Essentials of Investing. Stacie Mintz Portfolio Manager Quantitative Management Associates

Transcription

1 January 2012 Essentials of Investing Stacie Mintz Portfolio Manager Quantitative Management Associates

2 Why Invest? Grow Assets Save for specific financial goals Fund operations/charitable giving Maintain Purchasing Power (e.g. keep up with inflation) Extend the life of your funds IA SBBI US 30 Day TBill TR USD (%Total Return) IA SBBI US Inflation (%Price Return) Source: Morningstar, Inc. Please see 'Notes to disclosure' page for Important Information including risk factors and disclosures. 2

3 Investment Options Stocks/Equities: Represents ownership in company Returns through dividends and stock price appreciation/depreciation Stocks do well when economies and corporate earnings are growing or if there is speculation or high inflation. They do poorly when economies are contracting, or when parts of market system are failing (such as financial crisis) Bonds/Fixed Income: Represents loan to an entity (e.g. government, corporation) Returns through coupon payments, but bond price will appreciate/depreciate during life of bond (e.g. bond funds can lose money!) In general, bonds do well when there is economic uncertainty. They do poorly during economic booms and/or periods of inflation. 3

4 Investment Options Stocks/Equities: Country or region: US Stocks (however, many companies have world wide operation) International Stocks (typically refers to developed markets) Emerging Markets (e.g. Brazil, Russia, India, China) Style Value a company whose price is lower relative to earnings & book value when compared to its industry or overall market. Growth - a company whose earnings are expected to grow at an above-average rate compared to its industry or the overall market. Size Large cap - over $10 billion Mid cap - $2 billion to $10 billion Small cap $300 million to $2 billion Micro cap - under $300 million Fixed Income/Bonds: Government (aka Sovereign Debt): United States International Emerging Markets Corporate Investment Grade High Yield Term Structure (life of the bond) Long-term: years Intermediate Term: 5-10 years Short Term: Tbills - 90 days 4

5 More Investment Options Non-Traditional Asset classes Real Estate t TIPS (Treasury Inflation Protected Securities) Commodities (oil, gold) Infrastructure Hedge funds See Index Definitions page for more information. 5

6 How much of which investments? Examine Risk & Return Your return needs & risk tolerances: What return on the investments do I need to maintain or grow my purchasing power? What level of risk am I willing to take? How much liquidity do I need? Can I live with the worst case scenarios? 6

7 How much of which investments? Examine Risk & Return 16 Investment returns & risk: Long-run historical averages Perc cent Core Bonds 1/ /2011 US Large Cap Stocks US Small Cap Stocks International Stocks Emerging Markets Stocks 2/ /2011 1/ /2011 1/ /2011 1/ /2011 Source: Morningstar, Inc. Please see 'Notes to disclosure' page for Important Information including risk factors and disclosures. 7

8 Even Over 10 year periods, Returns Can Deviate Significantly from Long Term Averages S&P500 TR 1926:YTD Avg Trailing 10yr Avg Source: QMA, Standard & Poor s. Please see Notes to Disclosure page for Important Information including risk factors and disclosures. Past performance is not a guarantee or a reliable indicator of future results. 8

9 Typically, higher risk yields higher return over time Expected Historical Ret. Return Standard Dev. Deviation 20 Percent Core Bonds 1/ /2011 US Large Cap US Small Cap International Emerging Markets Stocks Stocks Stocks Stocks 2/ /2011 1/ /2011 1/ /2011 1/ /2011 Source: Morningstar, Inc. Please see 'Notes to disclosure' page for Important Information including risk factors and disclosures. 9

10 Typical Depiction of risk/return trade off 16.0 Expected Return Emerging Markets Stocks US Small Cap Stocks US Large Cap Stocks International Stocks Core Bonds Standard Deviation (Risk) Source: Morningstar, Inc. Please see 'Notes to disclosure' page for Important Information including risk factors and disclosures. 10

11 Recent Past Has been Unusual Bonds have outperformed Stocks over recent years. Perc cent S&P 500 Index Barclays Capital Aggregate 1 Year 3 Year 5 Year 10 Year As of 12/31/11. Source: FactSet. Please see Index Definitions for further information. 11

