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84 South Fourth Street Columbus, OH 43215
Mark Fissel, RFC Clint Edgington, CFA
www.BeaconHillAdvisory.com
The Wealth Managers for Business
Business Wealth Management Process TM
This Quarter: Cash Flow Planning
This quarter’s activity, planning for future cash flow needs, can be a powerful tool in prepar-
ing for your future. With a proper roadmap, we find that anxiety decreases and allows you
to focus your efforts. Cash flow planning can address future needs ranging from retirement
plan contributions to potential business liability decisions such as payroll and bonus obliga-
tions. Though planning can require an initial time commitment from the client, future ad-
justments can easily be made with our model to allow for dynamic adjustments.
Next Quarter: Estate & Legacy
Cash Flow and Retirement
Retirement and College Planning
Liability Driven Investments (payroll, bonus payments, etc.)
Corporate Retirement Plan
We’ll likely find out that U.S. GDP
rose about 2.8% for the year once
final numbers are out. Although
not a fast growth rate, we didn’t
have the “double dip” recession
that many experts predicted and
most were concerned about. Euro-
pean sovereign debt issues made
investors jittery in the summer, and
we continue to feel tremors due to
those shocks. Corporate profits in-
creased briskly, with large compa-
nies stockpiling record cash bal-
ances rather than hiring. Unem-
ployment has dropped slowly, but
remains stubbornly high at 9.8%.
While it’s said that econo-
mists and analysts make
predictions in order to give
weathermen something to
laugh at, a solid review of
where we came from is neces-
sary in order to focus on the fu-
ture. We laughably create mac-
roeconomic projections down to
the tenth of a percentage point,
and the only promise we make
to our investors are that none of
them will be completely accu-
rate. Although our past predic-
tions have not all come to light,
the process of creating projec-
tions and identifying areas of
concern brings significant value
to our processes and our clients’ portfo-
lios. Success is only measured by our port-
folios’ performance and, more impor-
tantly, in helping our clients meet their life
goals.
Just as Mama Bear’s porridge was “just
right”, the U.S. economy grew enough in
2010 to bring stability and profits, but not
enough to make central bankers turn off
the spigot of liquidity. This rising tide
lifted all risky asset classes in 2010.
www.BeaconHillAdvisory.com
Economic Summary- Goldilocks Brings Investors A Great 2010
The Wealth Managers for Business Owners
Winter 2011 Newsletter
84 South Fourth Street Columbus, OH 43215
P: 614.469.4685
www.BeaconHillAdvisory.com
In This Issue:
2010 Economic Summary 1
Equity Market Recap 2 Fixed Income Recap 3 Alternatives Recap 4 Upcoming Events 7 Wealth Mgmt Process 8
We have seen signs that they are beginning to put
cash to use through investments, acquisitions, divi-
dends, share buybacks, and dipping their toe in the
hiring waters.
We tend to agree with the majority of the pundits
that are predicting a bullish equity market in 2011.
Individual investors have finally started moving
money back into the equity markets from fixed
income, with equity investors injecting $42B net
new money into the equity markets in Q4, and we
see this trend continuing. This, coupled with com-
panies beginning to invest, acquire and hire cre-
ates a virtuous cycle. We are, however, never con-
fident in our ability to find the next bubble (and
there will be one) and the resulting pop. With
volatility at a low point, we will be discussing with
our clients the value of market insurance while
skies are blue and costs are low.
www.BeaconHillAdvisory.com pg. 2
The equity markets enjoyed a tail-
wind of low valuations at the beginning
of the year due to jitters over a double dip
recession.
Equity markets rallied in the beginning of the
year due to healthy economic indicators.
The optimism faded during the summer as
bondholders became concerned Greece and
other European Union members would not
be able to fund their fiscal commitments and
still pay their bondholders. As expected, the
bondholders demanded higher rates to con-
tinue holding their debts, and higher rates
on a country’s debt only makes the funding
problem worse, a classic Catch 22.
Stronger members of the European Union stepped
in and backstopped debt, and continue to do so as
issues surface. Equities then climbed a “wall of
worry” in the 3rd
Quarter of the year, and had a
great 4th
quarter due to robust holiday sales. Spe-
cifically, smaller company stocks continued their
outperformance over larger stocks for the third
straight year.
