand core strengths and have the ability to capitalize and sustain their competitive edge
Investment Culture strong ethical foundation, passionate about investing; proper organizational and compensation structure; culture pervades across organization
Risk Control not blind risk takers, but risk conscious; acknowledge mistakes; robust and effective risk mitigation
Active Return ability to identify and profit from investment opportunities; successful track record
Confidential Not For Redistribution11©2012 Fund Evaluation Group, LLC
PORTFOLIO DESIGN - DYNAMIC ALLOCATION
Active ManagersActive
Managers
Global Diversification
Global Diversification
IndexStrategies
IndexStrategies
Dynamic AllocationDynamic
Allocation
FEG Portfolio Team seeks to add alpha through dynamic asset allocation decisions that overweight asset classes with an opportunity to out-perform in the mid to long-term time frame.
Key Considerations
•Valuation – main criteria we focus on when making a portfolio change.
•Sentiment – measures the pulse of market participants; their level of fear and greed. It comprises the stories that investors tell themselves.
•Fundamentals – Fundamentals are what is happening now, which we then compare to the past and use to speculate about the future.
Confidential Not For Redistribution12©2012 Fund Evaluation Group, LLC
0%
10%
20%
30%
40%
50%
60%
70%
Equities Fixed Income/Credit
Real Assets Diversifying Strategies
Perc
enta
ge o
f Po
rtfol
io
FLAT
FLATTENING THE PORTFOLIO
•The low return environment
•The impact of interest rates and inflation on financial assets
• Our recommendation to “flatten” portfolio allocations (i.e., reduce financial assets, equities and bonds, in favor of real assets and diversifying strategies)
• can help improve return potential• can help to diversify risk
Source: FEG Data Source: FEG Data
0%
10%
20%
30%
40%
50%
60%
70%
Equities Fixed Income/Credit
Real Assets Diversifying Strategies
Perc
enta
ge o
f Po
rtfol
io
STEEP
Confidential Not For Redistribution13©2012 Fund Evaluation Group, LLC
DURATION TAILWIND
From 1981 through 1999, equities returned an unprecedented annualized return of 18.5% while bonds returned 10% annualized
•Performance was supported by the decline of interest rates (i.e., bond yields), which resulted in an expansion of credit and supported a secular bull market in equities that drove price/earnings multiples higher
0
5
10
15
20
25
30
35
40
45
50
0%
2%
4%
6%
8%
10%
12%
14%
16%
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Pric
e/Ea
rnin
gs M
ulti
ple
Bond
Yie
ld
INTERMEDIATE GOVERNMENT BOND YIELD AND PRICE/EARNINGS MULTIPLE EXPANSION (1981-2011)
Bond Yield P/E Normalized
Sources: Ibbotson Associates and Robert Shiller
Confidential Not For Redistribution14©2012 Fund Evaluation Group, LLC
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Retu
rn
RETURNS VS. OBJECTIVE60/40 Equity/Bond Portfolio, 10-year Rolling Return
Rolling 10-year Return
8% Return Objective
DURATION TAILWIND
Two easy decades - but not the norm
Return objectives vary, we use 8% for illustration
Source: Ibbotson Associates and Barclays Capital
Uniquely strong returns in the 1980s and 1990s allowed a simple equity/bond portfolio to meet investors’ goals
Confidential Not For Redistribution15©2012 Fund Evaluation Group, LLC
EMPHASIS ON VALUE
