Thomas Ford Library Investment Discussion Group · Changing Portfolio Design and Management Importance of Asset ... Nuveen Quality Preferred Inc 3 Common JHP -12.66 27.9 7.43 1.33

10/15/2014

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Thomas Ford Library Investment Discussion Group

Closed‐End Funds

October 14, 2014

Kirk A. Kreikemeier, CFP®, CFA, FSA4365 Lawn Avenue, Suite 5Western Springs, IL 60558

708‐246‐2366 | [email protected]

Topics Covered

Importance of Asset Allocation

Closed‐End‐Funds

Market Update

Kirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com

10/15/2014

2

Changing Portfolio Design and Management Importance of Asset Allocation

Traditional Current

Portfolio Mix 60% equity / 40% bonds Refined sectors plus alternatives

Holdings Individual stocks / bonds ETF / Mutual Fund / CEF / Individual

Regions US‐based Global

Return Yield focus and price return Total return

Risk Measures Standard deviation or none Std Dev, Sharpe, Capture Ratio, Drawdown

Accounts Manage each account as stand‐alone Combine all accounts by goal funding

Tax Management Tax‐loss harvest at year‐end ‘Asset Location’, harvest throughout year


Changing Portfolio Design and Management Importance of Asset Allocation

Traditional Current

Portfolio Mix 60% equity / 40% bonds Refined sectors plus alternatives

Holdings Individual stocks / bonds Individual / Mutual Fund / ETF / CEF

Regions US‐based Global

Return Yield focus and price return Total return

Risk Measures Standard deviation or none Std Dev, Sharpe, Capture Ratio, Drawdown

Accounts Manage each account as stand‐alone Combine all accounts by goal funding

Tax Management Tax‐loss harvest at year‐end ‘Asset Location’, harvest throughout year


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Capital Structure Exposure of Investment Importance of Asset Allocation

Debt

Equity


Refined Asset Classes and Allocation Weight Importance of Asset Allocation

Sample

Old

Weight

Sample

New

Weight

Asset ClassYTD (1)

Total

Return

3 Yr

Total

Return

10 Yr

Total

Return

15 Yr

Total

Return

10 Yr

Std

Dev

10 Yr

Sharpe

Ratio

2008

Annual

Return

60% 23% Equity‐US Large Cap 8.08 23.01 8.46 5.19 14.7 0.52 ‐37.067% Equity‐US Small Cap ‐1.16 23.34 10.12 9.31 19.9 0.51 ‐37.7610% Equity‐Int'l Developed ‐1.38 13.65 6.32 3.87 18.3 0.35 ‐43.38

5% Equity‐Int'l Emerging 2.43 7.19 10.68 9.01 23.8 0.49 ‐53.3340% 22% Bonds‐US Aggregate Bond 4.10 2.43 4.62 5.57 3.2 0.92 5.24

5% Bonds‐US High Yield Credit 3.49 11.09 8.33 7.67 10.4 0.67 ‐26.168% Bonds‐Int'l Bond (Curr Hdg) 6.04 4.78 4.61 4.98 2.4 1.20 5.75

5% Commodity ‐5.59 ‐5.34 ‐1.04 3.69 18.0 ‐0.05 ‐35.655% Real Estate‐US 14.69 16.19 8.21 11.70 26.4 0.38 ‐39.20

10% Cash & Equivalents 0.03 0.06 1.52 2.01 0.7 ‐0.08 1.77

Inflation (2) 1.21 1.64 2.30 2.37 1.2 0.57 ‐0.02Note: (1) Returns are not annualized; (2) as of 8/31/2014 Source: Morningstar Office, PVWM Research

Sharpe Ratio = (Return over Risk‐Free) / (Std Dev of Return over Risk‐Free); risk‐adjusted reward per unit risk

Asset Class Annualized Total Returns as of 9/30/2014


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Annualized Total Returns Vary by Starting Point Importance of Asset Allocation

Sample

Old

Weight

Sample

New

Weight

Asset ClassYTD (1)

Total

Return

3 Yr

Total

Return

10 Yr

Total

Return

15 Yr

Total

Return

10 Yr

Std

Dev

10 Yr

Sharpe

Ratio

2008

Annual

Return

60% 23% Equity‐US Large Cap 8.08 23.01 8.46 5.19 14.7 0.52 ‐37.067% Equity‐US Small Cap ‐1.16 23.34 10.12 9.31 19.9 0.51 ‐37.7610% Equity‐Int'l Developed ‐1.38 13.65 6.32 3.87 18.3 0.35 ‐43.38

5% Equity‐Int'l Emerging 2.43 7.19 10.68 9.01 23.8 0.49 ‐53.3340% 22% Bonds‐US Aggregate Bond 4.10 2.43 4.62 5.57 3.2 0.92 5.24

5% Bonds‐US High Yield Credit 3.49 11.09 8.33 7.67 10.4 0.67 ‐26.168% Bonds‐Int'l Bond (Curr Hdg) 6.04 4.78 4.61 4.98 2.4 1.20 5.75

