Buy and Hold vs. Active Risk Management 93% of the S & P 500 Index

Transcription

1 Slide 1 Managed Money Quarterly Client Meeting January 26, 2015 Slide 2 S&P 500 Index From % of the S&P 500 Index return total happened during this period. The Index averaged % per year. Sources: Standard & Poor s Corporation (without dividends) Buy and Hold vs. Active Risk Management 93% of the S & P 500 Index return total happened between 1982 and Generally the market showed steady growth with minimal corrections. For Investment Professional Use Only. Slide 3 Buy & Hold vs. Active Risk Management Source: Yahoo Finance S&P 500 Average Annual Return: 6.18% If You Missed The Your Average Annual Return Fell to Best 10 Days 3.02% Best 20 Days 0.92% Best 30 Days -0.87% Best 40 Days -2.52% The S&P 500 Index is unmanaged, investors cannot directly invest into the S&P 500. The S&P 500 is comprised of 500 widely held securities considered to be representative of the stock market in general. Investors should understand that the performance data presented comparing the four managed composites to the S&P 500 varies greatly and that depending upon the holdings within each composite, the volatility of the composites may be higher or lower than that of the S&P 500. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The performance of this index does not reflect any fees and charges associated with individual investments or investment advisory accounts. Typical Buy & Hold mentality says that you should stay in the market to make certain that you are there for the Best Days. The slide shows the impact of missing the 10, 20, 30 and 40 best days in the market during the period of 1990 through 2012.

2 Slide 4 S&P 500 Index Since 2000 High Sources: Standard & Poor s Corporation (without dividends) For Investment Professional Use Only. After 2000 the market is much more volatile, largely due to the information age where information dissemination is almost instantaneous and the markets react accordingly. This causes a greater fluctuation, sudden downturns and generally higher risk. This amplifies the need for Active Risk Management to help mitigate losses. Slide 5 What If You Missed the Bad Days? Source: Yahoo Finance S&P 500 Average Annual Return: 6.18% If You Missed The Your Average Annual Return Soared to Worst 10 Days 9.77% Worst 20 Days 12.33% Worst 30 Days 14.55% Worst 40 Days 16.50% The S&P 500 Index is unmanaged, investors cannot directly invest into the S&P 500. The S&P 500 is comprised of 500 widely held securities considered to be representative of the stock market in general. Investors should understand that the performance data presented comparing the four managed composites to the S&P 500 varies greatly and that depending upon the holdings within each composite, the volatility of the composites may be higher or lower than that of the S&P 500. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The performance of this index does not reflect any fees and charges associated with individual investments or investment advisory accounts. Being out of the market at times to try to miss the Worst Days may be more critical than staying in to not miss the Best Days. During the same period of 1990 through 2012, missing the 10, 20, 30, or 40 Worst Days is tracked on the slide, demonstrating that the impact of missing the Worst Days is far more beneficial. Slide 6 What If You Missed the Best and Worst Days? Source: Yahoo Finance S&P 500 Average Annual Return: 6.18% If You Missed The Your Average Annual Return Was Best & Worst 10 Days 6.51% Best & Worst 20 Days 6.78% Best & Worst 30 Days 6.94% Best & Worst 40 Days 6.96% The S&P 500 Index is unmanaged, investors cannot directly invest into the S&P 500. The S&P 500 is comprised of 500 widely held securities considered to be representative of the stock market in general. Investors should understand that the performance data presented comparing the four managed composites to the S&P 500 varies greatly and that depending upon the holdings within each composite, the volatility of the composites may be higher or lower than that of the S&P 500. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. The performance of this index does not reflect any fees and charges associated with individual investments or investment advisory accounts. Missing the Best and Worst days is a picture of Active Risk Management. An Active manager is not as interested in getting 100% of the gains as they are in mitigating more than a predetermined level of loss. They want to capture a significant portion of gains while eliminating an even greater portion of the potential losses.

3 Slide 7 A Better Investor Investment #1: $100,000 Solution Investor #2: $100,000 The Importance of NOT LOSING Money 40% Loss: $60,000 10% Loss: $90,000 60% Gain: $96,000 50% Gain: $135,000 Total Value Down (4%) Total Value UP 35% A Better Investment Solution Example of Buy and Hold Investment (Investor #1 on the Slide) and Loss Mitigation Investment (Investor #2 on the Slide) Slide 8 Methodology What do money managers do? Mutual Fund managers are focused on beating the benchmark while Institutional Managers are focused on mitigating losses Trend Following Algorithmic Models Methodology Less emphasis on going after maximum gains goal is to capture 70% to 80% of gains Emphasis on mitigating losses is more important move investments to cash to miss losses Slide 9 Buy in at signs of uptrend Go to cash before downturn is too great For Investment Professional Use Only.