An interesting divergence between economic
growth amongst different regions and the perform-
ance of stock markets cropped up in 2010. While
the U.S.’s economic growth was lackluster, our
stock markets outperformed most developing
countries’ stock.
How can this be? Valuation. The rampant predic-
tions of a double dip at the beginning of 2010 kept
U.S. stock valuations compressed. Corporate prof-
its rose very briskly and rewarded those whom in-
vested in U.S. stocks. Corporations responded to
the scare of market stress and the dislocation of
the capital markets in 2008 and 2009 very logically
by hoarding cash.
Equity Markets — Low valuations were our friend
1
Eric Kurjan is the president and owner of the Six Disciplines
NWO. He is certified on the Six Disciplines methodology and
is responsible for coaching and offering strategic advisory
services to both large and small companies. Prior to joining Six Disciplines, Kurjan was the president of
Plumbline Solutions, Inc., a 75-person start-up software consulting company. Plumbline was formed as a
spin-off from Microsoft in August 2004. Prior to Plumbline, Kurjan was general manager of the North
American professional services organization for Microsoft Corp. As general manager, he led a team of
more than 500. He earned his bachelor’s degree from Miami (Ohio) University. Kurjan currently serves
on the board of trustees of, Blanchard Valley Health System, Plumbline Solutions, Inc. and is the current
president of the Board of the Findlay Country Club. Kurjan and his wife, Lisa, and their two daughters, Madeline and Anna, live
in Findlay, Ohio.
www.BeaconHillAdvisory.com pg. 7
Upcoming Event:
Business Owner Strategy Session - B.O.S.S. ™
Are You Ready for 2011? Build a Strategic Plan & Produce Results
In one hour, learn;
• How to build an effective Strategic Plan
• How to execute the plan
• How to achieve the goals you set
___________________________________________________________________
MORE at www.BOSSworkshops.com ___________________________________________________________________
Attendees will receive;
• 1 FREE hour | one-on-one consulting in Feb.
• A complimentary Business Health Index
Wednesday, January 19th | 12:00 PM – 1:15 PM
RSVP at 614-469-4685
Ohio Employee Ownership Center
Special Thanks to our Sponsors:
Event Speaker: Eric Kurjan
www.BeaconHillAdvisory.com pg. 6
Commodities and Currencies (cont’d from page 5)
We do, however, question the wisdom of following the
crowds headlong into gold. Unlike many investments,
you can’t be a little bit wrong in a gold trade and make
money. For example, if our fixed income investments
face tailwinds this year, and interest rates jump up 1%,
we likely will not lose any money as our interest will
offset the amount our bonds will go down. If you are
wrong with gold you lose money. We too, are nervous
about the Federal Reserve printing massive amounts
of money. However, we choose to invest in profit gen-
erating enterprises that are not denominated in U.S.
dollars, therefore giving us a cushion in case we are a
little wrong and the U.S. Dollar rises.
1. Injected into conventional mutual funds and ETFs http://www.lipperweb.com/Handlers/GetReport.ashx?reportId=4150 Free registration required
2. http://www.lipperweb.com/Handlers/GetReport.ashx?reportId=4143 Free registration required
3. Many have concerns about the municipal markets now, however, that market is too localized and fragmented to be included in this brief review. 4. With a typical minimum investment of $1M, a diversified Private Equity portfolio of 10 investments, with Private Equity/Venture being 5% of a portfo-lio this would require a $200M portfolio.
5.Gold is included in the “Metals” Index, but we have broken it out for the readers convenience.
6. There are many one sided arguments for the value of gold. For a fascinating, balanced, philosophical discussion on the value of gold, see http://
www.oaktreecapital.com/MemoTree/All%20That%20Glitters%2012_17_10.pdf GDP info: Bureau of Economic Analysis
Unemployment data: U.S. Bureau of Labor Statistics
Currencies
Likely surprising to most is that the U.S. Dollar appreci-
ated slightly against a broad basket of other currencies
in 2010. Concerns about the Fed’s liquidity actions
and the spending of the U.S. Government in general
were offset by our economic growth. True to the ad-
age that “The Dollar is the worst currency, except for
all the others”, the dollar was buoyed by the E.U.’s
Euro and U.K.’s Pound Sterling’s depreciation due to
their fiscal issues. Most Asian economies strength-
ened.
