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Building a Portfolio with Stocks, Bonds and Mutual Funds
 

Building a Portfolio with Stocks, Bonds and Mutual Funds

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    Building a Portfolio with Stocks, Bonds and Mutual Funds Building a Portfolio with Stocks, Bonds and Mutual Funds Presentation Transcript

    • Building Portfolios with Stocks, Bonds, and Mutual Funds Financial & Retirement Planning Jay Taparia, CFA Managing Director, Sanskar Investments, Inc. Lecturer of Finance, University of Illinois @ Chicago 1
    • The Client Is A Human Being & Is Capable Of Having…  Emotion attached to wealth…  Goals (if…) that are ST, MT or LT  A limited life span…  Uncertainty about the future…  Irrationality associated with decision-making…  A gambling attitude toward the markets… over- confidence  Dreams that could be impossible to reach…  Dreams that are very possible to reach…  An aversion toward risk… whatever that may be  Annoying you at times…  And don’t forget that… Life Happens 2
    • Because Of This…  Building portfolios is not only a science, but it is an art  Having a nice irrelevant conversation with the client is necessary to build a relationship, but also to discover new ―needs‖ and ―objectives‖  Client needs & objectives change over time (years even days)  Portfolios are managed with continuously changing objectives 3
    • Individual Investor Life Cycle Spending Phase Accumulation Gifting Phase Consolidation Long-term: Retirement, Long-term: Children’s Retirement Long-term: college Estate Planning Short-term: Short-term: Vacations, Short-term: House, Car Children’s College Lifestyle Needs, Gifts Phases are Shifting Age 25 35 45 55 65 75 4
    • Portfolio Management Process  State the Objective – Mission statement of the portfolio, who and what it serves and why: income, and/or capital appreciation.  Identify the Constraints – there are always going to be constraints: taxes, legal, emotions, etc.  Formulate the Investment Policy – develop the ―business plan‖ of the portfolio listing out return, risk and all the other issues associated with the portfolio  Study Market and Economic Conditions to forecast future trends – This is everything that you learned in Economic, Industry, Financial Statements, etc.  Monitor Performance – keep in touch with what is going on in the portfolio, and…  Reevaluate & Modify the Portfolio – rebalance and/or reconfigure according to the policy and markets 5
    • Role of the Portfolio Manager  Bottom Line? You need someone to manage the whole process of investing –  Minimizing individual security risk (company, industry, or unsystematic risk)  Making sure that the portfolio is well-diversified among industry, country and company  Managing the tax consequences of the portfolio – esp. for expensive people  Most importantly, making sure the portfolio caters to the client needs via an Investment Policy Statement –  Return – capital gain vs.income  Risk Tolerance – varies typically according to age  Tax Issues – maximizing after-tax returns  Time – retirement, college payments  Liquidity – usually driven by time needs  Legal Issues – trust and pensions have special legal issues  Other Unique Needs of the client 6
    • Realistic Investor Goals  Current income  generate spendable funds  Capital preservation  minimize risk of real loss  strongly risk-averse or cash needs are soon  Capital appreciation  capital gains for real growth for future needs  growth strategy with accepted risk  Total Return  Capital Gains & Income  Desire to have ―medium‖ risk exposure 7
    • What Is Asset Allocation? Asset allocation is the process of combining asset classes such as stocks, bonds, and cash in a Stocks Bonds portfolio in order to meet your goals. Cash
    • The Need For Asset Allocation  An investment strategy is based on four decisions  What asset classes to consider for investment  What normal or policy weights to assign to each eligible class  The allowable allocation ranges based on policy weights  What specific securities to purchase for the portfolio to satisfy the strategy  90+% of the overall investment return is due to the first two decisions, not the selection of individual investments (BHB 1991)  70% of the overall investment return is due to style (Sharpe 1992) 9
    • Is Asset Allocation Important? Contributing Factors of Portfolio Performance Asset Allocation Policy 91.5% Asset Allocation Policy + 93.3% Market Timing Asset Allocation Policy + 97.9% Market Timing + Security Selection Asset Allocation Policy + 100% Market Timing + Security Selection + Other 0 20 40 60 80 100 Percent
    • Returns & Risk Of Different Asset Classes  Higher returns should compensate for risk  Policy statements must provide risk guidelines  Measuring risk by standard deviation of returns over time indicates stocks are more risky than T-bills  Measuring risk by probability of not meeting your investment return objective indicates risk of equities is small and risk of T-bills is large because of different expected returns  Focusing only on return variability ignores reinvestment risk and many other types of risk 11
    • Historical Asset Performances: A Guide 12
    • Asset Class Returns Highs and Lows: 1926 - 1999 Highest Annual Return 150% 142.9% Lowest Annual Return Average Return 100% 54.0% 50% 40.4% 29.1% 14.7% 0% 12.6% 11.3% 5.1% 5.2% 3.8% -5.1% 0.0% -9.2% -50% -43.3% -58.0% -100% Small Large Long-Term Int.-Term Treasury Company Company Government Government Bills Stocks Stocks Bonds Bonds Each bar shows the range of annual total returns for each asset class over the period 1926-1999.
