HonorVise Overview

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Learn about HonorVise and our approach to the markets and portfolio mangement.

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HonorVise Overview

  1. 1. Applying Scientific Research to the Real World of Investing Giving You The Best Opportunity For Success
  2. 2. Agenda  Review of common investment challenges and approaches – Randomness of returns – Picking winning stocks – Timing the market – Picking active managers – The Cost of Indexing  Our investment approach – Strategic partnership with institutional investment managers – Academically sound portfolio construction – Keeping costs low – Honorvise portfolios 2
  3. 3. The Randomness of Returns US Large Cap is the S&P 500 Index. US Large Value is the Fama/French Large Value Index (ex utilities). US Small Cap is the CRSP 9-10 Index. US Small Cap Value is the Fama/French Small Value Index (ex utilities). US Real Estate is the Dow Jones Wilshire REIT Index. International Large Value is the Fama/French International Value Index. International Small Cap and International Small Cap Value compiled by Dimensional from Style Research securities data; includes securities of MSCI EAFE countries in the 10%-1% of ME range; market-capitalization weighted; each country capped at 50%; value defined as the top 30% of book-to-market; rebalanced semi-annually. Emerging Markets is the MSCI Emerging Markets Index (gross dividends). One-Year Fixed is the Merrill Lynch One-Year US Treasury Note Index. Five-Year Government Fixed is the Lehman Brothers Treasury Bond Index 1-5 Years. Five-Year Global Fixed is the Citigroup World Government Bond Index 1-5 Years. The S&P data are provided by Standard & Poor’s Index Services Group. Frank Russell Company is the source and owner of Russell data. CRSP data provided by the Center for Research in Security Prices, University of Chicago. Fama/French data provided by Fama/French. Dow Jones Wilshire data provided by Dow Jones Indexes. See MSCI disclosure page for additional information. Lehman Brothers data provided by Lehman Brothers, Inc. The Merrill Lynch indices are used with permission; copyright 2007 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Citigroup bond indices copyright 2007 by Citigroup. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
  4. 4. Picking Individual Securities “Here’s a buy-and-forget portfolio to capitalize on the 10 Stocks To Last The Decade.” Returns as of 8/18/2008 1. Broadcom (81%) 2. Charles Schwab (33%) 3. Enron Oops! 4. Genentech 152% 5. Morgan Stanley (40%) 6. Nokia (33%) 7. Nortel Network (99%) 8. Oracle (38%) 9. Univision (26%) Kind of hard to explain… 10.Viacom Return on whole portfolio through August 18, 2008? (34.72)% $1,000,000 to $652,800 Source: Motley Fool Stock Advisor: “10 Stocks to Last the Decade, Revisited”, By Bill Barker, August 19, 2008 4
  5. 5. Selecting Mutual Funds  “All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage.” - Peter Lynch, Beating the Street (New York, Simon And Shuster, 1993) 60
  6. 6. The Difficulty With Fund Selection  “Unless you are lucky, or extremely skillful in the selection of managers, you’re going to have a much better experience going with the index fund…” Bill Miller, manager of the Legg Mason Value Trust Fund, Money Magazine Interview, July 2007 Average Annual Total Returns INCEP (%) 3MO 1YR 3YR 5YR 10YR Quarter End as of June 30, 2008 Legg Mason Value Trust -11.07 -36.41 -8.62 -0.40 2.18 13.29 The performance shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. Principal value and investment returns will fluctuate, and investors' shares, when redeemed, may be worth more or less than the original cost. Source: http://www.leggmason.com/individualinvestors/products/mutual-funds/performance/LMVT.aspx 6
  7. 7. Trying to Time the Market Performance of the S&P 500 Index January 1970-December 2006 Growth of $1,000 $51,299 $47,021 $38,105 $23,970 $16,232 $8,613 Annualized Compound Return Total Missed 1 Missed 5 Missed 15 Missed 25 One-Month Period Best Day Best Days Best Days Best Days T-Bills 11.23% 10.97% 10.34% 8.97% 7.82% 5.99% The S&P data are provided by Standard & Poor’s Index Services Group. US bonds and bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. 7
  8. 8. Separately Managed Accounts Advantages:  Tax Efficiency  Customization  Manager Selection Disadvantages:  The fees are high  No advantage to choosing portfolio managers vs. mutual funds  No compelling tax management advantages vs. low cost highly tax efficient ETF’s or passively managed portfolios  Higher minimum account size making diversification difficult Source: Seeking Alpha: Stock Opinion and Analysis, July 2006 8
  9. 9. Hedge Funds Features:  May be aggressively managed  Can be riskier due to concentration of investments  Open to Accredited Investors only  Not required to register with the SEC  Hard to value  High fees Since mid-2007, 67 distinct funds from 37 major hedge fund providers have “imploded*”. Source: Hedge Fund Implode-O-Meter, http:// hf-implode.com * The quot;implodedquot; list contains hedge funds (or other unregulated and autonomous speculative investment funds) which have gone through some sort of permanent adverse change. This is a somewhat subjective call, and does not necessarily mean total shutdown or bankruptcy. It can also mean steep and rapid mark-downs in net asset value; or abnormal quot;bail-outquot; by corporate parents or peers in order to avoid write-downs and provide liquidity. The funds are of any type and sector.