• Russell data since 1979 reiterates conclusion from Fama and French• The “value premium” has been more pronounced in Small Cap than Large Cap• The recent outperformance of Small Cap Growth over Small Cap Value is rare
-15
-10
-5
0
5
10
15
20
Dec
-83
Dec
-85
Dec
-87
Dec
-89
Dec
-91
Dec
-93
Dec
-95
Dec
-97
Dec
-99
Dec
-01
Dec
-03
Dec
-05
Dec
-07
Dec
-09
Dec
-11
Large Cap Value vs. Large Cap Growth5 Year Excess Return
-15-10
-505
1015202530
Dec
-83
Dec
-85
Dec
-87
Dec
-89
Dec
-91
Dec
-93
Dec
-95
Dec
-97
Dec
-99
Dec
-01
Dec
-03
Dec
-05
Dec
-07
Dec
-09
Dec
-11
Small Cap Value vs. Small Cap Growth5 Year Excess Return
Large Cap Growth has outperformed Large Cap Value in 60% of historical 5-year periods
Small Cap Value has outperformed Small Cap Growth in 83% of historical 5-year periods
Source: FEG Data
Confidential Not For Redistribution16©2012 Fund Evaluation Group, LLC
EMPHASIS ON VALUE
• Relative valuations are near historical norms suggesting the tactical posture return to “strategic equilibrium”, specifically a bias toward Value
1.2x
1.5x
0x
1x
2x
3x
4x
03/8
4
03/8
6
03/8
8
03/9
0
03/9
2
03/9
4
03/9
6
03/9
8
03/0
0
03/0
2
03/0
4
03/0
6
03/0
8
03/1
0
03/1
2
Russ
ell 1
000
Gro
wth
/ Ru
ssel
l 100
0 Va
lue
P/E
Source: Rimes
RELATIVE VALUATIONS: LARGE CAP GROWTH VS. VALUE P/E
+2 standard deviations
-1 standard deviation
-2 standard deviations
+1 standard deviation
Large Cap Value Attractive
Large Cap Growth Attractive
2.7x
2.4x
0.0x
0.5x
1.0x
1.5x
2.0x
2.5x
3.0x
3.5x
4.0x
4.5x
5.0x
03/8
4
03/8
6
03/8
8
03/9
0
03/9
2
03/9
4
03/9
6
03/9
8
03/0
0
03/0
2
03/0
4
03/0
6
03/0
8
03/1
0
03/1
2
Russ
ell 1
000
Gro
wth
/ Ru
ssel
l 100
0 Va
lue
P/B
Source: Rimes
RELATIVE VALUATIONS: LARGE CAP GROWTH VS. VALUE P/B
-1 standard deviation
-2 standard deviations
+1 standard deviation
+2 standard deviations
Large Cap Value Attractive
Large Cap Growth Attractive
1.3x1.7x
-2x
0x
2x
4x
6x
8x
10x
03/8
4
03/8
6
03/8
8
03/9
0
03/9
2
03/9
4
03/9
6
03/9
8
03/0
0
03/0
2
03/0
4
03/0
6
03/0
8
03/1
0
03/1
2
Russ
ell 2
000
Gro
wth
/ Ru
ssel
l 200
0 Va
lue
P/E
Source: Rimes
RELATIVE VALUATIONS: SMALL CAP GROWTH VS. VALUE P/E
Small Cap Value Attractive
Small Cap Growth Attractive
+2 standard deviations
+1 standard deviation
-1 standard deviation
-2 standard deviations
2.4x2.4x
0x
1x
2x
3x
4x
5x
03/8
4
03/8
6
03/8
8
03/9
0
03/9
2
03/9
4
03/9
6
03/9
8
03/0
0
03/0
2
03/0
4
03/0
6
03/0
8
03/1
0
03/1
2
Russ
ell 2
000
Gro
wth
/ R
usse
ll 20
00 V
alue
P/B
RELATIVE VALUATIONS: SMALL CAP GROWTH VS. VALUE P/B
Source: Rimes
-1 standard deviation
+1 standard deviation
+2 standard deviations
Small Cap Value Attractive
Small Cap Growth Attractive
-2 standard deviations
Source: Rimes
Confidential Not For Redistribution17©2012 Fund Evaluation Group, LLC
OVERWEIGHT EMERGING MARKETS
Emerging markets are attractive for 4 primary reasons:
•Valuations
•Expected economic growth
•Demographic trends
•Low debt-to-GDP
Confidential Not For Redistribution18©2012 Fund Evaluation Group, LLC
OVERWEIGHT EMERGING MARKETS
Valuations
15.0x
18.6x
0x
5x
10x
15x
20x
25x
30x
2000 2002 2004 2006 2008 2010
Pric
e / E
arni
ngs (
Nom
inal
10-
Year
Nor
mal
ized
)
MSCI Emerging P/E5
Average P/E5
Source: MSCI
HISTORICAL VALUATIONS: INTERNATIONAL PRICE/5-YEAR NORMALIZED EARNINGSMSCI EMERGING MARKETS, 2000 - PRESENT
11.8x
15.8x
0x
5x
10x
15x
20x
25x
30x
35x
40x
45x
03/9
9
03/0
0
03/0
1
03/0
2
03/0
3
03/0
4
03/0
5
03/0
6
03/0
7
03/0
8
03/0
9
03/1
0
03/1
1
03/1
2
Pric
e / E
arni
ngs (
Trai
ling
12 M
o.)
