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A Monthly Newsletter Source of Financial Sources • Absolute Return Convertible Bond Strategy Can Spell Success in Volatile Market • Does Private Equity Fit in Your Client’s Retirement Portfolio? • Poor Modern Mutual Fund Disclosure Perpetrates Myths of Excellence. • What to Do When Relatives Urge Ailing Business Owner to Disinherit Deserving Heir? • 16 Strategies for Saving Estate Taxes #7 – Family Foundations. • Is Your Advisor Doing The Right Thing in this Volatile Market? •
Tough Markets: What’s an Advisor to do? ---------------------------------------------------------------------------------------------------------------------------- Absolute Return Convertible Bond Strategy Can Spell Success in Volatile Market It is clear that the greatest secret to making money in the stock market is the ability to stay the course for the long haul. Convertible bond investing, using an absolute return seeking strategy can create a stable portfolio that encourages investors to keep their assets in the market rather than responding emotionally to market volatility. Absolute return investing can be a very desirable goal for most investors in volatile markets. The goal of this strategy is to generate positive returns every year and over complete market cycles. One way to accomplish this is to employ some degree of principal protection. Convertible bonds often have built-in principal protection via put options embedded in the bond, and as such can be a good tool for investors seeking absolute return. An absolute return seeking strategy using convertible bonds can replace volatile stocks, mutual funds, or the traditional bond allocation for investors seeking to minimize volatility. The most effective convertible bond management strategy does not use convertible arbitrage or deploy convertible bonds in a relative return strategy such as the strategies used by most convertible bond funds. When purchased close to the next put price, convertible bonds can provide a degree of principal protection. Many investors are not aware of the schedules of put options that are so often part of convertible bond instruments. The bondholder will typically have a series of dates, throughout the life of the bond – and particular to that bond – on which he can force the issuer to redeem the bond at a defined redemption price (usually par). Provided the company is solvent and honoring its obligations (naturally, convertibles cannot offer protection against default), this type of principal protection offers a world of benefits to investors and their managers. Knowing the par price can be obtained at some future date can help to support the price and limit volatility. Reduced volatility can help investors stay with the strategy, avoid panic-based decision making. Thus, they can really reap the types of returns that they are looking for over longer periods of time. When purchased and managed properly, high quality convertibles generally do not sustain the drawdowns that are experienced by most mutual funds and stocks. A drawdown is the loss incurred by an investment during a certain period of time, measured from its peak to its lower point. Convertible bonds can offer a unique value proposition: upside potential due to the equity component, and limited downside risk due to their debt classification and characteristics. In a volatile market where investors see wild gyrations in the value of their portfolios and losses of 10%, 20%, 30% or more, investors tend to press the panic button when they hit their pain threshold. This can result in bad decisions and promotes the cycle of “buy high, sell low”. An absolute return seeking strategy, using limited risk investing with convertible bonds can allow the investor to minimize volatility to a point where they can stay the course, and accomplish their long-term goals. Darlene Murphy, CPA, and Greg Miller, CPA, co-partners of Wellesley Investment Advisors, Inc., Wellesley, Mass, offer convertible bond strategies to investors through separately managed accounts, and through the Miller Convertible Fund (ticker: MCFAX). Founded in 1991, the firm manages convertible assets for retail clients in New England, and in a subadvisory capacity for other investment managers around the country. Darlene Murphy 781-416-4000 x123, dmurphy@wia.cc. Best in Class: Technology & Energy ranked high by Morris of Greg Morris, senior portfolio manager at PMFM Inc., talked with Bloomberg's Carol Massar on the network's Morning Call segment on April 1, broadcasting from Atlanta. (Go to: http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vdjY3GXaksdY.asf He discussed the performance of the PMFM Managed Portfolio Trust (ETFFX), the fund's 100 percent cash position, and his mention on the strength showing in technology, energy and international exchange-traded funds. The fund's performance during the recent equity market downturn propels it into the "Best in Class" category at Bloomberg. The fund has beaten 97% of its competitors for the last year. It lost no ground in the first quarter of 2008 and it's one year performance (as of 2/29/2008) is 9.36%. Morris says that until the proprietary PMFM trend following and rules based model indicates a commitment to assets, his recommendation is to cash. However, he