  10. 10. Are Index Funds the Answer?  “Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees.” Warren Buffet, Berkshire Hathaway, Inc. 1996 Annual Report chairman’s letter in www.berkshirehathaway.com
  11. 11. S1740.2 The Effect of Index Reconstitution on Stock Prices Price • Stocks rise on announcement of inclusion. • Index funds are forced to buy high on effective date. • Buying and selling to track index changes reduces tracking error but generates transaction costs. Time Announcement Effective MSCI EAFE S&P 500 Index Index One-Day Return after 3.2 3.4 Announcement (%) Run-Up to Effective Date (%) 3.8 4.5 Decay after Effective Date (%) -2.1 -2.6 S&P 500 data source: Anthony Lynch and Richard Mendenhall, “New Evidence on Stock Price Effects Associated with Changes in the S&P 500 Index,” Journal of Business 70, no. 3 (July 1997): 351-83. MSCI EAFE Index data source: Rajesh Chakrabarti, Wei Huang, Narayanan Jayaraman, and Jinsoo Lee, “Price and Volume Effects of Changes in MSCI Indices: Nature and Causes,” Journal of Banking and Finance 29, no. 5 (May 2005): 1237-64. For illustrative purposes only. Past performance is not a guarantee of future results.
  12. 12. Volume of Additions Around Effective Date Market Cap Weighted Relative to S&P 500 Index 1996-2003 Source: Dimensional Fund Advisors 12
  13. 13. Agenda  Review of common investment challenges and approaches – Randomness of returns – Picking winning stocks – Timing the market – Picking active managers – The Cost of Indexing  Our Investment approach – Strategic partnership with institutional investment managers – Academically sound portfolio construction – Keeping costs low – HonorVise™ portfolios 13
  14. 14. Investor Needs  Diversify Portfolio  Reduce expenses  Minimize Taxes (and turnover).  Stay Disciplined (long term horizon)  Risk and return are related 14
  15. 15. Strategic Partnership Dimensional Fund Advisors (DFA)  The mission of Dimensional Fund Advisors is to deliver the performance of capital markets and increase returns through state-of-the-art portfolio design and trading. – Founded in 1981 – $152 Billion in AUM (as of December, 2007) – Investment Pioneers • Rex Sinquefield – Co-founder of DFA, credited with inventing index investing • David G. Booth – Co-founder of DFA, pioneer of indexing and small cap investing • Eugene F. Fama – Efficient Markets Hypothesis, Multifactor Asset Pricing Model and Value Effect • Kenneth R. French – Capital Markets Research, Multifactor Asset Pricing Model and Value Effect 15
  16. 16. Structured Management Active Management Index Management  Attempts to beat the market through  Targets index returns Structured Asset ClassDelivers asset class returns minus indexing Investing security selection and market timing   Combinesasset class exposure to onlyand passive investing Undermines costs qualities of active buy “underpriced” securities  Accepts high transaction costs and turnover  Grounded in fees,to increased turnover Generates higher the trading costs, the efficiency ofincapital tracking theory of and favor of markets tax consequences due  Captures specific dimensions of risk identified by academic research  Seeks to minimize transaction costs and enhance returns through trading and engineering 16
  17. 17. A Partial List of DFA’s Institutional Clients 17
  18. 18. Progress through Scientific Principles
  19. 19. S1270.4 The Maturity Risk/Return Tradeoff 12 10 Quarterly: 1964-2007 Annualized 8 • Not all investors define risk as Compound Returns standard deviation. Some investors may seek to hedge 6 long-term liabilities using long- term bonds. 4 Annualized Standard Deviation • Historically, longer-maturity 2 instruments have higher standard deviations and have 0 not provided consistently greater returns. One-Month US Six-Month US One-Year US Five-Year US Twenty-Year US Treasury Bills Treasury Bills Treasury Notes Treasury Notes Govt. Bonds Maturity Annualized Compound Return (%) 5.78 6.53 6.71 7.38 7.49 Annualized Standard Deviation (%) 1.32 1.71 2.33 6.18 10.84 Source: One-Month US Treasury Bills, Five-Year US Treasury Notes, and Twenty-Year (Long-Term) US Government Bonds provided by Ibbotson Associates. Six-Month US Treasury Bills provided by CRSP (1964-1977) and Merrill Lynch (1978-present). One-Year US Treasury Notes provided by CRSP (1964-May 1991) and Merrill Lynch (June 1991-present). Ibbotson data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). CRSP data provided by the Center for Research in Security Prices, University of Chicago. The Merrill Lynch Indices are used with permission; copyright 2008 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Indexes are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Fixed income securities are subject to interest rate risk because the prices of fixed income securities tend to move in the opposite direction of interest rates. In general, fixed income securities with longer maturities are more sensitive to these price changes and may experience greater fluctuation in returns.