MSCI Emerging Markets Index Average
Source: Rimes
HISTORICAL VALUATIONS: EMERGING MARKETS P/E
1.7x1.8x
0x
1x
2x
3x
4x
03/9
809
/98
03/9
909
/99
03/0
009
/00
03/0
109
/01
03/0
209
/02
03/0
309
/03
03/0
409
/04
03/0
509
/05
03/0
609
/06
03/0
709
/07
03/0
809
/08
03/0
909
/09
03/1
009
/10
03/1
109
/11
03/1
2
Pric
e / B
ook V
alue
(Tra
iling
12
Mo.
)
HISTORICAL VALUATIONS: EMERGING MARKETS P/B
MSCI Emerging Markets Index Average
Source: Rimes
Confidential Not For Redistribution19©2012 Fund Evaluation Group, LLC
OVERWEIGHT EMERGING MARKETS
Expected Economic Growth•Estimated GDP Compound Annual Growth Rates 2011-2015
Source: IMF, Everest Capital
> 7% 5% to 7% 3% to 5% < 3%China Indonesia Australia AustriaIndia Malaysia Brazil Belgium
Taiwan Canada DenmarkThailand Chile Finland
Hong Kong FranceIreland GermanyIsrael Greece
Mexico ItalyNew Zealand Jamaica
Norway JapanPoland NetherlandsRussia Portugal
Singapore SpainSouth Africa SwitzerlandSouth Korea
SweedenTurkeyUkraine
United Arab EmiratesUnited Kingdom
United StatesZimbabwe
Emerging MarketsDeveloped Markets
Confidential Not For Redistribution20©2012 Fund Evaluation Group, LLC
OVERWEIGHT EMERGING MARKETS
Demographic Trends•Developed countries have aging populations
Source: PIMCO
Confidential Not For Redistribution21©2012 Fund Evaluation Group, LLC
OVERWEIGHT EMERGING MARKETS
Demographic Trends•Emerging economies will have a greater percentage in working age
Source: PIMCO
Confidential Not For Redistribution22©2012 Fund Evaluation Group, LLC
OVERWEIGHT EMERGING MARKETS
Debt to GDP•Lower in emerging economies than developed economies
Confidential Not For Redistribution23©2012 Fund Evaluation Group, LLC
BENCHMARK WEIGHT IN REAL ASSETS
Inflation was severely depressed following the financial crisis but is trending toward a more normal level today
-20%-15%
-10%
-5%
0%
5%
10%
15%
20%
25%30%
1915 1927 1939 1951 1963 1975 1987 1999 2011
Source: Bloomberg LP
Consumer Price Index (YoY)
2.7%
3.4%
Confidential Not For Redistribution24©2012 Fund Evaluation Group, LLC
BENCHMARK WEIGHT IN REAL ASSETS
0%
1%
2%
3%
4%
5%
6%
7%Lo
ng
Te
rm
Go
v B
on
ds
Bo
nd
s
Sto
cks
TIP
S
Hig
h Y
ield
Bo
nd
s
Priv
ate
Re
al
Esta
te
-O
pp
ortu
nis
tic
Pu
bli
c R
ea
l E
sta
te
MLP
s
Co
mm
od
itie
s
Priv
ate
Re
al
Esta
te
Tim
be
r
Priv
ate
En
erg
y
Average Quarterly ReturnsAs of March 31, 2012
Unexpected Inflation Remaining Inflation
Sources: Lipper,NCREIF, Ibbotson, Alerian
Confidential Not For Redistribution25©2012 Fund Evaluation Group, LLC
DOUBLELINE
• DoubleLine (DBLTX) exhibits a high current yield (7.5%) and a low historical volatility (see below)
• The management team is experienced and proven• The supply of non-agency Mortgage Backed Securities (MBS) is shrinking• Combining agency and non-agency MBS helps reduce expected risks
Annualized Volatility Inception of Strategy at TCW Investment Management Company to Present
August 1993 – May 2012: 3.95% DoubleLine-Branded Strategy to Present
April 2010 – May 2012: 2.94%
Source: Morningstar
Confidential Not For Redistribution26©2012 Fund Evaluation Group, LLC
CURRENT EMPHASIS
GLOBAL EQUITYGLOBAL EQUITY GLOBAL FIXED INCOME & CREDIT
GLOBAL FIXED INCOME & CREDIT REAL ASSETSREAL ASSETS DIVERSIFYING
STRATEGIESDIVERSIFYING STRATEGIES
Tactical emphasis on Residential
Mortgage Backed Securities