We tend not to maintain a significant outlook on cur-
rencies, although we do position our portfolios to hold
non U.S. Dollar denominated assets.
Benchmarks for 2010 review
Equity Market “Large U.S. Companies”- S&P 500 Total Return
“Small U.S. Companies”- Russell 2000 Total Return “Foreign Developed”- MSCI Europe, Austrialia, Far East Total U.S. Dollar return
“Foreign Emerging”- MSCI Emerging Markets Total U.S. Dollar return
Fixed Income “U.S. Aggregate Bond”- BarCap U.S. Agg. Bond Total Return
“U.S. High Yield Bond”-BarCap U.S. High Yield Bonds “Foreign Developed”-BarCap Global Aggregate Bond ex-U.S. U.S. Dollar return, unhedged, Total Return
“Foreign Emerging”- JP Morgan Emerging Bonds Plus U.S. Dollar return, unhedged
Alternatives “Short Bias”- DJ Credit Suisse Short Bias Hedge Fund
“Market Neutral”- DJ Credit Suisse Market Neutral Hedge Fund “Long/Short”-DJ Credit Suisse Market Neutral Hedge Fund “Event Driven”- DJ Credit Suisse Event Driven Hedge Fund
“Global Macro”-DJ Global Macro Hedge Fund “Venture Capital”-Cambridge U.S. Venture Capital
“Private Equity”-Cambridge U.S. Private Equity “REITS”-FTSE NAREIT All Equity
“Private Commercial”-NCREIF Property Index
Alternatives II “Agriculture”-Roger’s International Commodity-Agricultural
“Energy”-Roger’s International Commodity-Energy “Metals”-Morningstar Metals Commodity Total Return
“Gold”-spot price in U.S. dollars
We believe many of the tailwinds bonds enjoyed in 2010 will turn to headwinds in 2011. They will cer-
tainly no longer provide the boost that they did.
Our concerns are:
• Individual investors will move out of fixed income when the appetite for equities returns, which
has begun. Individual investors were net redeemers of bond funds in November for the first time
in a year2.
• Economic growth will increase the return investors demand for fixed income, which will decrease
prices.
• Many of the “levers” that sovereign governments pull to keep rates low have been exhausted.
Keep in mind that a shock to high quality bonds will not result in near the losses from a shock to equi-
ties. Therefore, there is still value to having a fixed income component to buffer our more conservative
investors, and to “keep powder dry” for our more aggressive investors during the inevitable rainy day.
We foresee continuing to earn our return (and take our risk) on the credit side rather than through in-
terest rate risk.
As you can see in the graph, the last quarter of
2010 was difficult for the fixed income market due
to concerns over Quantitative Easing 2 described
above. This reaction should not be shocking, in
fact, we have been surprised it has not yet hap-
pened. What is startling was the speed and depth
of the reaction.
www.BeaconHillAdvisory.com pg. 3
Fixed Income - Money kept pouring in
Still scared from the Great Recession of
2008, individual investors that missed the
2009 run-up poured cash into fixed in-
come, to the tune of $236B through November
searching for yield on their assets. The Fed, nerv-
ous of a double dip recession, continued its cam-
paign to keep interest rates low. Only in No-
vember when they announced the purchase
of another $600B in treasuries (“Quantitative
Easing 2”) did bondholders get concerned
over the Federal Reserve paying the federal
debt by printing money and the spurring infla-
tion. As inflation hurts the value of their
bonds, they responded by demanding higher
rates, which increased interest rates along
most maturities.
Consistent with risk being rewarded, high
yield bonds (“junk”) outperformed the overall
market. Europe’s sovereign debt issues held
down foreign developed bonds while Emerg-
ing market bonds appreciated due to currency
appreciation and rapid economic growth.
2
3
www.BeaconHillAdvisory.com pg. 4
Hedge Funds (Equity based only)
Equity based hedge fund managers had diffi-
culty adding value due to high correlations
among stocks. Hedge fund index returns should be
viewed skeptically from a data perspective for reasons
too lengthy and boring to discuss in this brief review
(i.e. survivorship bias).