    • Diversify To Reduce Risk Or Increase Return Fixed Income Portfolio Cash 1970 - 1999 10% Lower Risk Portfolio Higher Return Portfolio Bonds Stocks 90% Cash 12% 20% Stocks Cash 35% 39% Return 9.0% Risk 8.5% Bonds Bonds 53% 41% Return 9.0% Return 10.9% Risk 6.1% Risk 8.5% Risk is measured by standard deviation. Risk and return are based on annual data over the period 1970-1999. Portfolios presented are based on Modern Portfolio Theory.
    • Return Before & After Inflation 15% 1926 - 1999 Compound Annual Return 11.3% 10% 8.0% 5.1% 5% 3.8% 2.0% 0.7% 0% Stocks Stocks Bonds Bonds Cash Cash after after after Inflation Inflation Inflation Assumes reinvestment of income and no transaction costs or taxes.
    • Monitor Performance  Revise IPS as needed  Modify investment strategy accordingly  Evaluate portfolio performance not only with market return or benchmark portfolio  Consider that relative performance will mean little when relative progress is on track 16
    • Reevaluate & Modify Portfolio  Asset Allocation – has fixed income/equity balance changed from the design  Style Under/Over-weights – is the portfolio tilted in style?  Industry Selection – based on the economic environment what might the best sectors be, or is the portfolio weighted too much in any 1 sector (i.e. 25%)?  Security Concentrations – usually anything greater than 10% of the portfolio must be reduced in size  Security Selection – sell stocks that have poor fundamental issues in the future – and buy those that have positive changes ahead.  Key point – LT focus – not ST turnarounds. Why? Tax constraints. 17
    • Understanding How Stocks Work 18
    • What is a Stock?  Legal ownership in a company through “shares” – purchase of stock implies you own a “slice” or “share‖ of the company  Stockholders have 1st right to purchase new shares issued by the company – gives them right to maintain % share of ownership 19
    • 4 Characteristics of Stocks  Voting Power - Ownership implies ―control‖ having the right to appoint Board of Directors, who in turn, elect management  Residual Claim – you are last on the food chain to collect your investment if the company goes bankrupt  Limited Liability – can only lose the investment you make into the company – not more than that  Stock Market Listing – stocks are traded between buyers and sellers in stock exchange 20
    • Return & Risk of Stocks  Two Ways to Earn a Return on a Stock  Appreciation in Stock Price – if the investors perceive strong growth in the company’s sales & earnings, then investors will demand to buy more of the stock. As demand increases, the price of the stock increases.  Dividend Payment – if the company pays dividends 21
    • Caveats of Stock Ownership  No Guarantee of Return – you can lose your investment  % Ownership Can Be Small – you are just 1 of many owners – you have some, but not a whole lot of influence  Mergers & Acquisitions – other companies can offer to ―buy your share out‖ and replace your shares with theirs  Voting Proxy Statements - investors should take an active role in voting for directors and management – they are ―owners‖ 22
    • Conceptualizing Financial Statements  Financial statements are guided by a set of accounting rules, called GAAP (Generally Accepted Accounting Principles).  Because of flexibility, financial statements can be manipulated to give a ―better-than-expected‖ view of earnings.  Ratio Analysis & Footnotes is one of the key tools to understanding a company. 23
    • Conceptualizing Companies  Companies are dynamic, financial statements are static  One date of release: summary of 3, 6, 9 or 12-month activity  Lagged: released approximately one month after quarter- or year-end  Past-tense: information possibly already incorporated into the stock price (barring any major surprises)  Dynamic forces on companies are qualitative  The economic cycle  Industry analysis  Management strategy 24