4 Slide 10 S&P 500 Index Slide of S & P 500 A typical manager would buy in at green points, go to cash at red points. For Investment Professional Use Only. Slide 11 Beta Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. S&P F-Squared Domestic Weekly 0.54 Donoghue Power Dividend 0.48 Beta Beta is a measurement of the volatility of a security compared to the general market as tracked by the S & P 500 index. Beta can be applied to a manager s investment model as well. A Beta score greater than 1.0 indicates greater volatility and risk than the general market, therefore greater risk of losses. A Beta score less than 1.0 indicates lower volatility and risk. Example: Beta of 1.20 indicates 20% greater risk than the general market. Beta of 0.6 indicates 40% less risk than the general market as tracked by the S & P 500.

5 Slide 12 Max-Drawdown Maximum drawdown measures the percentage drop in cumulative return from a previously reached high. This metric is good for identifying funds that preserve wealth by minimizing drawdowns throughout up/down cycles, and gives an analyst a good indication of the possible losses that this fund can experience at any given point in time. F-Squared Domestic Weekly s Largest Max-Drawdown was 13.39% while the S&P 500 incurred a 36.13% loss during the same time. Donoghue Power Dividend s Largest Max-Drawdown was 13.25% while the S&P 500 incurred a 50.95% loss during the same time. Maximum Drawdown This is a measurement of the percentage drop of a funds cumulative return. Understanding the Maximum Drawdown can help to understand how a management fund works. Each investor is encouraged to be aware of the maximum drawdown potential of the funds that they have allocated their investments to. Slides show maximum drawdown percentages for several funds. Slide 13 Slide 14 Performance S&P 500: 13.69% - You cannot buy directly into this These managers returns are net of fees F-Squared Domestic Weekly: 7.66% Donoghue Power Dividend: 13.16% Faith Based Contrarian: 22.90% Howard Capital Management Viper II Balanced: 2.05% Performance A comparison was drawn showing the performance last year of selected investment models from different managers as shown on the slide.

6 Slide 15 Slide shows a chart of the price of crude oil during 2014 with significant drops in 4Q2014 Slide 16 As we all know, oil prices fell massively in the 4th quarter of The massive drop in oil prices can clearly be classified as a black swan event, dropping from over $100/bbl to below $50/bbl. This sent a shock wave through the stock market, but as oil stabilizes so will the market. With oil dropping as low as it has, we see no way the Fed can do anything but keep rates low. We are in more danger of deflation than inflation at this time. As we have heard on the news, the drop in oil is similar in many ways to a tax break. This will give most people more money in their pockets for a period of time to spend on other things. Slide 17 The OPEC cartel, especially Saudi Arabia, says they are not cutting output. Saudi Arabia, by virtue of its size, is always the decision making member of OPEC. They clearly want to regain control of oil prices by driving the higher cost producers (oil shale and oil sands producers) out of the market. Don't think that OPEC doesn t feel the pain of lower oil prices. They feel it more than anyone else. Oil is about all they have. But they were losing market share at what, for them, was an alarming rate. Russia is also in a lot of pain with lower oil prices and we wonder if there has not been some discussion between OPEC and Russia.

7 Slide was a rough year for commodity ETFs, and much of the weakness has been due to the decline in oil prices. Oil makes up a large percentage of most diversified commodity indices and ETFs. For example, crude oil, heating oil, and gasoline make up almost 50% of the holdings in the Power Shares DB Commodity Index Tracking Fund (DBC), the largest commodity ETF on the market. It has had a 78% correlation with WTI (West Texas Intermediate) Crude over the past three years. Slide 19 The best buy within the Energy sector in the current environment looks to be the Oil Refiners. Refiners continue to benefit from low oil prices resulting from the excess oil supply created by the oil shale revolution. These lower input costs generally mean higher margins for refiners, and expanding margins means higher stock prices for the refining companies. Slide 20 Oil has been a big job creator and a driving force in our economic recovery, so we analyzed the impact of falling oil prices on S&P 500 earnings. Bad news for the oil companies, in the form of lower oil process, is usually good news for the rest of the market, in the form of lower energy costs. One of our findings was that when crude prices plunge, the bad news will generally be reflected in Energy earnings before the good news has affected the rest of the market. Our conclusion was that in the short term, investors may be frustrated that the benefits of cheap oil may not show up in earnings reports However, in the intermediate term, falling Energy profits relative to the benefit to the other sectors could actually be positive for the broad market. The point was that soaring oil prices were draining earnings power from the rest of the market.

8 Slide 21 As of 12/31/14, Energy accounted for 11.2% of S&P 500 earnings. Consensus estimates are for Energy earnings to plunge by 13.4% in the next four quarters. Consensus for the S&P 500 is for 10.7% growth. Even if estimates ex. Energy decline, Energy s earnings weight should fall. When Energy s earnings have accounted for 11% or less of total earnings, the S&P 500 Index has risen at a 12.1% annualized rate. The effects may not be immediate, but lower oil prices should benefit the market as a whole. Slide 22 Foresight Retailers This sector will benefit not only because consumers will have more money available for spending, but also because lower gas prices will make traveling to shopping centers a lot less expensive. The extra money that people have as a result of lower gas prices will enable them to buy more of everything, from groceries to big-ticket items, like flat screen TVs and home appliances. Consumers will also be able to spend more on luxury items and beauty supplies. Because of the drop in oil prices, people typically have more money to spend on other things, so we are seeing a significant increase in consumer spending. Slides explain further. Slide 23 Foresight Airlines & Hotel Chains Airlines are one of the biggest beneficiaries of lower gas prices. Since fuel represents a major expense for airlines, lower prices will enable them to operate more profitably. As that happens, they are likely to get more aggressive in pricing their flights, in an attempt to increase market share. This will be a direct benefit to consumers. Lower airline tickets will enable people to more travel frequently. That will also be a benefit to hotel chains, since people need a place to stay while they re away on their trips. Foresight Slides explain the impact of the drop in crude oil prices on other segments of the market