5% Commodity ‐5.59 ‐5.34 ‐1.04 3.69 18.0 ‐0.05 ‐35.655% Real Estate‐US 14.69 16.19 8.21 11.70 26.4 0.38 ‐39.20






Risk Measures – No Free Lunch Importance of Asset Allocation

Sample

Old

Weight

Sample

New

Weight

Asset ClassYTD (1)

Total

Return

3 Yr

Total

Return

10 Yr

Total

Return

15 Yr

Total

Return

10 Yr

Std

Dev

10 Yr

Sharpe

Ratio

2008

Annual

Return

60% 23% Equity‐US Large Cap 8.08 23.01 8.46 5.19 14.7 0.52 ‐37.06

7% Equity‐US Small Cap ‐1.16 23.34 10.12 9.31 19.9 0.51 ‐37.7610% Equity‐Int'l Developed ‐1.38 13.65 6.32 3.87 18.3 0.35 ‐43.385% Equity‐Int'l Emerging 2.43 7.19 10.68 9.01 23.8 0.49 ‐53.33

40% 22% Bonds‐US Aggregate Bond 4.10 2.43 4.62 5.57 3.2 0.92 5.24

5% Bonds‐US High Yield Credit 3.49 11.09 8.33 7.67 10.4 0.67 ‐26.168% Bonds‐Int'l Bond (Curr Hdg) 6.04 4.78 4.61 4.98 2.4 1.20 5.755% Commodity ‐5.59 ‐5.34 ‐1.04 3.69 18.0 ‐0.05 ‐35.655% Real Estate‐US 14.69 16.19 8.21 11.70 26.4 0.38 ‐39.20






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Calendar Year Total Returns – 9/30/2014 Importance of Asset Allocation

Source: Morningstar OfficeKirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 | pvwealthmgt.com

Topics Covered



Market Update


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Investment Vehicle Comparison Closed End Funds

Individual Stock/Bond Mutual Fund Exchange‐Traded Fund Closed‐End Fund

Asset Class Available Mostly equity, bonds All All; focused; index Mostly equity, bonds

Buying/Selling Throughout day End of day only Throughout day Throughout day

Expense Ratio None Higher if active Lower Higher + borrow costs

Transaction Costs Commission + bid/ask‐ Bonds embed in yield

None if fund company‐ Loads for some

Commission + bid/ask‐Wide b/a for focused

Commission + bid/ask‐Wide b/a for some

Premium Discount None None Yes, generally small Yes, can be substantial

Leverage If use margin, options None Margin, options, 2x, 3x Yes, part of structure

Tax Efficiency Investor controls No control, annual‐ Sell as redeem

Investor mostly control‐ Trade units, create

Investor mostly controls, tax leverage


Premium / Discount for Closed‐End Fund (HPF) Closed End Funds


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Leverage Closed End Funds

House #1 House #2 House #3 House #4

Purchase Price (Exposure) 100,000$ 100,000$ 100,000$ 100,000$

Down Payment (Equity) 100,000$ 72,000$ 20,000$ 5,000$

Mortgage (Borrow) ‐$ 28,000$ 80,000$ 95,000$

Leverage 100% 139% 500% 2000%

$ Gain/Loss if 10% Move 10,000$ 10,000$ 10,000$ 10,000$

% Gain/Loss if 10% Move 10% 14% 50% 200%

Equivalent Investment Mutual Fund Closed End Fund New Home Spec Home


Closed‐End Fund Key Metrics – Illustration Only Closed End Funds

Morningstar Category

Name Ticker Prem / Disc

Lvg Distn Rate

Net Exp (excl Int)

Total Ret YTD

3 Yr TRR Annlzd

Std Dev 3 Yr

Worst 3 Mo Ret

Preferred Stock iShares US Preferred Stock PFF 0.00 5.66 0.47 11.31 9.51 6.71 -29.22JH Preferred Income II Common HPF -7.79 36.2 8.45 1.28 16.32 7.77 10.73 -33.75JH Preferred Income III Common HPS -8.81 35.2 8.46 1.26 16.65 9.39 11.90 -37.15Nuveen Quality Preferred Inc 3 Common JHP -12.66 27.9 7.43 1.33 13.17 12.52 10.27 -45.74

Real Estate iShares US Real Estate IYR 0.01 3.74 0.45 14.88 14.92 14.05 -47.35LMP Real Estate Income Common RIT -12.87 19.4 6.35 1.30 18.28 16.84 17.32 -61.35

Municipals iShares National AMT-Free Muni Bond MUB -0.05 2.88 0.25 8.54 4.47 5.33AllianceBernstein Nat Muni Inc Common AFB -8.89 37.2 6.47 1.02 13.93 6.52 11.79 -18.05PIMCO Municipal Income II Common PML -4.26 36.0 6.67 1.16 15.91 9.28 13.98 -35.57

Source: Morningstar Office; CEF Connect; PVWM Research

25.0% 33.0% 39.6% <= marginal federate rate

3.8% 3.8% <= Medicare Surtax on Unearned Income

AllianceBernstein Nat Muni Inc Common 8.63% 10.24% 11.43% <= pre‐tax equivalent for comparison

