Using Alternatives with a Purpose - FPA Mi · Vince has earned the right to use the Chartered Financial Analyst and Chartered Alternative Investment Analyst ... Presentation Overview

institutional.acadviser.com

Using Alternatives with a Purpose

THIS MATERIAL IS FOR INSTITUTIONAL/RIA USE ONLY. NOT FOR USE WITH THE PUBLIC. Strategy Behind Every Move.


Vincent A. Vitale, CFA, CAIADirector of Equity & Alternative Strategy Research

Presenters

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Vince received his BA degree in Finance from Michigan State University and an MS in Finance from Walsh College. Vince has earned the right to use the Chartered Financial Analyst and Chartered Alternative Investment Analyst designations. He was employed in analytical finance positions with Atlas Oil Co. and Duff & Phelps prior to joining Advance Capital. Vince has 13 years of investment experience, and is responsible for investment research, analysis, and portfolio construction.

John B. PelonInstitutional Business Director

John earned a BS degree in Finance from John Carroll University. Prior to joining Advance Capital, he worked for Comerica Bank in the Institutional Trust Department and the Asset Management Group. John has experience as an institutional investment consultant with Fund Evaluation Group, LLC and Aileron, Ltd, and has worked in the Treasury Department of the Detroit Medical Center and at Manufacturers National Bank. John has 31 years of investment experience and is responsible for overseeing the firm’s institutional client relationships.


Presentation Overview

Definitions of Main Alternative Asset Categories

Understanding the Intended Objective of Alternative

Asset Usage

Fallacies of Diversification Benefits from Some Alternatives

Determining the Proper Alternative Allocation Levels

Liquid Alternatives vs. Non-Liquid Alternatives

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Four Categories of Alternatives Commodities: represent claims on raw materials vs. most financial investments represent claims on an

organizations underlying assets or cash flow streams.

Hedge Funds: pooled funds employing multiple strategies to earn active return, or alpha, for their investors.

Hedge funds may be aggressively managed or make use of derivatives and leverage in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Private Equity: capital that is not listed on a public exchange. Composed of funds and investors that directly

invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.

Real Assets: physical assets that have value due to their substance and properties. Real assets include real estate,

agricultural land, infrastructure, and timber.

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Commodities Return Enhancer or Diversifier

Potential for both, based on timing the commodity cycle.

We view it more as a diversifier than a return enhancer in a strategic asset allocation.

Long term return, risk & correlation of commodity indexes relative to Stocks and Bonds from common inception of (5/1/1991):

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Index Name Return Standard DeviationS&P

correlation/Bond Correlation

S&P GSCI TR 0.67% 20.37% 0.24/-0.01

Bloomberg Commodity TR 2.17% 14.48% 0.29/0.04

S&P 500 TR 10.00% 13.97% 1.00/0.06

BBgBarc Us Aggregate Bond TR 5.62% 3.57% 0.05/1.00


Liquid vs. Non-Liquid

Owning commodities in non-liquid form would entail taking physical delivery.

This creates two main problems:

Storage Space and Storage Cost

Impractical for most investors

Investing in Commodities using liquid vehicle products is most common.

Alleviates the two main problems listed above

Understanding the difference in index construction

Active or passive approach

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Commodities


Real Assets

Real Assets are comprised of the following investment types

Real Estate

Infrastructure

Farmland

Timberland

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Return Enhancer or Diversifier Depends on type of Real Asset.

Long term return, risk & correlation of Real Asset indexes relative to Stocks and Bonds

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Investment Return Standard DeviationRussell 1000


Public Real Estate 11.75% 21.71% .58/.06

Private Real Estate 7.90% 4.77% .12/-0.17

Infrastructure 13.98% 15.99% .80/.16

Farmland 11.51% 6.60% .12/-.10

Timberland 9.90% 7.53% .05/.12

Russell 1000 11.38% 16.85% 1/-0.11

Return period is from 01/01/1990 through 09/30/2018 or since Benchmark inception if later than 01/01/1990 for the respective benchmark for each asset class. Benchmarks used for each asset class is as follows: Public Real Estate: DJ US Select REIT TR USD; Private Real Estate: NCREIF Property; Infrastructure: DJ Brookfield Global Infra TR USD; Farmland: NCREIF Farmland; Timberland: NCREIF Timberland.

