Using tactical investing to preserve and grow client wealth.

Transcription

1 Using tactical investing to preserve and grow client wealth. 1

2 Because we believe that stock prices reflect known information, our quantitative bottom-up approach offers our clients an efficient investment process designed to diversify and optimize portfolios to capture opportunity and avoid significant loss. Robert Rafael, President, MRM

3 MRM S PURPOSE Preserve and Grow Client Wealth We seek to achieve our primary goal to outperform equity markets through tactical use of efficient investments, such as ETFs by controlling the impact of down stock markets on client portfolios and participating broadly in strong market performance. It is our belief that buy and hold strategies ignore the powerful negative impact that today s market volatility can have on wealth-building. We only have to look at the price behavior of a broad stock market index, like the S&P 500, to see the potential effects of the significant rise in volatility. As markets are roiled by investor behavior due to strong or weak economic news, negative sentiments, or exuberance we recognize that addressing the potential erosion of wealth due to market volatility is a key challenge to professional investment managers today. You get recessions, you have stock market declines. If you don t understand that s going to happen, then you re not ready. You won t do well in the markets. Peter Lynch 3

4 MRM S INVESTMENT PHILOSOPHY We believe that addressing the potential for wealth erosion is critical to effective investment management today. To seek to address volatility, while continuing to participate in the benefits of stock investing, it s important to: Diversify your holdings and introduce discorrelated assets to the portfolio, Tactically respond to market change to identify an optimal portfolio of efficient investments, and Use cash and other defensive vehicles when you can t find anything that meets your buy criteria. 4

5 Why We Designed this Approach Diversification using Non-correlated Assets In today s global economy, most stock markets operate efficiently the price of a stock represents its known value. The US stock market, for example, is so efficient that price change is driven primarily by market sentiment, supply, and demand. The market price of a security is the arbiter that reflects everything over time. In the international markets, country-specific ETFs are highly-liquid and offer the chance to efficiently participate in equity markets outside the US. As we look to further diversify to lower risk, US stocks and international ETFs along with segment, industry sector, regional developed and emerging international index market ETFs expand our opportunities to lower market correlation. Tactical Optimization via Efficient Investments MRM s proprietary quantitative approach brings an emotionless decision-making approach focused on the evaluation of potential ETF holdings based on a set of well-tested and systematic criteria. We review equity candidates on an ongoing basis and attempt to identify portfolios invested in an optimal mix of securities, based on characteristics our research shows may provide strong return potential with controlled risk. Our tactical investment process monitors market change through a bottom-up analysis where market shifts are quickly identified through changes in stock and ETF characteristics that, when significant, will drive portfolio change. Because we believe it s important to address market changes tactically, it s necessary to use investment vehicles that are highly efficient. Use Cash and other Defensive Vehicles When Quantitative Analysis Can t Find Good Investments MRM agrees that even the most skilled professional investor cannot predict when markets will rise or fall based on economic projections or other top-down market-timing approaches. We do believe, however, that an investor cannot ignore situations when very few investments look attractive. We see this, at times, when the results of our quantitative decision-making process indicate very limited numbers of ETFs or stocks that score well. In the past, this type of result meant the market was either going to move sideways or down, in the near future. When this occurs, we buy only attractive ETFs or stocks that meet our requirements and invest the remaining portfolio assets in cash or other defensive vehicles. This approach seeks to protect the portfolio from the potential of significant losses. 5

6 MRM S INVESTMENT STRATEGIES & PROCESS We use a consistent quantitative investment process across four equity strategies: Dynamic Overlay An actively-managed all-etf portfolio that seeks higher returns, protection of principal and reduced volatility. Invests in ETFs across a broad spectrum of equity markets, segments and sectors of various equity markets, and utilizes non-equity segments, when indicated, to further diversify the portfolio. Global Strategies A long-term growth portfolio designed to capitalize on investment opportunities throughout the world. Invests in US stocks and Country Specific and Country Blended International ETFs (weighted approximately 50%/50%.) Dynamic International A quantitative strategy that rotates investments among Country Specific and Country Blended International ETFs that seek to offer the potential for capital appreciation. All Domestic Equity An actively-managed US stock portfolio that uses a quantitative, bottom-up investment process focused on identifying stocks with strong relative momentum and improving prices. The individual investor should act consistently as an investor and not as a speculator. You are an investor, not someone who can predict the future. Base your decisions on real facts and analysis rather than risky, speculative forecasts. 6 Ben Graham