12 Recent Past Has been Unusual: Why? U.S. Business Cycles Since World War II Peak-to-trough % change Real Industrial Nonfarm Jobless Rate Peak Trough GDP Production Employment Low High Change * Assumes recession ended September 2009 Dec Sept % -19.2% -5.5% 4.4% 10.1% 5.7% Mar Nov % -6.3% -2.0% 3.8% 6.3% 2.5% July 1990 Mar % -4.3% -1.5% 5%5.0% 7.8% 2.8% July 1981 Nov % -9.5% -3.1% 7.2% 10.8% 3.6% Jan July % -6.2% -1.3% 5.6% 7.8% 2.2% Nov Mar % -14.8% -2.7% 4.6% 9.0% 4.4% Dec Nov % -5.8% -1.4% 3.4% 6.1% 2.7% Apr Feb % -6.2% -2.3% 4.8% 7.1% 2.3% Aug Apr % -12.7% -4.4% 3.7% 7.5% 3.8% July 1953 May % 27% -9.0% 90% -3.3% 33%25% 2.5% 61% 6.1% 36% 3.6% Nov Oct % -8.6% -5.1% 3.4% 7.9% 4.5% Average -2.0% -8.3% -2.7% 4.4% 7.6% 3.2% 09/2009 Sources: NBER, BEA, FRB, BLS, Moody's Economy.com 09/2009 Past performance is not a guarantee or a reliable indicator of future results. 12

13 Recent Past Has been Unusual: Why? 2,500 Secular Bull Market in Stocks (INDEX) Standard & Poors 500 Composite Index, Total Return, USD, End of Period - United States 130 Secular Bear Market in Stocks (INDEX) Standard & Poors 500 Composite Index, Total Return, USD, Close - US 120 2, , , '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 50 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 As of 2000 As of 2011 Source: FactSet, QMA Past performance is not a guarantee or a reliable indicator of future results. 13

14 What might the future bring? Likely to have more normal relationship between stocks & 30 bonds, but lower overall returns. 25 Like many investment managers, QMA develops long- 15 run expected risk and return 10 assumptions for asset classes. They are based on long run 5 history, recent past and 0 expectations about the future. ent Perc 20 Summary of Key Long Term QMA Expected Returns for 2011* Expected Return Standard Deviation *Capital market assumptions are subject to change. Source: QMA QMA s capital market assumptions (i.e., long-term risk and return expectations for each of the asset classes) are based on our analysis of long-term historical performance numbers, current market conditions, and fundamental and economic factors. There are no guarantees that these expectations will be met and past performance is not a guarantee or a reliable indicator of future results. These numbers may be revised at any time without notice. Please see Notes to Disclosure page for Important Information including risk factors and disclosures. 14

15 How the risk/return trade off may look Expected Return 10.0 US Small Cap Stocks Emerging Markets Stocks 9.0 International Stocks 8.0 US Large Cap Stocks Core Bonds Standard Deviation (Risk) Core Bonds - 1/ /2011 US Large Cap Stocks -2/ /2011 US Small Cap Stocks - 1/ /2011 International Stocks - 1/ /2011 Emerging Markets Stocks - 1/ /2011 Source: Morningstar, Inc. Please see 'Notes to disclosure' page for Important Information including risk factors and disclosures. 15

16 Combination of these investments perform better than any one alone over time Since asset classes perform differently in different market conditions, a combination of them is beneficial. Correlation is the degree to which investment move together. Investments that are not perfectly correlated have risk/return benefits when combined. Correlations change over time. Perfectly Positively Correlated: No Diversification Benefit Positively Correlated: Diversification Benefit Negatively Correlated: Strong Diversification Benefit Period 1 Period 2 Period 1 Period 2 Period 1 Period 2 Source: QMA Shown for illustrative purposes only. Asset A Asset B 16

17 Diversify to get a better risk/return trade-off Red line represents portfolios that have the best risk/return trade off based on individual asset class estimated risk, return & correlation (Efficient Frontier) Portfolios of assets that fall on or near the red line are maximizing return at a given level or risk 10.0 US Small Cap Stocks Expected Return Conservative Moderate Aggressive Emerging International Markets Stocks Stocks US Large Cap Stocks UCF Asset Allocation Funds 3.0 Core Bonds Standard Deviation (Risk) Source: Morningstar, Inc. Please see 'Notes to disclosure' page for Important Information including risk factors and disclosures. 17

18 Potentially Higher returns with Active Management An Index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. You can not directly invest in an index. Active Managers aim to do better than index returns over time. Asset Class Index US Large Cap S&P 500 Russell 1000 US Mid Cap S&P 400 US Small Cap S&P 600 Russell 2000 International Developed MSCI EAFE International Emerging US Bond Market MSCI Emerging Markets Barclays Capital US Aggregate Tbill 1m Non-US Bond Market Citigroup Non-US$ Gvt Citigroup World 1+ Yr Gvt 18

19 Degrees of Active Management Passive Enhanced Index Active Market return (index) Lower risk relative to index Less expensive(fees) Potentially higher return Higher risk relative to index More expensive (fees) 19

