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A Monthly Newsletter Source of Financial Sources • Some QDIA’s Risk-Control Strategy Better Than Others • The Market Downturn Puts Focus on Infrastructure • A “Transition Market” Requires Best Bet Large Cap Growth Funds • REIT Volatility Climbs Dramatically. Advisors allocating toward real estate for lower risk profiles may want to go (at least partially) private. Dowd • Boomers Buying Down • Tax Time Tips for Unmarried Couples ---------------------------------------------------------------------------------------------------------------------------- Some QDIA’s Risk-Control Strategy Better Than Others Financial publications are filled with stories about the devastating blow dealt to pre-retirees by the recent 30 to 40% drop in many 401(k) accounts. Even 2010 target date funds—ostensibly aimed at more conservative asset mixes to protect the accounts of near-term retirees—experienced losses of 25-30% last year. One thing is certain: if money management pros cannot prevent this kind of beating, individual participants directing their own accounts are hopeless to do so themselves. The stock market has averaged 12% a year for the past twenty years. The average investor has gained 4% in the same time frame. Most 401(k) participants, as ‘average’ investors, do not have the knowledge, time, discipline or emotional objectivity to manage their own money. Nor fix their own cars, take their own cases to court, or perform surgery on themselves. Specialists are as important to retirement health as doctors are to medical health. The answer for retirees and pre-retirees concerned about gut-wrenching drops in the value of their retirement accounts may be to find professional money managers who aim to capture most of the good times while missing most of the bad times—accentuating reduced risk in during tough markets, and growth in better ones. Over the last 15 months, the market has (once again) taught us the value of prudence. Missing most of the bad times not only means losing less, it means less ground to make up in the next upturn. Take Pat and Mike. Pat uses an investment strategy that mimics the stock market. Chris uses a risk-adjusted strategy to protect assets and provide modest growth over time. When the market nose-dives, so will Pat’s assets, but when the market improves, Pat’s assets will potentially see significant gains. Chris, however, with fewer losses, could pull ahead of Pat’s returns in the long run even though Pat’s gains were greater in prior good markets. The risk-adjusted model that Chris’ investment manager employs is based on science and discipline. It not only intends to deliver better results over time, but is designed to produce a smoother ride along the way. How does that translate to today’s market challenges? Chris can likely retire on time because his portfolio did not take a big hit, while Pat, if he faces retirement soon, may need to delay retirement and work longer to replace assets in his retirement savings as the market slowly improves. One company that provides the service that our hypothetical Chris might prefer is 401k Toolbox, an award-winning advisory service that is approved as a Qualified Default Investment Alternative under the 2006 Pension Protection Act. QDIAs provide professional investment services to individual 401(k) participants within their company’s 401(k) plan. For a modest $75 on $10,000 per year, 401k Toolbox not only assumes the burden of making investment decisions for the participant—putting those decisions into the hands of professionals who prioritize protecting investments in volatile markets—but staffs a team of retirement specialists who can help participants define their personal retirement objectives and make decisions that will help them reach their goals. This kind of personalized service and risk-controlled investing may be the perfect combination that can help today’s plan participants properly plan their own futures. Getting professional help may also overcome fear that might cause them to exit the market at just the wrong time, potentially damaging their chances to benefit from the kind of future growth necessary to achieve their long-term goals. For further information, Tim McCabe, Senior Vice President, 401k Toolbox -- 800-222-7636. tim.mccabe@401ktoolbox.com. The Market Downturn Puts Focus on Infrastructure The investment consequences of the impending changes in the country’s administration and political plans signaled by President Obama’s efforts to put a recovery program in place to drag the country out of the continuing market carnage points to one word – infrastructure. Even a moderate adjustment halfway back to levels seen this time last year could translate into 60-100% gains in many infrastructure stocks Governments around the world are making plans to jumpstart their economies by throwing hundreds of billions of dollars at infrastructure projects. Add that to the probable spending in Asia, Europe and the U.S., an amount potentially in excess of $1 trillion over the next two years could be spent on infrastructure. While one might debate the efficacy of these actions, one cannot question that this tsunami of new spending will likely create an earnings tailwind for a sector decimated this year due to concerns about the global slowdown. A trillion dollars worth of new business coming literally ‘out of the blue,’ combined with enormously depressed valuations could set up a significant bull move in this sector. Looking at the landscape objectively, questions remain unanswered in many investment sectors:
Infrastructure construction and repair, however, is one broad sector that can see new business and increased spending even as we approach overall economic Armageddon. Ironically, this area, while possibly having the best potential of any sector, is the least well known and understood. It’s a good bet that most financial editors and reporters have ten tech or retail analysts in their rolodex for every one industrial equipment analyst. Most investors have never been introduced to engineering and construction and industrial equipment companies. Clearly, a global infrastructure build-out is coming. The same crisis headlines that have driven down the price of blue chip, globally diversified companies have created new realities that foretell an enormous new, long-term tailwind for infrastructure stocks. Infrastructure stocks, after a market-beating, multi-year run have slammed into the wall of the global economic slowdown in 2008. Blue chip, globally diversified companies that focus on designing, engineering and building roads, ports, bridges and energy infrastructure have seen declines of upwards of 80% as markets priced in concerns that the global credit crisis would halt or seriously delay many anticipated projects. However, governments around the world are addressing the global economic slowdown by jumpstarting and funding previously dormant infrastructure projects. There is a bipartisan consensus in the United States that the best way to deliver relief to working America is to create well paying jobs through funding of long needed infrastructure projects. On Sunday, November 10, the government of China announced that it would spend an estimated $586 billion on a wide array of infrastructure projects, including new railways, subways, and airports. There is little doubt that European governments, facing the same prospects of slowdown currently experienced in the U.S., will soon follow suit. The reality is that the world will soon be absorbing an unforeseen trillion dollar flood of spending over the coming few years. Thus infrastructure stocks, currently priced for a severe global slowdown, could be ready to be jolted back to life. As noted, so severe have been the recent declines that even a moderate adjustment halfway back to levels see this time last year could translate into 60-100% gains in many infrastructure stocks. Investors should be getting their infrastructure stock shopping list ready; this is a sector set to boom in 2009. Robert Markman, Managing Director, Markman Capital Management, Edina, MN, is the portfolio manager of the Markman Core Growth Fund (MTRPX) and the Markman Global Build Out Fund (MGBOX) bob@markman.com, 952-920-4848. A “Transition Market” Requires Best Bet Large Cap Growth Funds We are in a difficult market environment for fund investors. The market remains troubled, so there is a tendency to try to find the most stable stock fund. Yet if the bull market occurs soon, a forward looking investor hoping to maximize the subsequent rebound, could be shopping for good bull market funds . Placing bets on a bull market fund too early, however, could lead to further significant losses. It’s a confusing, transition time. It is possible to screen large cap growth funds using two little known but important stats: upside capture ratio and downside capture ratio. These numbers show how much of the S&P’s Index move a fund captures during up cycles and down cycles. Using data for the six year period 1/1/03-12/31/08, it’s possible to look for funds that had an upside capture ratio of 120 or higher (meaning they captured 120% of what the index returned). Then, an investor can screen for funds that had a downside capture ratio of less than 105 (meaning they lost little more than the index on the downside). The rationale is to expose a shareholder to a significantly positive upside without exposing them to more than a minimal downside, relative to the market). The most important statistic, though, took the upside and downside stats and looked at the ratio between the two. The higher the ratio, the better the balance between upside potential and downside risk. Here are the top five funds that met the criteria in Morningstar’s large cap growth category, ranked in three different ways:
Similar screens could be run for any other asset class. Investors looking for a core holding that they can buy and hold with a high degree of confidence for the next few years should be using this screen as an important way to find the right core funds for the intermediate and long term. Robert Markman, Managing Director, Markman Capital Management, Edina, MN, is the portfolio manager of the Markman Core Growth Fund (MTRPX) and the Markman Global Build Out Fund (MGBOX) bob@markman.com, 952-920-4848.REIT Volatility Climbs Dramatically. Advisors allocating toward real estate for lower risk profiles may want to go (at least partially) private. Private real estate equity returns have been much less affected than REITS in the post 2000 world. Up until fairly recently, REITs were a slightly more boring investment than your father’s Oldsmobile. Good ones generated stable cash flows and gradual long-term appreciation with few surprises, good or bad. Earnings forecasts were generally within a few cents a share of analyst estimates (and since the total market cap of the REIT industry was pretty small there were not many analysts). The multiples at which the stocks traded varied — but not too drastically — mostly affected by shifts in interest rates. REIT investors were primarily individuals interested in the dividend income and not the least interested in active day trading. The individual stocks in the REIT category were too small for most major funds to consider taking a position, there was no easy way to bet the industry, and not enough shares in sophisticated hands for short sellers to function. All in all a profitable, snoozy, investing backwater. For their first three decades of existence (1960-1990) REITs averaged a reliable IRR of about 12% with perhaps 40% less volatility than the broader NYSE indices. And for portfolio strategists REITs had the added advantage of a fairly low correlation with the general equity stock markets. At the end of the 1980s, the S&Ls imploded, and in the early 1990s the REIT market exploded, creating a storm of new issues that forced Wall Street to add a number of analysts. Well known companies were able to attract institutional investors in relative droves. By the beginning of this century the emergence of REIT and real estate based ETFs made it easy for hedge funds to make long and short bets on the industry and get in and out at reasonable costs for active traders. Investors now had derivative vehicles that enabled them to bet easily on many people’s hopes and fears about the sector, not just a few patient, experienced REIT investors and the pension fund private investors who can afford, indeed are required, to take a longer view. REITs suddenly resembled a Wild West crapshoot in Marlene Dietrich’s saloon. According to ETFguide.com, (referencing the Wall Street Journal) in the last quarter of 2008 the Dow Jones Equity All REIT Index racked up a 5% (gain or loss) or more on 35 out of 61 trading days. The S&P 500 only experienced 17 days of 5% + moves. So much for snoozing. ETFguide.com went on to say: “The Journal further reports that Equity Residential (NYSE: EQR - News), a top holding in the SPDR DJ Wilshire REIT ETF (NYSEArca: RWR - News) and Vanguard REIT ETF (NYSEArca: < A href="http://finance.yahoo.com/q?s=vnq&d=t" target=_blank>VNQ - News), surged 18% the same day (December 12th) that the ProShares Ultra Real Estate ETF had its biggest volume day of the month. On December 18th, the biggest volume day for the ProShares UltraShort ETF, Equity Residential fell from $32.85 to $28.86 (12.15%).” REITs have turned into a volatile security, but the volatility of the underlying commercial real estate assets most REITs own has not been nearly as volatile and has not increased much at all over the last few decades. Meanwhile improved measurement of private real estate investment performance by the MIT Center for Real Estate indicates private real estate has been far less volatile than the broader markets. The MIT Index is down 21% from its all time highs and property values may be stabilizing but many of the broader stock indices are down 50% and the bottom is in real doubt. Investment advisors whose clients would like to benefit from high yields and low volatility may wish to consider whether REITs can improve their risk adjusted returns as much as they have in the past, and also whether their clients will see REITs as providing the kind of lower correlation they used to offer. Perhaps now is the time to consider a private real estate allocation for investors with a long-term horizon, and for advisors seeking to reduce portfolio risk. Michael Dowd, Senior Vice President of the United Group of Companies, specializes in real estate debt and equity financing. He can be reached at DowdBoston@aol.com or 781-893-4119. Boomers Buying Down; a matter of choice for some, necessity for most “Buying down” is a big idea and an important retirement strategy for boomers. According to AARP, when people turn 65, only 20% have the resources to maintain their current standard of living. That means that 80% of those aged 65 and older do not have the resources to maintain their lifestyle - a big percentage, and growing. “Buying down" by reducing cost, size, scale, and expenses of the home in which a Boomer couple will live is an excellent way to reduce the capital needed to help fund retirement and life's remaining risks (medical, long term care, etc.). In a classic financial planning process, cash flow projections into the future further demonstrate the impact of keeping the larger home versus buying down. The difference can be dramatic, and have a tremendous positive impact for retirees. Yet at the age of retirement, what is an otherwise rationale view can becomes clouded with emotion. What follows are issues to consider when exploring the option to buy down:
Reading about these issues is the easy part. Most people can intellectualize. This ideal use of this information is more about how specific needs and resources match a retirees dreams and goals. Since no two circumstances are identical, a comprehensive review of the circumstances and financial modeling of the options help retirees make the most suitable decisions for their needs. With this as a deliverable, it is worth the price of a good fee-based advisor to help navigate the planning. It is ironic that arguably when people need planning the most, the AARP mentality of getting free advice on everything kicks in, and the retiree ends up with a half-baked discussion from a commissioned advisor rather than unbiased advice from a fee-based plan. The cost of a fee-planner can help leverage peace of mind for the rest of a retiree’s life. Rich Arzaga is Founder and President, Cornerstone Wealth Management, San Ramon, California, a life planning company specializing in providing options and solutions for residential and commercial real estate investors. He is also an instructor in the nationally-recognized financial planning certification program at U.C. Berkeley, and teaches the highly-acclaimed Real Estate Investments course at U.C. Santa Cruz and U.C. Berkeley. Rich can be reached at rich@consultrich.com or toll free (888) 290-9900. Helping Elders with Costly Purchases Donald L. McCoy, J.D., CMFC -- Planners Financial Services, Inc., 952-835-9000. Minneapolis, Minnesota. Registered investment adviser and subsidiary company Montgomery Investment Management, specialize in the management of no-load mutual fund portfolios for individuals and retirement plans designed to protect capital by reducing risk. 952-835-9000 - pfs@usinternet.com Tax Time Tips for Unmarried Couples There are valuable choices to be made at tax time when the IRS allows unmarried couples to select which partner will receive what deductions in their jointly owned investment accounts as they file their separate tax returns. Hopefully, all investors have already received advice and assistance from their advisors about harvesting tax losses prior to the December 31, 2008 deadline. After December 31, there are other strategies for unmarried couples to consider. Take the example of John and Jake. Their investment account had only losses in 2008. Jake, a special education teacher, is in the 15% marginal tax bracket and will pay zero taxes on long-term capital gains and dividends. John is a corporate attorney with a six-figure income and is in the highest tax bracket of 35%. John and Jake should check with their accountant to determine if it makes sense for them to split the loss attribution from a joint account. If all else is equal, John and Jake may want the accountant to attribute any dividends to Jake, the lower income client in this joint account. A significant issue for John is avoiding Alternative Minimum Tax (AMT). Advisors, working with accountants, should assess the conventional and AMT tax liabilities of unmarried couples. If AMT may be an issue, then consider the deductions that are added back into the AMT calculation. These items are standard deductions, exemptions, home equity interest (unless for home improvements), property and income taxes, and miscellaneous deductions. The accountant also must consider the preference items. The most common are incentive stock options and private activity municipal bond interest (any not covered by the recently signed American Recovery and Reinvestment Act of 2009). The advisor and accountant must then consider who will benefit most in the long run from the attribution of deductions. Here is an AMT checklist:
Unmarried couples can learn a great deal by working with their advisor and accountant as a team. Conway Halsell, CFP®, CLU®. Ameriprise Financial Services, Inc.. Vienna, VA. Office: 703.255.7091 | Fax: 703.255.7093 or conway.a.halsall@ampf.com, ameriprise.com. Mr. Halsell is a member of the steering committee for the 2009 PridePlanners Fifth Bi-Annual Conference to be held in Fort Lauderdale, FL, June 11 to June 13. This is the only financial services conference that focuses on the financial needs and issues of the GLBT community. PridePlanners June 2009 Conference is Only Financial Conference to Focus on Financial Issues of LGBT Clients, Non-traditional Families and Unmarried Couples. Financial advisors working with the gay, lesbian, bisexual, transgender (LGBT) and unmarried clients will have the opportunity to learn vital information and understand the changing law for serving the complex needs of this market segment at the Fifth Bi-Annual National Financial Planning Conference of PridePlanners Association (www.prideplanners.org), at Hyatt Regency Pier Sixty-Six, Ft. Lauderdale, Florida from June 11 to June 13, 2009. The event features keynote addresses by:
Additional topics will include:
The PridePlanners Association (www.prideplanners.org), is the only national organization of financial, tax, insurance, investment and estate planning professionals, represents financial advisors and money managers who specialize in meeting the unique needs of the LGBT community, non-traditional families, and unmarried couples. Further information about the Conference can be obtained from: Nicole Rosandich, Comer Consulting, Plymouth, Minnesota, Nicole@jcomerconsulting.com 877-540-0711 Or register at www.prideplanners.org |
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