feels that if the recent strength continues, the PMFM model will signal that it is time to commit assets to the market. Components of his model are price based using NASDAQ. Morris follows breadth indicators. He says breadth always arrives at the party in time. Breadth is in sync with price and will signal a move up in the market. When that market up move is over, breadth precedes price, giving an indication of weakness at the top, ahead of capitalization-weighted price indices. Greg Morris, Portfolio Manager, PMFM Managed Portfolio Trust (ETFFX) can be reached at 800-222-7636, or greg.morris@pmfm.com. For further information about PMFM Managed Portfolio Trust (ETFFX), call 800-222-7636. PMFM offers separate account management services, proprietary mutual funds, and is the advisor to 401k Toolbox, one of the leading 401(k) managed account and investment advisory services in the nation. As of 12/31/07, PMFM manages more than $1 billion. The firm has increased its assets under management by nearly 25 percent in the last year. The management team at PMFM includes experienced investment advisors with offices in Watkinsville, Georgia. PMFM offers 401k Toolbox, it’s investment advice and managed account service, via vendor partnerships with 401k providers and direct to large plan sponsors. You can reach National Sales Manager Tim McCabe at 800-222-7636 or tim.mccabe@401ktoolbox.com. Does Private Equity Fit in Your Client’s Retirement Portfolio? Even in this market, several major leading edge pension fund managers, such as the $68 billion Washington State Investment Board, are allocating a larger portion of their funds’ assets to private equities. Washington State has recently boosted its target allocation from 17% of assets to 25%. The Oregon Public Employees and the Pennsylvania State Employees Retirement Systems are the next most aggressive at 14%. Washington State reports it is getting private equity yields that are “beating its benchmark for the last one-, three-, five- and ten-year periods. It returned 29 percent for the year ended June 30, versus its 17 percent benchmark, and 30 percent for the previous three years, double its 15 percent benchmark. Bruebaker, of Washington State, believes that the asset class will outperform public equities by 400 basis points annually over the long haul.” * The stock markets have been dodgy recently, and the bond markets have been at close to all time low yields, and those are typically the reasons offered why fund managers are considering exchanging some of the liquidity of public securities for what they hope will be the higher yields of private equity placements. These funds have large staffs and believe they can monitor a wide range of complex investments. Planners and wealth managers of smaller funds considering adding private equity to their accredited high net worth clients’ portfolios may also achieve higher total returns from making a private equity allocation but they may well not be as high as Washington State claims to have achieved, and in any case, investors considering a private equity allocation should be careful. They might well benefit from a checklist of questions they should answer before making that allocation decision. Seven Questions: A Private Equity Investment Advisors’ Beginning Check List. (Not all these questions are specific to private placements. As you think further you may find more.) 1.Do you understand the deal yourself? The most urgent question an advisor should to ask is whether he understands the offering. Is the industry one that he believes he can reasonably get his hands around? Some investments, notably real estate and producing oil properties may have simpler economics and balance sheets and more transparent disclosure than start-up and technology companies. But in any case you have to decide, is it a business you believe you can understand? 2.How good is the disclosure you have been offered? Is the company making the offer able to pull together explanatory material that makes sense to you and can be made available to your clients? Will you be able to cogently describe the offering so your client will understand what you intend to put in their long-term portfolio? Are their counsel and accountants qualified? 3.Do your clients understand the benefits of a partial allocation to illiquid assets? What will your individual client or fund expect to gain from giving away the opportunity to have this portion of their assets liquid? It could be the expectation of a higher current yield; it could be a lower total cost of issuance than the combination of public offering costs and the high reporting costs of public companies in this post -Sarbanes/Oxley world; it could be the belief you are recommending assets that will later be sold to a public company at a higher yield; it could be you are investing in a niche market where you cannot find a surrogate public investment. Whatever the reason, your client is giving up liquidity for that portion of their portfolio and they ought to get something material in exchange for that. 4.Is this particular client an accredited investor? Certainly, there is a reason why private equity holders must be accredited. The client will not have the costs of a public offering but it will also typically have undergone less regulatory scrutiny. There is an increased implied risk of loss, and there will probably not be a quick exit if you suddenly want to get out. You need to have a large enough portfolio so the client can satisfy any unexpected short-term liquidity needs with other parts of the portfolio. The illiquid nature of, for instance, private placement real estate offerings, may often require a five-to-eight year time frame for holding the assets to get the maximum return. During that time clients should not expect to liquidate. 