PIMCO Municipal Income II Common 8.89% 10.55% 11.78% <= pre‐tax equivalent for comparison


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Closed‐End Fund Analytics – cefconnect.com Closed End Funds


cefconnect.com – Key Functionality Closed End Funds

Enter Ticker in Quick Search

Overview – distribution rate, premium/discount graph

Fund Basics – leverage, expenses, sponsor website (Fact Sheet)

Distributions – ex‐div date, changes, income/gain/return of capital

Pricing Information ‐ premium/discount graph, different time periods

Performance ‐ total returns, NAV and price

Portfolio Characteristics – bond type, quality, sector, region (also Fact Sheet)

Fund Screener

Filter by asset class (called Investment Strategy) then sort by key metric; beware of Managed DistributionKirk A. Kreikemeier, CFP(R), CFA, FSA | 708 246‐2366 |

pvwealthmgt.com

10/15/2014

9

Topics Covered



Market Update


Asset Class Returns Heat Map – 10/10/2014Source: Morningstar Office

Market Update

Name Total Ret MTD - Oct 10

Total Ret YTD - Oct 10

Annual Ret 2013 USD

Annual Ret 2012 USD

Annual Ret 2011 USD

Annual Ret 2010 USD

Annual Ret 2009 USD

Annual Ret 2008 USD

Annual Ret 2007 USD

DJ US TSM Large Cap TR USD -3.43 4.37 32.65 16.12 1.71 16.07 26.98 -37.06 6.40DJ US TSM Small Cap TR USD -4.71 -5.82 39.63 18.30 -2.91 28.61 41.93 -37.76 1.90MSCI EAFE NR USD -5.25 -6.56 22.78 17.32 -12.14 7.75 31.78 -43.38 11.17MSCI EM NR USD -1.50 0.89 -2.60 18.22 -18.42 18.88 78.51 -53.33 39.42Barclays US Trsy Bellwethers 5 Yr TR USD 1.10 2.85 -2.47 2.29 9.36 7.02 -1.35 13.97 10.28Barclays US Trsy Bellwethers 30Y TR USD 3.48 21.65 -15.03 2.34 35.60 8.72 -25.88 41.25 10.14Barclays US Treasury US TIPS TR USD 1.47 5.19 -8.61 6.98 13.56 6.31 11.41 -2.35 11.64Barclays US Corp IG TR USD 1.35 7.03 -1.53 9.82 8.15 9.00 18.68 -4.94 4.56Barclays US Corporate High Yield TR USD -0.23 3.25 7.44 15.81 4.98 15.12 58.21 -26.16 1.87Barclays Gbl Agg Ex USD TR Hdg USD 0.39 6.45 1.18 6.46 3.94 3.28 4.43 5.75 4.27Bloomberg Commodity TR USD -0.41 -5.98 -9.52 -1.06 -13.32 16.83 18.91 -35.65 16.23DJ US Select REIT TR USD 2.46 17.51 1.22 17.12 9.37 28.07 28.46 -39.20 -17.56

CurrencyShares® Euro ETF -0.07 -8.65 4.10 1.20 -3.03 -6.70 3.25 -1.67 14.29CurrencyShares® Japanese Yen ETF 1.64 -2.91 -18.06 -11.37 4.99 14.32 -3.01 22.98


10/15/2014

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Treasury Rates – Different Maturities Market Update


Corporate Spreads – Different Qualities Market Update


10/15/2014

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S&P 500 versus Volatility Index (VIX) Market Update


Unemployment Rate Falling; So is Participation Market Update


10/15/2014

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Inflation versus Treasury Bills Market Update


Social Security 2015 COLA Estimate * (Oct 22nd) Market Update

CPI ‐ W Year Inflation2013-07-01 230.084 2001 3.50%2013-08-01 230.359 average 2002 2.60%2013-09-01 230.537 230.327 2003 1.40%2013-10-01 229.735 2004 2.10%2013-11-01 229.133 2005 2.70%2013-12-01 229.174 2006 4.10%2014-01-01 230.040 2007 3.30%2014-02-01 230.871 2008 2.30%2014-03-01 232.560 2009 5.80%2014-04-01 233.443 2010 0.00%2014-05-01 234.216 2011 0.00%2014-06-01 234.702 2012 3.60%2014-07-01 234.525 2013 1.70%2014-08-01 234.030 average 2014 1.50%9/1/2014 * 234.030 234.195 2015* 1.70%

0.016794987

{ (234.195 / 230.327) ‐ 1} x 100 = 1.68

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015*

Social Security Inflation Adjustment

Source: ssa.gov, PVWMResearch


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Contact Information

Kirk A. Kreikemeier, CFP®, CFA, FSA

4365 Lawn Avenue, Suite 5Western Springs, IL 60558

pvwealthmgt.com

708‐246‐[email protected]

Documents

Thomas Ford Library Investment Discussion Group · Changing Portfolio Design and Management Importance of Asset ... Nuveen Quality Preferred Inc 3 Common JHP -12.66 27.9 7.43 1.33