20 Historical Risk/Return of Active & Passive Managers 7 10 Years Ending December 31, US Large Cap Core US Enhanced S&P 500 Equity US Passive S&P 500 Equity 5th Percentile Median th Percentile S&P Source: QMA and evestment Alliance Prepared by QMA using evestment Alliance data. Please see Notes to Disclosure page for Important Information including risk factors and disclosures. evestment Alliance is an outside vendor whose software has been used to create this exhibit. QMA pays a fee for this software. QMA has made efforts to confirm accuracy/reliability of the data provided by evestment Alliance but we disclaim responsibility for its accuracy or completeness. Past performance is not a guarantee or a reliable indicator of future results. 20

21 Choosing and monitoring managers: fulfilling asset class mandates Initial evaluation of managers: Stability and goals of Firm Quality of Staff Investment Philosophy & Process Historical Investment Performance (track record) Length/strength Good record does not guarantee future success! Operational support (back office, compliance, client service) 21

22 Choosing and monitoring managers: fulfilling asset class mandates On going monitoring: Keep abreast of changes in firm, personnel, investment strategy Evaluate performance against appropriate measures Versus stated objectives Versus appropriate benchmark Versus appropriate peers 22

23 Evaluate Managers against appropriate benchmarks and peers Years Ending December 31, US Large Cap Equity US Small Cap Equity 5th Percentile Median th Percentile S&P Source: QMA and evestment Alliance Prepared by QMA using evestment Alliance data. Please see Notes to Disclosure page for Important Information including risk factors and disclosures. evestment Alliance is an outside vendor whose software has been used to create this exhibit. QMA pays a fee for this software. QMA has made efforts to confirm accuracy/reliability of the data provided by evestment Alliance but we disclaim responsibility for its accuracy or completeness. Past performance is not a guarantee or a reliable indicator of future results. 23

24 Monitor Asset Allocation Monitor your asset allocation: Rebalance periodically to avoid profit drift Avoid making rash decisions i in unusual market conditions i (upside or down side) Revisit your investment plan periodically (every 3-5 years); or if your goals change. $200k higher $12,000,000 12/31/08 $12,000,000 $12,000,000 12/31/09 $10,000, $10,000, $10,000,000 $8,000,000 $6,000,000 40% Bonds Stocks: Down 20% $8,000,000 $6,000,000 49% Bonds 40% Bonds Stocks: up 30% $8,000,000 $6,000,000 43% Bonds 35% Bonds $4,000,000 $2,000,000 60% Stocks Bonds: Up 9% $4,000,000 $2,000,000 51% Stocks 60% Stocks Bonds: Up 5% $4,000,000 $2,000,000 57% Stocks 65% Stocks $0 12/31/ /31/2008 $0 Source: QMA Please see Notes to Disclosure for Important Information including risk factors and disclosure. Past performance is not a guarantee or a reliable indicator of future results. 24 Rebalance to 60/40 target $0 Drift Portfolio Rebalanced Portfolio

25 Rebalancing Adds Value Over Time $18,000,000 $16,000,000 Drift Portfolio Rebalanced Annually Rebalanced portfolio $750k higher $14,000,000 $12,000,000 $10,000,000 $8,000,000 Jan-02 Jun-02 Nov-02 Apr-03 Sep-03 Feb-04 Jul-04 Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Source: QMA Please see Notes to Disclosure for Important Information including risk factors and disclosure. Past performance is not a guarantee or a reliable indicator of future results. 25

26 Conclusions Establish long term goals based on your risk tolerance, asset and liquidity needs. Choose a diversified asset mix based on long-run risk/return expectations to take advantage of diversification. Decide on active or passive management for each investment; choose and monitor professional managers. Revisit your plan periodically, but not in response to severe, short-term market conditions. 26

27 Appendix Biography Notes to Disclosure Index Definitions

28 Biography Stacie L. Mintz is a Principal and Portfolio Manager for Quantitative Management Associates (QMA) and a member of the investment committee. Within the quantitative core equity team, Stacie is primarily responsible for overseeing large-cap equity mandates. Previously, Stacie was a member of the asset allocation team, where she was responsible for several retail and institutional portfolios, in addition to a portion of the Prudential Pension Plan. She earned a BA in Economics from Rutgers University and an MBA in Finance from New York University. 28