5.Do the sponsors clearly appear to be reliable? What is the private equity company's reputation in the marketplace? As in any investment, ask lots of questions about the performance of past deals. If it’s real estate, physically look at properties the sponsor has brought to market through private equity offerings. Assess how the properties are doing, their upkeep, and current ability to throw off income as expected depending on occupancy and demographics of the area. Did these sponsors make a good decision back when they decided to do that transaction? For other asset classes such as oil and gas wells, look for disclosure backed by accountants on how those transactions have performed. 6.Has the private equity company made an effort to help liquidate a position if events such as death or divorce required it? It is important to understand the process that the private equity company has in place if a portion of the shares need to be sold. There should be a process that offers the shares to other existing shareholders. Ask if the company has any data about the numbers of times the assets have needed to be sold and the disposition of the shares? 7.Does the private equity company make annual reports so the offering's current value may be added to a client's aggregated asset report? Many advisors are paid their compensation as a % of the clients’ listed assets under management. Will the advisor platforms such as TD Ameritrade, Schwab or Fidelity list the offering so you can get paid on it as a percentage of clients’ assets under management? * Steven Brull, Raising the Stakes, Washington State Investment Board boosts its bet on private equity and other illiquid asset classes in the face of market turmoil. Institutional Investor Extra, February 2006
Poor Modern Mutual Fund Disclosure Perpetrates Myths of Excellence. Currently, mutual funds are required to show the stocks in their portfolios twice a year; this is all that is left of a once vital disclosure policy. Even these bi-annual disclosures are outdated. Typically, the disclosure lags behind the actual holdings by roughly thirty days. By the time holdings are released to the public, stocks in the portfolio have already been reshuffled. If holdings are disclosed in January and July, for instance, the public is seeing a catalogue of stocks that were held in December and June. Reformers and financial advisors have demanded that the SEC require mutual funds to disclose their holdings more often, and have specialized funds increase the percentage of assets held in their specialty. At the same time, the Investment Company Institute (ICI) attempted to squelch investors’ reform efforts through lobbying, in contradiction of the image it portrays of itself as a platform for shareholder advocacy. Other industry leaders have said that changes in fund disclosure would make funds vulnerable to competition. If shareholders want more disclosure and that is not good for them, then less information would be even better for them, the industry’s reasoning seems to go. When Fidelity stopped making the top ten holdings available on a monthly basis, they told shareholders that it was for their own good that the information was no longer available. In fact, secrecy at the fund companies has to survive if the mutual fund marketing machine is to continue to thrive. Myths need secrecy in order to breathe. This kind of secrecy demands that investors give up key rights. But these rights are not for the taking. Secrecy has regained status as an industry entitlement. Now everything is hidden: trades, holdings, operations, and fees. Meanwhile fees increase while expensive, hyperactive trading within portfolios continues unabated. The innovations of disclosure and the convention of buying and holding stocks in a portfolio survived intact for four decades: nevertheless, today the industry denies the most critical aspects of its former, commendable “fish-bowl” tradition. Index investing, with its emphasis on diversification and discipline, buying and holding for the long term, rejection of gambling and the mutual fund marketing hype that surrounds it, the new index investing restores the core principles of the mutual fund founders. Tim Decker, President, ISI Financial Group, Lancaster, PA, is a fee-only financial advisor providing comprehensive financial advice and retirement planning. He is the author of the soon to be released book “The Sleep At Night Investor”. He can be reached at 800-342-5474. His radio show “Financial Freedom” can be heard every Saturday at 2:00 pm on WHP 580 AM providing financial guidance and answering questions from callers. Media review copies of “The Sleep Well At Night Investor” now available by e-mailing beth_chapman@inkair.com with Sleep in the subject line. Provide a mailing address.