    • Conceptualizing the 3 Financial Statements  Think of analyzing your own finances…  Financial analysis of companies is similar to personal financial planning  Your balance sheet = a loan application  Income statement = your tax return  Cash & cash flow statement = Your checking account and salary  Footnotes to financial statements =how you would explain what the numbers really mean to an IRS auditor or loan agent 25
    • Balance Sheet Income Statement Statement of Cash Flows (or ... what have you got?) (or ... what do you tell the Government you made?) (or ... what REALLY happened this year) Assets Current assets Cash flows from operations Cash and temporary investments Sales Income from operations Accounts receivable - Cost of sales (including depreciation Net income (Profits) Inventory expense) + Depreciation Prepaid expenses + Restructuring charge not spent Total current assets = Gross profit on sales - or + Gains or losses Long-term assets + or - Deferred income taxes - Selling and administrative expenses Property, plant and equipment - Restructuring expense Cash provided by (used for) working capital Less: Depreciation + or - Accounts receivable +/- Gains or losses Net property, plant, and equipment + or - Inventory Deferred tax assets = Net Operating Income + or - Accounts Payable Intangible assets and goodwill = Net cash provided by operating + Other revenues Total long-term assets activities (Cash Flows From - Other expenses Operations)(CFFO or CFO) Total assets = Earnings before tax - Income tax expense Cash from investing activities Liabilities + Owners' Equity + Sale of assets = Net income (Profits) - Purchase of assets Current liabilities Accounts payable Taxes Payable = Net cash provided by investing Short-term notes payable activities Current portion of long term debt - Dividends on preferred stock Total current liabilities = Net income available to Cash from financing activities Long-term liabilities common stock Long-term debt less current portion - Dividends on common stock + Issue of debt Deferred tax liability - Retirement of debt Total long-term liabilities = Net income transferred to + Sale of common stock surplus or retained earnings Owners' equity - Dividends paid Common stock par Capital surplus = Net cash provided by financing Retained earnings activities Less treasury stock at cost Total owners' equity The sum of the last line in each box above = the change in cash balances Total liabilities + Owners' equity 26
    • Public Filings You Need to Know  Form 10-K (due 90 days after fiscal year close)  Income statement (aka Statement of Operations)  Balance Sheet  Cash Flow Statement  Footnotes to the Financial Statements  Management Discussion and Analysis  Auditor’s Report  Liquidity Position and Capital Expenditures 27
    • Stock Market Indices (i.e., Indexes)  Price-Weighted Index - each company represented by 1 share in index. Gives higher-priced shares more weight in determining performance of the index (e.g., Dow Jones Industrial Average)  Market Value-Weighted Index - weight of companies in index based on its market capitalization (stock price x # shares outstanding) – the higher the market value, the higher the weight in the index (e.g., S&P 500, NASDAQ)  Comparing your portfolio’s performance to the “market” depends on which index you are using and whether you are really comparing “apples to apples” or “ apples to oranges” 28
    • Costs of Investing  Commissions – Costs from the broker to implement trades one-way – must remember that you incur the cost when selling also  Bid-Ask Spread – brokers who ―make a market‖ in the stock make the spread as their profit (or your cost)  Market Impact Costs - if you are institutional (mutual or pension fund), your purchases/sales are large enough to move the stock price against you while buying or selling 29