Real Assets


Real EstateOptions for owning Real Estate (with multiple sub classes)

Private Real Estate & Public REITS

Equity vs. Debt

Domestic vs. International

Residential vs. Commercial

Primary vs. Secondary vs. Tertiary

Core vs. Value Add vs. Opportunistic

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Private Real Estate

Broadly considered a diversifier. Can enhance long-term portfolio returns based on the risk profile of the sub-class of Private Real Estate.

Core Private Real Estate, Value Add Private Real Estate, or Opportunistic Real Estate

Public REITS

Public REITs have proven to be a diversifier over time as well as a return enhancer.

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Real Estate


Liquid vs. Non-liquid Ownership

Public Real Estate is very liquid and can be owned via individual securities, ETFs or Mutual Funds

Private Real Estate can be owned via direct property purchase (Least Liquid), or through private real estate funds

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Real Estate


InfrastructureMost common ways to own Infrastructure Private Direct Infrastructure Return enhancer and a diversifier.

Public Infrastructure Return enhancer and diversifier.

Liquid vs Non-liquid Ownership Public Infrastructure is very liquid and can be

owned via individual securities, ETFs or Mutual Funds Private Infrastructure can be owned via direct property purchase

(Least Liquid), or through private infrastructure funds

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FarmlandHistorical returns indicate Farmland can add value as

both a return enhancer and a diversifier.

Believed to be more of a diversifier rather than return

enhancer to a portfolio.

Liquid vs non-liquid ownership

Various Farmland publicly traded REITS, have not provided the return or diversification benefit vs. non-liquid counterparts

Non-Liquid structures can be owned via direct Farmland purchase (least liquid) or private equity structures.

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Timberland Historical returns indicate Timberland can add

value as both a return enhancer and a

diversifier.

Believed to be more of a diversifier rather

than return enhancer to a portfolio.

Liquid vs non-liquid ownership

Various Timberland publicly traded REITS, have not provided the return or diversification benefit vs. non-liquid counterparts

Non-Liquid structures can be owned via direct Timberland purchase (least liquid) or private equity structures.

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Hedge FundsMultiple strategies, below are some broad classifications:

Diversified

Event-Driven

Long/Short

Relative Value

Macro

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Hedge FundsReturn Enhancer or Diversifier Strategy dependent

Long term return, risk & correlation of Hedge Fund indexes relative to Stocks and Bonds indicate they are relatively good diversifiers rather than return enhancers.

Manager selection is key to the amount of alpha produced.

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Diversified 7.83% 8.04% .68/-.04Event Driven 8.26% 8.20% .71/-.21Long/Short 9.07% 11.05% .76/-.11Relative Value 7.76% 6.40% .52/-.06Macro 9.96% 9.73% .22/.20Russell 1000 11.38% 16.85% 1/-0.11

Return period is from 01/01/1990 through 09/30/2018 or since Benchmark inception if later than 01/01/1990 for the respective benchmark for each asset class. Benchmarks used for each asset class is as follows: Diversified Hedge Fund: Credit Suisse Hedge Fund USD; Event Driven Hedge Fund: Credit Suisse Event Driven USD; Long/Short Hedge Fund: Credit Suisse Long/Short Equity TR USD; Relative Value Hedge Funds: Credit Suisse Multi-Strategy USD; Macro Hedge Funds: Credit Suisse Global Macro USD.


Liquid vs. Non-Liquid Ownership

Investing in Hedge Funds via GPs or less liquid structures have typically led to better returns than Liquid Alt counterparts

Hedge Funds have greater flexibility to implement their strategies through uses of leverage and purchasing of less liquid securities when owned in an illiquid structure.

Illiquid structures also lead to greater ability to increase long term returns for their strategy.

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Hedge Funds


Private EquityReturn Enhancer or Diversifier Private Equity is a return enhancer in a strategic asset allocation

Long term return, risk & correlation of private equity index relative to Stocks and Bonds.

Historically proven to add value through returns with a 0.73 correlation. The correlation reduction is derived from Private Equity pricing rather than true diversifying properties.

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Return period is from 01/01/1990 through 09/30/2018 or since Benchmark inception if later than 01/01/1990 for the respective benchmark for each asset class. Benchmarks used for each asset class is as follows: Private Equity: Cambridge Associates US Private Equity.