What to Do When Relatives Urge Ailing Business Owner to Disinherit Deserving Heir? Often, changes in a parent’s will do not come to light until after the parent dies. In the case of parents who are ailing and have caregivers or distant relatives who have shown up recently, it is not uncommon for a new will to appear after the elder’s death favoring the caregiver or prodigal relative. When the dust settles and you, the long term employee of your father’s firm and appropriate new owner of the company have been disinherited, here is a list of things to do before you contact your attorney. Protect yourself, your career, and your family by keeping your own file of family papers (as much as you are able) and not hesitating to question very late in life changes to the will of a parent. There is a reason why most state’s laws make it illegal for wills to be changed when the signatory is in a reduced mental state. Stonegate Wealth Management’s highly experienced professionals, including partners Thomas J. Geraghty, Jr., CPA, CFP, Steve Craffen, MBA, CFA, and Craig Marson, JD, CPA, solve complex financial challenges and provide counsel for the pressing financial issues confronting their high net worth clients. They have deep knowledge and experience in taxes, estate planning, investment management and divorce settlement counseling. The firm manages $175 million in assets under management. Tom Geraghty, tomg@stonegatewealth.com, office, 201-791-0085, cell 908-347-3032 16 Strategies for Saving Estate Taxes #7 – Family Foundations Current costs of the Bush Administration’s foreign policy have been estimated at about $ 3 trillion, money that the U.S. Government does not have and has not yet grappled with paying. All three candidates for President have said they will not eliminate the estate tax, often called the war tax, because its loss would put a further strain on the U.S. budget. Pearson Financial Services, Dennis, MA, is the author of "The Two Million Dollar Gift: Dynasty Trusts. Why Leave Your Assets Any Other Way", written for his clients, his clients' families, and his own family. He offers a fully integrated wealth management process, incorporating investment, retirement, financial and estate planning specialists under one roof, serving clients as their family's office, designing and implementing strategies to protect and distribute their wealth and highly appreciated property. Seth Pearson, CFP, 800-385-7925, seth.pearson@verizon.net. Is Your Advisor Doing The Right Thing in this Volatile Market? Tough Markets: What’s an Advisor to do? We’re in tough times. Everywhere you look there are dire headlines about unhappy investors. Like any bad news, there are also opportunities and ways to “make lemonade from lemons” if you know what to do. Where should you allocate time to benefit from the downturn – (1) Let clients know what you’re doing – more frequently and more effectively. It can be hard to share the bad news. But reaching out and explaining to clients what’s happening and what steps you are taking is key. Clients hope their portfolio will go up, but they generally understand the market conditions. They want confidence you’re in charge – with a plan. And, communicate in a variety of ways – simply sending an e-mail or newsletter isn’t adequate when so much turmoil is afoot. Call them. Invite them in for a presentation to talk in person. (2) Look at your staffing and hiring needs. A difficult market will often mean experienced people are out of work or restless. Maybe you can locate that key hire. Wise companies are always looking ahead -- identify future needs, talk to people who may be a fit and plan growth. (3) Spend time identifying those areas where your firm may be inefficient or need an overhaul. Are you streamlined? Can you respond quickly when the market changes? Is your staff managing easily in the face of the difficulties? Perform a self-audit and be sure you are as efficient and effective as you need to be. (4) Revisit your positioning and market presence. Do you have a clear message to clients? Ensure your story is strong, your positioning is clear and your clients know exactly what you’re doing. Firms think they shouldn’t spend money on PR, marketing and other image-building items during volatile markets, but it’s critically important to show the world who you are and how well you’re doing. While it’s hard to justify spending when revenue is down, the smart firms do it when they can least afford to! (5) Keep yourself up. Practice meditation, stress management or go to the gym. Do what you need to alleviate the feelings of depression and impending doom when they start to creep in. One advisor we know has a “hot line” to a trusted friend. Whenever needed, he calls and she talks him back up. Different things work for different people but we all tend to know what works for us – we just stop practicing our healthy habits when we most need them! Being smart right now and finding ways to capitalize on the difficult times will leave you especially well positioned when things turn around. And, they will turn around – this is a temporary period. Wishing it will go away isn’t going to work. But, looking for the sliver of opportunity will set you apart. The Collaborative increases the effectiveness of advisors and wealth managers in growing revenue and increasing assets. With decades of real-world experience, The Collaborative has a long track record applying actionable, workable strategies and tactics to support clients in improving business practices and surpassing their goals, including increasing selling activities and success, identifying talent, motivating and retaining employees, eliminating organizational obstacles to success, using behavioral profiles to match employees to roles and reduce internal conflict, and providing positioning and marketing support. Contact Beverly Flaxington at 1-888-580-9473 or www.the-collaborative.com |