    • Buying Stock on Margin  Definition - Borrowing Funds to Buy Stock - initially up to 50% of the equity purchase – called the Initial Margin Requirement  After the Purchase - must maintain at least 30% equity of the total account value – called the Maintenance Margin Requirement – to guard against default  Primary Objective - Usually done to make higher returns on your equity via ―using someone else’s funds‖ – but can also lose more than if you did not borrow the funds  High Risk Strategy – only meant in cases where client has high amounts of liquidity (cash reserves) or has the risk tolerance (i.e., loves risk and has nerves of steel) 30
    • Buying Stock on Margin  Example of Margin Trading  $10,000 of GE desired to be purchased with $5,000 personal funds and a $5,000 Margin Loan from broker  GE’s stock price is $50 per share = # of shares = 200  Interest Rate on Loan is 10% Ending Ending Loan Net Maint. Rate of % Chg Price Value Value Equity Margin Return Price $80 16,000 5,000 11,000 68.75% 110% 60% $50 10,000 5,000 5,000 50.00% -10% 0% $30 6,000 5,000 1,000 16.67% -90% -40% Bottom Line? Margin increases gain and loss returns substantially! 31
    • Short Selling  Definition – Instead of ―Buying Low 1st, And Selling High 2nd,‖ you are doing this in reverse (Selling High, Buying Low) - You do this, when you think the stock price is overvalued and you decided to ―short‖ or sell first, in expectation that the stock is going to fall  High Risk Strategy – only meant in cases where client has high amounts of liquidity (cash reserves) or has the risk tolerance (i.e., loves risk and has nerves of steel) 32
    • Procedure to Short Selling  Borrow the Stock from Broker – as if you were taking a loan  Sell the Stock in the Market – collecting the proceeds  When Stock Price Declines – buy the stock back at lower price  Return the Stock to the Broker – keep leftover funds as profit  Similar Margin Requirements – as in Margin Trading 33
    • Basics on Portfolio Management  Always make sure that your portfolio is diversified – not just 8-10 securities, but 20-30 minimum – across industries and countries  Caveat emptor – there are 7,000 stocks and 10,000 mutual funds at a minimum to choose from in the USA – should you be picky about what you buy? YES!!  Be “street smart” – make sure that what you are buying makes sense and you know the reasons why you are buying it – not just a ―hot stock tip‖ – in other words, squeeze the tomatoes 34
    • Basics on Portfolio Management  Make sure your portfolio does not become too concentrated in 1 name or 1 sector. Be receptive to sell if any 1 stock becomes greater than 10% of the portfolio – it may drive future performance, including downward  Just because you made good money on 1 stock or sector, please be aware that you might get “emotionally attached” to it – but keep in mind, stocks and money never were born with a ―heart‖ 35
    • Understanding How Bonds Work 36
    • Definition of a Bond  Contractual loan that pays interest over a fixed term  Upon its maturity, the principal or the investment amount is returned to the lender of the bond  Interest rate (called Coupon Rate) is typically fixed – hence, the alternative name for bonds as ―fixed income‖ securities  An Income-Based Investment – focus on generating income and less so on capital appreciation <> stocks  Bond Contract is called an Indenture Agreement – which has all of the structure details about the bond and disclosures about the company issuing the bonds  Usually denominated in $1,000 units – $50,000 in Bonds = 50 Bonds 37
    • Bond Classifications  Registered vs. Bearer Forms  Security  Collateral – secured by financial securities  Mortgage – secured by real property, normally land or buildings  Debentures – unsecured  Notes – unsecured debt with original maturity less than 10 years  Seniority 38
    • Major Classes of Bonds  U.S. Treasury Bonds – issued by the U.S. Government and considered the safest type of bond  Corporate Bonds – issued by corporations to fund their projects and assets – carry higher risk than the U.S. Treasury bonds due to high risk of default (or non-payment of interest and/or principal)  Municipal Bonds – issued by cities, counties, quasi- government agencies (like the Illinois State Tollway) and states to fund projects and general municipal funding. 39