9 Slide 24 Foresight Shipping & Freight Companies Shipping and freight companies are one of big beneficiaries of lower gas prices. Since fuel represents a major expense for these companies, lower prices will enable them to operate more profitably. Slide 25 Foresight Restaurants With nearly half of all food dollars being spent on meals away from home, the number of meals consumed in restaurants is only likely to increase with lower gas prices. Not only will lower gas prices mean that consumers have more money available to pay for restaurant meals, but they are likely to frequent restaurants more often while they are out on shopping trips and on travel away from home. Slide 26 Foresight Paint & Solvent Manufacturing Companies This sector also has a double edged advantage. Since oil figures into the production of many of the product lines, lower prices will increase profit margins. At the same time, consumers with more money to spend, are likely to spend at least some of it doing home repairs, including painting.

10 Slide 27 Foresight Tire Manufacturers The same situation exists with tire manufacturers. The cost of raw materials to produce tires will decline, which will increase profit margins. An increase in driving by consumers will also prop up demand for new tires. And with the extra cash flow afforded by lower gas prices, consumers will have the money to replace their tires more frequently than they do when gas prices are considerably higher. Slide 28 Foresight Entertainment Companies Much like airlines, hotels, restaurants, and large retailers, entertainment companies are likely to benefit from consumers suddenly having deeper pockets, as well as the likelihood that they ll be spending more time away from home. With cheap gas, and more money in their wallets, it s likely that a large amount of consumer spending will go into entertainment, maybe even a disproportionate amount. This should benefit companies across the entertainment spectrum, including movie theater chains, manufacturers of sporting goods, and theme parks. Slide 29 Foresight Auto Companies With more disposable income, and a greater demand for driving, consumers are likely to be buying more cars very soon. This isn t just because gas prices are lower either. Consumer confidence tends to rise when a basic commodity like gasoline, falls in price. Consumers are likely to buy cars on the optimism that lower gas prices generate. Another important factor when it comes to autos is that there is significant pent-up demand. The average age of a car in the US is now 11.4 years and that means that a lot of them are due for replacement. Lower gas prices could be the catalyst that starts the ball rolling.

11 Slide 30 Foresight Homebuilders and Related Businesses The same consumer confidence that is likely to drive increased auto sales may also spill over into homebuilding. Construction of new housing, particularly of single family detached housing units, may benefit. So will any businesses that are related to the homebuilding industry, such as companies that provide building supplies and related merchandise. In addition, lower gas prices will enable consumers to consider buying homes farther from metropolitan regions - homes that are likely to be lower in price. Lower gas prices will mean that commuting longer distances isn t as big a factor as it was when gas price higher. Slide 31 Foresight Bottom Line Since gasoline is one of the fundamental costs affecting the entire economy, the major drop in prices that we ve see in the past few months may very well be a game changer. Lower gas prices affect nearly every sector of the economy, and most in positive ways. The longer lower prices continue, the more positive that investment in these sectors will be. Now is the time to get into those sectors, since the drop in gas prices is still very recent. Slide 32 Why money managers are talking about the power of dividends! Attractive Returns Historically stable businesses can afford to share profits with shareholders Reduced Volatility Companies that distribute reasonable dividends generally have exhibited lower stock-price volatility. They also tend to be more stable and mature. Boosts Total Return Sustainable dividend income can be an important component of total return and can help protect against depreciation of a stock s price. In this way, dividends may soften the impact of stock-price declines on the overall value of a portfolio. Diversification Dividend payers can be found across many sectors and industries and often have both value and growth characteristics. Yield Dividends provide income. The Power of Dividends Stable businesses share profits with investors Volatility is reduced by the distribution of reasonable dividends Dividends are an important component of total return Investments paying dividends are found across a variety of market segments Dividends provide income

12 Slide 33 Focus for our clients in 2015 Balance of macro & micro focused portfolios Utilize portfolios capitalizing on dividend focused stocks Utilize managers that have loss mitigation strategies in place to reduce a client s overall risk Ensure a money manager utilizes ETFs and/or individual stocks over mutual funds for efficient trading 2015 Client Focus Balance of Macro (Market segment driven) and Micro (Individual stocks or bonds driven) focused portfolios Utilize portfolios capitalizing on dividend focused investments Utilize managers that have strong loss mitigation strategies in place Ensure that managers utilize ETF s and/or individual stocks over mutual funds for efficient trading Slide 34 Thank you!