Private Equity 14.81% 10.53% .73/-.24

Russell 1000 11.38% 16.85% 1/-0.11


Private Equity

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institutional.acadviser.com 19

Liquid vs. Non-Liquid Ownership

Access to Private Equity through ownership of publicly traded securities of certain private equity companies

Historically this has provided no diversifying benefit to portfolio and average returns

Access through traditional GP structures has led to a higher opportunity to achieve return enhancing benefit, although with caveat that manager selection is everything.

Private Equity


Liquid vs. Non-Liquid AlternativesBenefits of investing in alternatives (return premium, non-correlation, risk diversification) are closely tied to liquidity.

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Illiquid

Liquid

1. Liquidity Spectrum Liquid and illiquid alternatives are characterized by their underlying abilities to be exchanged or sold in return for cash.

Investments such as private equity, hedge funds and real estate generally limit access to the assets for specific time periods.

Liquid alternatives may include alternative ETFs, ’40 Act funds or some Business Development Companies (BDCs), which can be sold on public exchanges.

2. Costs Generally, illiquid investments may provide less exposure to intermediary- based fees than liquid alternatives.

Many illiquid alternatives can be purchased directly from the source, reducing exposure to intermediary-based fees.

Many liquid alternatives have layers of fees that serve to compensate the intermediary or financial institution for creating and maintaining the liquid alternative.

3. Regulatory Requirements Illiquid investments are generally limited to accredited investors to compensate for their overall lack of oversight at the regulatory level.

In keeping the higher net worth profile of accredited investors, the minimum investment amounts for illiquid alternatives tend to be higher.

In contrast, liquid alternatives traded daily on public exchanges are generally offered to unaccredited investors at more affordable levels.

Source: Equity Institutional


Proper Allocation Level for Alternatives

There Isn’t OneFactors to Consider Goal of Alternative Investment Selected Return Enhancer Diversifier

Investment Horizon

Liquidity Requirements

What Portfolio Risks are being Mitigated or Increased?

Crisis Period Performance

Meaningful Allocation to Impact the Total Portfolio

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Source: TheStreet https://www.thestreet.com/story/13383547/1/4-reasons-why-investors-should-consider-alternative-investments.html


Lots of Ways to Butter Bread

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Source: Global Asset Allocation: A survey of the World’s top Investment Strategeis. By: Meb Faber


Tail Event Risk

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Source: When Diversification Fails, by Sebastien Page, CFA and Robert A. Panariello, CFA, Financial Analysts Journal


Price Smoothing

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Source: When Diversification Fails, by Sebastien Page, CFA and Robert A. Panariello, CFA, Financial Analysts Journal


Things to ask yourself when investing in AlternativesWhat is the intended goal? Return Enhancement, Diversification, Both?

Does the investment have stand alone economic viability

that would not be affected by similar factors impacting stocks

or bonds.

Why has the correlation been low? Is it because of non-daily pricing or is it because of stand alone economic viability

How has the investment performed during various stress periods, different economic environments (High/Low Inflation, Rising/Falling Interest Rates, etc..)

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– Founded in 1986 with headquarters in Southfield, Michigan and offices in Grand

Rapids, Michigan, Cleveland, Ohio and Lisle, Illinois

– Named by Financial Times as a Top 300 Registered Investment Adviser

– $2.6 billion in assets under management

– Employee owned (50%), original founders (50%)

– Over 50+ employees including CFA, CAIA, CPA, CFP designations

– Serving institutions, pension funds, bank trusts, foundations, financial advisors and

high net worth individuals

– GIPS verified returns

Firm Overview


Thank You!

Vince [email protected]

800-345-4783

John [email protected]

800-345-4783

Advance Capital Management, Inc. was established in 1986 and is an SEC registered investment adviser. The firm provides investment advice to many types of clients including individuals, investment advisers, investment companies, pension, profit sharing and other forms of retirement plans, trusts, estates, charitable organizations and corporations. The firm is owned by Advance Capital Group, Inc.

To receive a list of composite descriptions of Advance Capital Management, Inc. and/or a presentation that complies with the GIPS standards, contact John Pelon at (800) 345-4783, or [email protected]. Advance Capital Management, Inc. claims compliance with the Global Investment Performance Standards (GIPS®).

mailto:[email protected]



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Using Alternatives with a Purpose - FPA Mi · Vince has earned the right to use the Chartered Financial Analyst and Chartered Alternative Investment Analyst ... Presentation Overview