    • Major Classes of Bonds  Foreign Bonds – issued by foreign governments as well as foreign corporations – can be denominated either in US Dollars or in foreign currency – considered to have multiple layers of risk, both in terms of the foreign entities willingness to pay as well as in currency risk terms  Securitized Certificates – issued by taking a group of assets such as mortgages, auto loans or credit cards and packaging them for issuance as a security. Considered to have higher quality than a single asset due to diversification. Cash flow is usually less predictable and dependent on changing levels of interest rates 40
    • Key Characteristics of Bonds  Par Value – stated value of a bond – usually $1000 par value per bond. $50,000 par is = to 50 bonds to buy.  Coupon Interest Rate – the amount that is paid each period to a bondholder by the issuer. Rate is usually quoted as an annual rate, but payments are made usually semi-annually.  Coupon Payment = Coupon Interest Rate x Par Value  Maturity Date – when the bond matures – principal and last coupon payment paid on this day.  Price (Market Value) – what the value of the bond is worth. Better yet, what the market is valuing this Annuity Stream. 41
    • Bond Value ($) 1,372 kd = 7%. 1,211 kd = 10%. M 1,000 837 775 kd = 13%. 30 25 20 15 10 5 0 Years remaining to Maturity
    • Bond Risks  Default Risk – Risk that you are not going to get your original principal back due to the company going bankrupt.  Interest Rate Risk – as interest rates rise, the price (and value) of the bond falls. Capital Loss!!  Reinvestment Rate Risk – has to do with the reinvestment of interest and principal payments.  Interest Payments – what do you do with the interest payments (beside spend it) – if rates decline, your return is lower as you reinvest these at a lower rate.  Principal Payments – what do you do when you get your money (principal) back – if rates decline, your principal gets reinvested at a lower rate.  Keep in mind that Callable Bonds also have reinvestment rate risk. The company will only call the bonds when rates decline. You have both interest and principal payment reinvestment rate risk. 43
    • What is Interest Rate Risk? Also, called Price Risk… Interest rate risk: Rising kd causes bond’s price to fall. Which bond has more risk? 1-year or 10- year? kd 1-year Change 10-year Change 5% $1,048 $1,386 +4.8% +38.6% 10% 1,000 1,000 -4.4% -25.1% 15% 956 749
    • Prices and Yield / Interest Rates Price Yield 45
    • Default Risk Premium (Credit Risk) Investment Grade Junk Bonds Moody’s Aaa Aa A Baa Ba B Caa C S&P AAA AA A BBB BB B CCC D 46
    • Corporate Bond Spreads – AA & BB 10 9 8 7 6 5 4 4-96 7-96 1-97 4-97 7-97 1-98 4-98 7-98 1-99 4-99 7-99 1-00 4-00 7-00 1-01 10-9 10-9 10-9 10-9 10-0 6 7 8 9 0 10-YR US Treasury AA Corporate Rate BBB Corporate Rate 47
    • Benefits of Bonds in Portfolios  Historically Lower Risk  Diversification Benefits  Income Generation  Expand Efficient Opportunities  Potential Growth 48
    • Fixed Income Maturity (Interest Rate) Risk 1970 - 1999 Long-Term 15% Gov’t Bond Intermediate-Term 9.8% 10% Gov’t Bond 5.9% Short-Term 5% Gov’t Bond 1.5% 0% -1.3% -5% -4.5% -10% -8.7% Average Rise in Price during Declining Interest Rate Periods Average Decline in Price during Rising Interest Rate Periods 49
    • Using Bonds to Diversify 1970 - 1999 Original Portfolio Lower Risk Portfolio Cash 19% Stocks 38% Bonds 43% Return 10.8% Return 10.8% Risk 8.0% Risk 7.6% Risk is measured by standard deviation. Risk and return are based on annual data over the period 1970-1999. Portfolios presented are based on Modern Portfolio Theory.
    • Bonds Produce Greater Income 1970 - Capital Appreciation 1999 Income 2% Reinvestment of Income 6% 9% 25% 73% 85% Stocks Bonds Based on annual data over the period 1970-1999.