7 Dynamic Overlay Investment Process The Dynamic Overlay strategy actively invests in Exchange Traded Funds (ETF s) in an attempt to generate above-market returns, protect principal and reduce volatility. The Flagship portfolio of MRM, this tactical portfolio combines a diversified allocation among broad-based domestic and international equity market ETFs with opportunistic investments in sector ETFs that have the potential to outperform broader market indices. The portfolio can be fully invested when investments rank positively and may hold up to 70% in cash when potential investments look unattractive. The portfolio does NOT use inverse or leverage ETFs. 1 MRM Universe Screened for Appropriate Sectors & Liquidity MRM screened the ETF universe to identify a diverse group of potential investment vehicles, representing markets, market segments, and industry sectors. As new ETFs are introduced into the market, MRM monitors them for potential inclusion in the universe, as they mature and become more liquid. 2 Quantitative Evaluation & Ranking Based on Historical Returns & Risk Technical Factors Evaluated & Ranked Weekly ETFs in the universe are quantitatively ranked, based on a broad set of technical factors related to price momentum and relative strength. If a portfolio candidate scores positive on ALL criteria, it is fully-weighted; if it has NO positive scores, it is minimum-weighted. 3 Portfolio Construction Controlled for Diversification Constraints Residual Cash Position Actively Adjusted (as needed) To enhance diversification and incorporate discorrelated assets into the portfolio, ETF investments are made based on designated ranges to insure that all twelve holdings are represented. When investing in cash, MRM utilizes money market to 2-year Treasuries. Dynamic Overlay Strategy Characteristics Universe US Equity Style Segments (growth, value, LC, MC, and SC), International Developed and Emerging Markets, US Industry Sectors (financials, materials, utilities, telecom, consumer staples, consumer discretionary, energy, industrial, healthcare, technology, real estate, transportation, biotech, pharmaceuticals, precious metals and, metals & mining) and 20-year US bond, homebuilders, S&P dividends, Dow Dividends, TIPS bond, oil & gas. New ETFs are monitored and added to the universe, when appropriate. Benchmark 75% S&P 500 (with dividends)/25% EAFE (without dividends) Selection Criteria Price momentum, price divergence, relative strength and other technical factors Portfolio Diversification Constraints Portfolio holdings pre-assigned within the following ranges: Holding Maximum Minimum Domestic Growth 5% 3% Domestic Value 5 3 Domestic LC 5 3 Domestic MC 5 3 Domestic SC 5 3 Intl. Developed 20 4 Intl. Emerging 5 1 Top Five Sectors Aggregate minimum in equities 30%; can be 100% equities when markets are deemed positive, in MRM s opinion. In markets MRM deems weak, hold up to 70% in cash. 7

8 MRM S ASSET ALLOCATION GROUP, INC. As a quantitative equity investment firm, MRM uses a team-based approach to managing portfolios. Led by Robert Rafael and using sophisticated portfolio management systems, the team provides consistent implementation across all client portfolios, while monitoring for specific client constraints. MRM s systems utilize industry-recognized programs to gather information from index and ETF providers, to efficiently analyze investment opportunities and identify and build optimal portfolios. The firm s proprietary portfolio management system combines the best parts of these systems to provide an industry-leading approach to managing equity portfolios. Robert Rafael, President has acted as an investment broker and financial advisor for over 35 plus years and provides extensive experience analyzing market trends and their impact on equity performance. His proprietary methods are based on a broad-spectrum form of microanalysis. During his career, Mr. Rafael designed, tested and modified a wide range of other quantitative models, used for various portfolio strategies and applications. Tasha Reece Operations Manager/New Accounts performs back office operations and assists in account type/opening procedures with Custodians for advisors/clients. She also accommodates communication between MRM and advisors. Ms. Reece, with over 13 years of office and managerial experience, brings a great deal of expertise to the firm. Melanie Seiberlich Portfolio Analyst joined MRM Asset Allocation Group, Inc. in With extensive background in data analysis, financial reporting, and computer programming, Ms. Seiberlich focuses on portfolio data management and financial analysis and review. Provident Capital Management ( PCM ) and MRM Asset Allocation Group, Inc ( MRM ) are associated companies and have entered into a unique agreement where both companies have the right to use investment strategies developed by each company to manage and sub manage accounts for investors. Although each company remains under separate ownership for the present time, PCM and MRM have agreed to share their respective investment systems with each other, to provide full statistical and logistical support for their respective systems and to work together to develop further enhancements. PCM and MRM have entered into cross licensing agreements and a business continue agreement to provide for continued management of client assets in the event of the retirement, death or disability of the principal in either company Olive Boulevard, Suite 305 St. Louis, Missouri (800)