Investment Objectives

Transcription

1 Investment Objectives Prepared by: Dean A. Junkans, CFA Chief Investment Officer, Wealth Management In This Special Report: Standard Investment Objectives 1 Specialty Investment Objectives 3 Douglas W. Evans, CFA, CIMA Head of Investments, Philip W. White, CFA Head of Research, Stephen A. Bobo Asset Allocation Committee Chair,

2 Investment Objectives At, we provide ultra-high-net-worth investors and families of wealth with institutionalquality investment services across a full spectrum of sophisticated solutions not widely available to individual affluent investors. In order to meet our client s financial goals and aspirations as well as manage the uncertainty unique to the ultra-high-net-worth we have developed a suite of investment objectives unique to. Our standard investment objectives utilize a global investment framework that incorporates not only traditional cash, bonds, and equities, but also private equity and venture capital; real assets such as commodities, infrastructure, public and private real estate, and timberland; and complementary strategies such as absolute return strategies, hedge funds, managed futures and structured solutions. These standard objectives are exclusive to clients engaged with our global asset allocation advisory services. To complement and diversify investments a client might have outside of the relationship with, we have specialty investment objectives available. These include single asset class strategy subsets of our standard investment objectives and offer a higher allocation to complementary strategies. Standard Investment Objectives Although designed from the ground up for Abbot Downing, our standard and specialty investment objectives are based on the same capital market assumptions used in The Private Bank. Further, the basic methods employed to allocate among asset classes is also consistent between and The Private Bank. However, ultra-high-net-worth investors and families of wealth have the financial resources to access a wider array of investable asset classes, talent pools, and financial instruments, ones that often require higher investment minimums ($1 million and above) and/or illiquidity of up to 10 years or more. Consequently, the opportunity set of investments (as represented by an efficient frontier) becomes less constrained when investment minimums and lack of liquidity are less of a concern. Our five standard investment objectives are designed for single portfolios of $100 million, yet are scalable for accounts of $25 million to $250+ million and multi-generational (or multi-interest) relationships beyond $1 billion. Figure 1 on the following page shows the strategic target allocations for our standard investment objectives. These allocations represent the neutral weighting for each asset class within each objective. Cash is not currently recommended as a strategic allocation; however, a portfolio may hold cash, as appropriate to the client s liquidity and consumption needs, or as a tactical response to market conditions. The allocation ranges of the standard investment objectives are found in Figure 2, also on the following page. These ranges allow for tactical shifts around the neutral weighting (strategic target allocation) to potentially benefit from short-term capital market conditions. Our five standard objectives range from conservative risk-tolerant to aggressive risk-tolerant, with the primary difference in the balance of risk control versus potential for capital accumulation. The more conservative objectives emphasize risk control at the expense of potential capital appreciation; the more aggressive strategies favor potential capital appreciation at the expense of elevated risk measures. Investment Objectives 1