Tactical emphasis on Residential
Mortgage Backed Securities
Strategic weightStrategic weight Absolute Return Strategies
Absolute Return Strategies
Overweight Emerging Markets and International
Small Cap
Overweight Emerging Markets and International
Small Cap
Emphasize a Value tilt and Fundamental
Indexing
Emphasize a Value tilt and Fundamental
Indexing
Commodities, MLPs and hedged
REITs
Commodities, MLPs and hedged
REITs
Underweight Treasuries
Underweight Treasuries
Uncorrelated Return StreamsUncorrelated
Return Streams
Confidential Not For Redistribution27©2012 Fund Evaluation Group, LLC
QUESTIONS & ANSWERS
Confidential Not For Redistribution28©2012 Fund Evaluation Group, LLC
BIOGRAPHY
MICHAEL J. OYSTER, CFAManaging Principal - Portfolio Strategist
• B.B.A. in Finance, University of Cincinnati• Investment professional since 1994• FEG team member since 1999
Career Highlights:• Author. 2005. Mission Possible, Achieving Outperformance in a
Low-Return World. Chicago: Dearborn Trade.
Prior experience:• Schaeffer Investment Research, Inc. – Senior Quantitative Analyst
Memberships:• CFA Society of Cincinnati• CFA Institute• FEG Investment Policy Committee
Michael J. Oyster 513.719.5120
The CFA designation is a professional certification issued by the CFA Institute to qualified financial analysts who: (i) have a bachelor’s degree and four years of professional experience involving investment decision making or four years of qualified work experience[full time, but not necessarily investment related]; (ii) complete a self-study program (250 hours of study for each of the three levels); (iii) successfully complete a series of three six-hour exams; and (iv) pledge to adhere to the CFA Institute Code of Ethics and Standards of Professional Conduct.
Confidential Not For Redistribution29©2012 Fund Evaluation Group, LLC
FEG ADVISOR SUPPORT TEAM
Matthew J. Boyko
INTERNAL SUPPORT
Matthew J. Mullane
WEST
Jeremiah Whiteley
EAST
Confidential Not For Redistribution30©2012 Fund Evaluation Group, LLC
This one on one report was prepared by Fund Evaluation Group, LLC (FEG), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directed to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202 Attention: Compliance Department.
The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it.
FEG, its affiliates, directors, officers, employees, employee benefit programs and client accounts may have a long position in any securities of issuers discussed in this report. Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell any securities. Past performance is not indicative of future results. Index performance results do not represent any managed portfolio returns. An investor cannot invest directly in a presented index, as an investment vehicle replicating an index would be required. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
This report is prepared for informational purposes only. It does not address specific investment objectives, or the financial situation and the particular needs of any person who may receive this report.
DISCLOSURES
Confidential Not For Redistribution31©2012 Fund Evaluation Group, LLC
FIRM CONTACT INFORMATION
201 East Fifth StreetSuite 1600
Cincinnati, OH 45202Phone: 513.977.4400
Fax: 513.977.4430www.feg.com
Satellite Offices: Detroit / Indianapolis