Short Bias hedge funds bet against stocks by
“shorting” stocks them. They had an uphill battle dur-
ing a year when equities increasing by double digits.
Market Neutral funds have approximately the same
amount of “long” exposure (owning a stock) as they do
in short exposure. They only provide returns when the
manager successfully determines stock winners and
losers. As most stocks were winners in 2010 that was
a difficult proposition and we can see that they did not
succeed as a group. Long/Short mutual funds tend to
be net long, but also have short positions. They strug-
gled to provide returns as well, although their larger
long bias helped. These three categories performance
is not exciting and, in effect, investors simply got what
we would have predicted based on how much long
exposure they had.
Event driven hedge funds attempt to profit
from mispricing of securities due to specific
events. An example is share class arbitrage,
which is shorting expensive classes of a
company while buying the cheaper class of
the same company- hoping for the gap to
close. Assuming that their return was
somewhat independent of general asset
returns, they may have added value.
Surprisingly, Global Macro funds, which
scour the globe to look for mispricing in all
asset classes (equities, currencies, com-
modities) did not yield compelling returns.
In a year with rising asset classes worldwide, and their
usual comfort getting into commodities (which had a
great year), we would not have expected such low re-
turns.
We continue to research hedge funds and like the con-
cept of Event Driven hedge funds and certain fixed
income hedge funds (which we did not review here).
However, we can’t justify our clients paying the typical
fee structure of 2% of Assets plus 20% of all gains for
what has historically been middling returns. We do
not hold hedge funds in the vast majority of our port-
folios and do not foresee including them in the near
future.
Private Funding
Private Equity and Venture Capital do appear to have
rebounded well in 2010. Many data issues also occur
with private funding, and these index returns should
also be taken with a grain of salt. However, this data is
somewhat stale (as it always is for PE and Venture)
and the ending date is 6/2010. Economic conditions
and activity have improved since then, so it is probable
that this understates performance considerably.
Hedge Funds, Private Equity, and Real Estate- Worth the costs?
Commodities and Currencies- Global Growth lights a fire under commodities
Commodities
Commodities benefitted generally from
expectations of renewed global growth,
and specifically from emerging markets (Brazil,
India, and China especially) requiring signifi-
cant resources to continue building their infra-
structure and satisfying their emerging middle
class populations.
The majority of Metals have risen because
they are an input to production and China’s
export restrictions on certain “rare earth”
metals caused prices to spike. Gold, however,
has risen as investors have become nervous of
worldwide currency devaluations.
We keep a commodity investment in our portfolios to
act as a hedge. We do not foresee maintaining a large
position. In the long term, commodities do not bring a
lot of return but they do react positively at times we
need it most (i.e. Oil Embargo, etc.).
Unlike most assets, there are no reasonable ways to
value gold. Gold has value because it always has and we
assume it always will. It does not generate profits or
interest, and is not used substantially as an input to pro-
duce anything that generates profits or interest. It is no
longer linked to any currencies. There obviously is value,
it is just impossible to value. Therefore, we cannot as-
certain or argue that it is overvalued or undervalued.
www.BeaconHillAdvisory.com pg. 5
Although the definitions are murky at best, Venture
Capital typically focuses on start up funding, while Pri-
vate Equity typically focuses on later stage funding and
events (i.e. taking a company private, etc.). We do not
hold private funding for our investors primarily due to
the large amount of capital needed to invest in a diversi-
fied manner.
Real Estate
Although extremely localized and fragmented, we do
review nationwide commercial real estate assets as a
4
5
6
separate asset class. Interestingly, the dichotomy be-
tween the returns of REITS and privately held real estate
was astounding. There are several arguments that can
be made for REITS currently, the most compelling is that
they are able to raise capital easily, which is still difficult
for private real estate investors. However, we would
speculate that the dichotomy is mostly due to the gen-
eral liquidity of REITS and investors quickly crowding into
the space to pick up yield. This is not possible or advis-
able in private real estate.
Due to the massive inflows to REITS, REIT yields have compressed from over 5% at the beginning of the year
to just over 3%. We do continue to hold a position in REITS for the majority of our investors and, a large por-
tion of our investors hold private commercial real estate. We do have a concern that the investors can flee
the REIT space as quickly as they crowded into it and are considering trimming or adjusting our exposure.