3 Figure 1: Standard Investment Objectives Strategic Target Allocations Investment Objective Conservative Moderate/ Conservative Moderate Moderate/ Cash 1% 1% 1% 1% 1% Fixed Income 55% 40% 29% 18% 4% Equities 22% 27% 32% 37% 42% Real Assets* 10% 12% 13% 14% 16% Description 12% 20% 25% 30% 37% Emphasizes stability of principal with a high degree of liquidity and income. Limited exposure to morevolatile, less-liquid, less-transparent, growth assets. Little to no leverage. No concentrations. Emphasizes stability but accepts some market volatility and downside risk in order to seek some growth. Modest exposure to more-volatile, lessliquid, less-transparent, growth assets. May employ leverage. Balance in emphasis between stability and growth potential. Moderate amounts of illiquidity and capital flow restriction acceptable. Exposure to volatile growth assets. Leverage and credit risk may be involved. Emphasizes growth. Portfolio of mainly volatile assets, with small proportion of stable assets. Illiquidity, capital restrictions and leverage employed. Some concentration or specific risks present. Strongly emphasizes long-term growth. Portfolio of volatile assets exposed to market, economic and political uncertainties. Meaningful level of illiquidity. Acceptance of credit risk, concentrated strategies and capital restrictions. Figure 2: Standard Investment Objectives Allocation Ranges Investment Objective Conservative Moderate/ Conservative Moderate Moderate/ Cash 0-15% 0-15% 0-15% 0-15% 0-15% Fixed Income 40-80% 25-60% 15-50% 5-40% 0-20% Equities 5-30% 10-40% 15-50% 20-60% 20-70% Real Assets* 0-25% 0-30% 0-30% 5-30% 5-30% 0-25% 5-35% 10-40% 10-50% 15-60% Liquidity is a separate but equally important risk factor and has the ability to manage the changing nature of investor goals and objectives over time. Liquid portfolios have the ability to implement tactical changes and portfolio rebalancing to take advantage of current market conditions; however, liquidity is an option embedded in a public investment that can be exchanged for a higher expected rate of return in a private illiquid investment. For example, a client could desire risk control over potential capital appreciation, but due to the nature of the client s assets, may be able (and willing) to tolerate illiquidity, so a conservative investment objective may be implemented through illiquid investments such as protected investment contracts (PICs) or unlevered real estate holdings. Or, a client desiring capital appreciation over risk control may have significant liquidity requirements, so an aggressive objective may be implemented through primarily publicly traded assets and relatively liquid absolute-return and hedge fund strategies. Risk factors considered among investment options will include standard deviation, credit risk, currency fluctuations, lack of liquidity/marketability/transparency, political and economic conditions. The cumulative amount of risks taken will increase in a measured fashion from conservative portfolios towards aggressive portfolios. The methods to control those risks will include asset class diversity (i.e. common equity vs. real estate), structure diversity (i.e. liquid fund vs. limited partnership), varying investment terms (illiquid 10 years vs. 3 year soft lock-up) and varying 2 Investment Objectives

4 providers. Each risk factor will be evaluated for the commensurate amount of excess return associated with the investment. Where incremental return, as compared to competitive alternatives, exceeds the incremental risks associated is superior, then those investments will be pursued. Specialty Investment Objectives Our five specialty investment objectives differ from the standard objectives in that they offer a higher allocation to complementary strategies. Figures 3 and 4 show the strategic target asset allocations and the allowable ranges within each investment objective. The liquidity, real assets, and complementary strategies investment objectives are appropriate for portfolios of at least $25 million. The lower minimums for the equity and fixed income investment objectives are available only to clients who have larger overall relationships with from other services. Figure 3: Specialty Investment Objectives Strategic Target Allocations Investment Objective Liquidity Management Fixed Income Equities Real Assets Strategies Cash 100% 0% 0% 0% 0% Fixed Income 0% 80% 0% 0% 0% Equities 0% 0% 70% 0% 0% Real Assets* 0% 0% 0% 85% 25% Description 0% 20% 30% 15% 75% Maintain a high degree of liquidity with capital preservation. Willing to employ alternative investments to enhance short-term liquidity needs. fixed income portfolio for income and for stability over a market cycle. Willing to employ non-directional alternative assets to enhance return. May employ other asset purposes from time to time. equity portfolio for long-term capital growth. Willing to employ growthoriented alternative assets to enhance long-term equity strategy. May employ other asset classes for diversification purposes from time to time. Employ an investment portfolio consisting primarily of nonfinancial assets for long-term capital growth. Willing to accept illiquid, nontransparent, restricted capital and credit risk investments. Will employ alternative assets to enhance longterm real asset strategy. May employ other asset purposes from time to time. alternative investment portfolio for long-term capital growth. Willing to accept illiquid, nontransparent, restricted capital and credit risk investments. May employ other asset purposes from time to time. If Strategies is the only client investment relationship, there will be a minimum 2% allocation to cash for liquidity purposes Investment Objectives 3

5 Figure 4: Specialty Investment Objectives Allocation Ranges Investment Objective Liquidity Management Fixed Income Equities Real Assets Strategies Cash % 0-15% 0-15% 0-15% 0-15% Fixed Income 0-30% % 0-20% 0-20% 0-20% Equities 0-10% 0-20% % 0-20% 0-30% Real Assets* 0-10% 0-20% 0-20% % 0-40% 0-30% 0-30% 0-50% 0-30% % If Strategies is the only client investment relationship, there will be a minimum 2% allocation to cash for liquidity purposes To have a conversation about these or other topics, please contact your relationship manager. Visit or call Disclosures Investment Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value, a Wells Fargo Business, provides products and services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries. Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time y our taxes are prepared. Additional information is available upon request Wells Fargo Bank, N.A. All rights reserved. Member FDIC. A Wells Fargo Business (Rev 01)