29 Notes to Disclosure IMPORTANT INFORMATION The information contained herein is provided by Quantitative Management Associates LLC ( QMA ). This document may contain confidential information and the recipient hereof agrees to maintain the confidentiality of such information. Distribution of this information to any person other than the person to whom it was originally delivered and to such person s advisers is unauthorized, and any reproduction of these materials, in whole or in part, or the divulgence of any of its contents, without the prior consent of QMA, is prohibited. These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. Certain information in this document has been obtained from sources that QMA believes to be reliable as of the date presented; however, QMA cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. QMA has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any information presented regarding the affiliates of QMA is presented purely to facilitate an organizational overview and is not a solicitation on behalf of any affiliate. These materials are not intended d as an offer or solicitation it ti with respect to the purchase or sale of any security. These materials do not take into account individual client circumstances, objectives or needs. No determination has been made regarding the suitability of any securities, financial instruments or strategies for particular clients or prospects. The information contained herein is provided on the basis and subject to the explanations, caveats and warnings set out in this notice and elsewhere herein. Any discussion of risk management is intended to describe QMA s efforts to monitor and manage risk but does not imply low risk. The basis for the performance objective set forth within this presentation ti is QMA's research and its long experience in managing equity accounts that use quantitative methods to drive stock selection and portfolio construction. There can be no guarantee that this objective will be achieved. QMA has based this investment objective on certain assumptions that it believes are reasonable. There is no guarantee, however, that any or all of such assumptions will prove to be accurate in the face of actual changes in the equities market or other material changes in regional or local markets specific to this strategy. Factors that would or could mitigate against achieving this investment objective would include material changes in the economic environment and factors that are not included in our model or are underperforming in our model. The investment objective contemplated herein is over a complete market cycle which is generally between five and ten years for this strategy. The investment objective set forth above is calculated gross of management fees. Had such fees been taken into account, the investment objective indicated would be lower. Enhancements represent the results of ongoing research initiatives intended to continually advance the design of QMA s model. An enhancement or collection of enhancements does not constitute a material change to QMA s investment philosophy or strategy unless otherwise communicated to all clients. 29

30 Notes to Disclosure - Continued IMPORTANT INFORMATION Investing in securities involves risk of loss that investors should be prepared to bear. In addition, model-based strategies present unique risks that may result in the model s not performing as expected. These risks include, for example, design flaws in the model; input, coding or similar errors; technology disruptions that make model implementation difficult or impossible; and errors in externally supplied data utilized in models. To the extent that portfolio manager judgment is applied to model output, decisions based on judgment may detract from the investment performance that might otherwise be generated by the model. The financial indices referenced herein are provided for informational purposes only. The manager s holdings and portfolio characteristics may differ from those of the benchmark(s). Additional factors impacting the performance displayed herein may include portfolio-rebalancing, the timing of cash flows, and differences in volatility, none of which impact the performance of the financial indices. Financial indices assume reinvestment of dividends but do not reflect the impact of fees, applicable taxes or trading costs which may also reduce the returns shown. You cannot invest directly in an index. The statistical data regarding such indices has been obtained from sources believed to be reliable but has not been independently verified. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in portfolios managed by QMA and, if such securities are held, no representation is being made that such securities will continue to be held. These materials do not purport to provide any legal, tax or accounting advice Morningstar, Inc. All Rights Reserved. The information contained herein (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; (3) does not constitute investment advice offered by Morningstar; and (4) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from use of this information. Past performance is not a guarantee or reliable indicator of future results. The Russell 1000 and Russell 2000 Index are trademarks/service marks of Russell Investments. Russell is a trademark of Russell Investments. 30

31 Index Definitions Real estate that generates income or is otherwise intended for investment purposes rather than as a primary residence. It is common for investors to own multiple pieces of real estate, one of which serves as a primary residence, while the others are used to generate rental income and profits through price appreciation. The tax implications for investment real estate are often different than those for residential real estate. TIPS - A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed. Interest on TIPS is paid semiannually. Commodities -Abasicgoodusedincommercethatisinterchangeablewithothercommoditiesofthesametype.Commoditiesaremostoftenused as inputs in the production of other goods or services. Infrastructure - The basic physical systems of a business or nation. Transportation, communication, sewage, water and electric systems are all examples of infrastructure. These systems tend to be high-cost investments, however, they are vital to a country s economic development and prosperity. Hedge funds - An aggressively managed portfolio of investments that uses advanced d investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark). The S&P 500 Index - Covers 500 industrial, utility, transportation, and financial companies of the U.S. markets. The value-weighted index represents about 75% of the NYSE market capitalization and 30% of the NYSE issues. The S&P 400 MidCap Index is a capitalization-weighted index that measures the performance of mid-range sector U.S. stocks where median market capitalization is $700 million. The S&P SmallCap 600 Index is a capitalization-weighted index that measures the performance of selected US stocks with small market capitalization. The Russell 1000 Index measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 90% of the total market capitalization of the Russell 3000 Index. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The MSCI EAFE (Net) Index is invested in Europe, Australasia, and the Far East. Dividends are reinvested monthly, weighted by each country s aggregate market capitalization. The MSCI Emerging Market Index is a market-capitalization-weighted index of over 850 stocks traded in 22 world markets. Citigroup Non-U.S. World Government Bond Index ($ hedged) excludes issues denominated in U.S. dollars. The Index measures the total return of government securities in major sectors of the international bond market and is hedged d to the USD. 31