    • Bond Prices & Yields Over Time When Yields Increase, Bond Prices Decrease $1.60 Bond Prices ($) 16% Bond Yields (%) $1.40 14% $1.20 12% $1.00 10% $.80 8% $.60 6% $.40 4% $.20 2% $0 0% 1925 1935 1945 1955 1965 1975 1985 1999 52
    • Understanding How Mutual Funds Work 53
    • Definition of an Investment Company  Financial intermediaries (i.e., middlemen) that collect funds from individual investors and invest those funds in a diversified pool of stocks, bonds, or other assets based on the company’s focus or specialty. (i.e., a bond fund, an international fund)  Benefits to the Individual Investor –  Recordkeeping & Administration – for all holdings in the fund  Diversification & Divisibility – if the investor has a small amount of money they can have instant ownership of many stocks, not just one. They can also easily buy more (in increments of $, not 100 share blocks)  Professional Management – this is of course relative – you must do you homework on management – but it does beat doing the research yourself  Lower Transaction Costs – due to pooling of funds, commissions, fees, and market impact costs are lower 54
    • Types of Investment Companies  Managed Investment Companies (mutual funds)  Open-End – issues shares every time a buyer adds money to the mutual fund – investor buys shares at NAV.  Closed-End – trade like stocks on the exchange. Investor buys at the current stock prices (which could be higher or lower than the NAV).  Unit Investment Trust – pool of money invested in a portfolio whose investments are fixed for the life of the fund. Usually Bonds given that they have a maturity, but also seen used with stocks for a 1 year term.  Commingled Funds (i.e., limited partnerships) – similar to Open- Ended Funds, but instead of buying shares, you are buying units at NAV. Usually offered by banks & insurance companies.  Real Estate Investment Trusts (REITs) – a closed-ended fund that invests in real estate 55
    • Net Asset Value and Price  Used as a basis for valuation of investment company shares.  Selling new shares  Redeeming existing shares Market Value of Assets - Liabilities Shares Outstanding  Open Ended Funds – NAV is Price  Closed Ended Funds - NAV is compared to Stock Price of Fund 56
    • Open-End and Closed- End Funds: Key Differences Shares Outstanding  Closed-end: no change unless new stock is offered.  Open-end: changes when new shares are sold or old shares are redeemed. Pricing  Open-end: Net Asset Value (NAV)  Closed-end: Premium or discount to NAV 57
    • Investment Policies  Money Market  Fixed Income  Equity  Balance & Income  Asset Allocation  Indexed  Specialized Sector 58
    • Costs of Investing in Mutual Funds  Fee Structure  Front-end load  Back-end load  Operating expenses  12 b-1 charges  distribution costs paid by the fund  Alternative to a load  Fees and performance 59
    • Exchange Traded Funds  Allow investors to trade funds based on indexes like stock.  Examples  SPDRS  WEBS  HOLDERS  Allow sector specialization 60
    • A First Look at Fund Performance  Benchmark: Wilshire 5000  Results  Most funds underperform  Not fair comparison because of costs  Adjusted Benchmark: Wilshire 5000 with passive management costs considered.  The majority of funds still under-perform. 61
    • Consistency of Fund Performance  Do some mutual funds consistently outperform?  Evidence suggests that some funds show consistent stronger performance.  Depends on measurement interval  Depends on time period  Evidence shows consistent poor performance. 62
    • Rate of Return Calculations for Funds  Performance – History has shown that 80% of mutual fund managers do not beat the ―market‖ – so why bother? Main difference is that they are comparing apples and oranges.  Mutual fund managers charge fees and hence their performance will be lower. In other words, you cannot get around the fees period – even if you bought the index yourself – you would still have commission charges.  Past Performance does not completely indicate future performance, but do remember you are investing in the mutual fund manager. If his/her performance is poor, then it is likely that it might remain poor (if he is not fired, that is) – Money Magazine flaws as an example of this. 63
    • Information Sources on Mutual Funds  Wiesenberger’s Investment Companies  Morningstar  Investment Company Institute  Popular press  Investment services 64
    • Measuring Fund Performance – Category Ranks and Ratings  You can view all mutual funds as 1 peer group – but everyone is investing with a different ―style‖  Category ratings are used to see who did better within a ―category‖ of style.  Certain investment styles perform better than others at any point in time – if that is the case, then managers must be compared to their peers…  Category Style = Investment Objective of the Fund  Helps to determine what funds do well even when style is out of favor  Points out funds that are just riding on the coat tails of their group 65
    • Categories Identify the Real Competition  For example: International Equity  Foreign  World  Diversified Emerging Markets  Regional  International Hybrid  This reaffirms that returns do not tell the whole story –  10 YR Trailing Return (1/2001)  Janus Twenty 21.63%  Weitz Partners Value 21.57% 66
    • Morningstar Equity Style Box Value Blend Growth Large Medium Small  Classifies a fund based on –  Style —Value, Blend, Growth  Size — Small, Medium, Large 67
    • Style Box Breakpoints  Market Capitalization  Large – >= $10 billion  Medium – < $10.0 billion, >= $1.6 billion  Small – < $1.6 billion  Style Types – Relative Valuation Ratios vs. Market  Value – rel. P/E + rel. P/B <1.75  Blend – rel. P/E + rel. P/B = 1.75-2.25  Growth – rel. P/E + rel. P/B >2.25 68
    • Styles <> Objectives Fund Objective Actual Style Oakmark Select Growth Mid Value Pioneer Cap Growth Small Co. Mid Value Prudential Equity Inc Equity Inc. Mid Value 69
    • Styles <> Objectives Fund Objective Actual Style Vanguard Growth Index Growth Large Growth Sequoia Growth Large Value Delafield Growth Small Value 70
    • Current Equity Style Box Twenty Weitz Value Blend Growth Value Blend Growth Large Medium Small Large Cap Growth Mid Cap Value 71
    • Janus Twenty Top Holdings 72
    • Weitz Top Holdings 73
    • Janus Twenty Portfolio Breakdown 74
    • Weitz Partners Value Portfolio Breakdown 75
    • Janus Twenty Sector Exposure 76
    • Weitz Partners Value Sector Exposure 77
    • Risk Measures Twenty Weitz Morningstar Risk (10 YR) 1.32 0.59 Standard Deviation 24.72 14.18  Morningstar Risk Ratio = Fund SD / Market SD  It is a Relative Measure of Risk 78
    • Five Key Points in Picking Funds  How has the fund performed?  Compare with appropriate index  Compare with peer group  Examine after-tax returns, if relevant  How risky has the fund been?  Big returns spell risk  Are you comfortable with the level of volatility?  Morningstar risk & standard deviation  What does the fund own?  Value vs. Growth  Sectors  U.S. and Foreign  Who runs the fund?  Who earned the fund’s record?  Where does this manager come from?  What’s the fund family like?  What does the fund cost?  Low expenses are best  Load funds aren’t bad if performance is justified, but rare 79
    • Understanding Global Investing 80
    • Why Invest Globally?  Investment Opportunities – roughly 50% of the global stock market currently Foreign  Market History  Growth Potential – faster growing economies  Diversification Benefits – Expand Efficient Range
    • Global Stock Market Returns Highest and Lowest Historical Annual Returns for Each Region 1970 - 1999 Pacific 120% Europe 107.5% 100% International 80% 79.8% 69.9% 60% United States 40% 37.4% 20% 13.7% 13.2% 13.8% 13.4% 0% - 20% -26.5% -23.2% -22.8% - -34.3% 40% Each bar shows the range of annual total returns for each region over the period 1970-1999. Average Return
    • Domestic Versus Global 1970 - 1999 U.S. Stocks U.S. Bonds International Stocks Domestic Portfolio Global Portfolio 18% 40% 40% 60% 42% Average Return 12.0% Average Return 12.0% Risk 10.8% Risk 10.0% Risk is measured by standard deviation. Risk and return are based on annual data over the period 1970-1999. 83
    • Risks Of Foreign Investing  Currency Risk  Economic/Political Risk  Market Liquidity Risk  Differences in Accounting Standards  Costs of Investing Internationally 84
    • The End! Thank You! 85