  20. 20. The Risks Worth Taking - Equities Multifactor Analysis Small The Dimensions of Stock Returns Three Dimensions Around the World • Equity Market Growth Value (Low BtM) (High BtM) (Complete Value-weighted universe of stocks) Stocks have higher expected returns than Total fixed income. Stock • Company Size Market (Measured by market capitalization) Small company stocks have higher expected Large returns than large company stocks. • Company Price (Measured by ratio of company book value to market equity) Lower-priced “Value” stocks have higher expected returns than higher-priced “growth” stocks 20
  21. 21. S1220.2 Size and Value Effects Around the World Annual Index Data In US dollars. Developed markets value and growth index data provided by Fama/French, ex utilities. The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. International Small Index data: 1970-June 1981, 50% UK small cap stocks provided by the London Business School and 50% Japan small cap stocks provided by Nomura Securities; July 1981-present, compiled by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE Index countries, market- capitalization weighted, each country capped at 50%; rebalanced semiannually. MSCI data copyright MSCI 2008, all rights reserved; see MSCI disclosure page for additional information. Emerging markets index data compiled by Fama/French from countries in the IFC Investable Universe; indices are free-float weighted both within each country and across all countries. Standard deviation is a statistical measure of risk. Generally speaking, the higher the standard deviation, the greater the risk. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Small company risk: Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Emerging markets risk: Numerous emerging countries have experienced serious, and potentially continuing, economic and political problems. Stock markets in many emerging countries are relatively small, expensive, and risky. Foreigners are often limited in their ability to invest in, and withdraw assets from, these markets. Additional restrictions may be imposed under other conditions. Foreign securities and currencies risk: Foreign securities prices may decline or fluctuate because of: (a) economic or political actions of foreign governments, and/or (b) less regulated or liquid securities markets. Investors holding these securities are also exposed to foreign currency risk (the possibility that foreign currency will fluctuate in value against the US dollar).
  22. 22. S1240.3 Risk Factors Have Periods of US Size Premium Under- and Over- Performance Annual: 1927-2007 • From year to year, stocks with high book-to-market ratios and smaller market caps do not always produce higher returns. • Over longer time periods, the size and value premiums are more prevalent. US Value Premium Multifactor data provided by Fama/French. SmB and HmL research factors. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. There is always the risk that an investor may lose money. Securities of small firms are often less liquid than those of large companies. As a result, small company stocks may fluctuate relatively more in price. Even a long-term investment approach cannot guarantee a profit. Economic, political, and issuer-specific events will cause the value of securities, and the funds that own them, to rise or fall. Because the value of investments will fluctuate, there is a risk that investors will lose money.
  23. 23. A Structured Approach to Asset Allocation Quarterly Data: 1973 – 2006 Portfolio 1 Portfolio 2 Portfolio 3 Lehman Government / Credit Bond Index 40% S&P 500 Index 60% 30% 7.50% One-Year US Treasury Note Index 40% 40% CRSP 9-10 Index 30% 7.50% Fama/French US Small Value Index 7.50% Fama/French US Large Value Index 7.50% Fama/French International Value Index 15% Dimensional International Small Cap Index 15% Total 100% 100% 100% Annualized Portfolio Return 10.31 11.00 12.24 Annualized Standard Deviation 10.94 12.51 10.87 For illustrative purposes only. Lehman data provided by Lehman Brothers, Inc. The S&P Data are provided by Standard & Poors Index Services Group. One-Year Treasury Note index provided by Merrill Lynch. CRSP 9-10 Index data provided for the Center for Research in Security Prices, University of Chicago. Fama/French data provided by Fama/French. International Value data provided by Fama/French (January 1975 – January 2004) and MSCI EAFE index (net dividends) (January 1973 – December 1974), data copyrighted MSCI, 2006. All rights reserved. International Small Cap Index, June 1970 – June 1981. 50% UK Small Cap stocks and 50% Japan Small Cap stocks (1981 – present). Simulated by Dimensional from StyleResearch securities data, includes securities of MSCI EAFE countries, market capitalization weighted, each country capped at 50%. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. 23
  24. 24. Dimensional Has Relatively Low Expenses 24
  25. 25. The Value of Low Fees Assumed 6.5% Annualized Return over 30 Years 1% Fee • Fees Matter. $4,983,951 $5,000,000 • Over long time periods, high management fees and related expenses 2% Fee $4,000,000 $3,745,318 can be a significant drag on wealth creation. Dollars 3% Fee $3,000,000 $2,806,794 • Passive investments generally maintain lower fees than the average actively managed investment by $2,000,000 minimizing trading costs and eliminating the costs of researching stocks. $1,000,000 1 Year 3 Years 5 Years 10 Years 20 Years 30 Years Time 25
  26. 26. The Results – Positive Alpha Source: Which Fund Families Have the Best Managers? Ranked by Their 3 Year Alpha. Reprinted with permission from the January/February issue Broker/Dealer Journal TM
  27. 27. The Results – Positive Alpha
  28. 28. S1010.2 The Impact of Volatility Impact on a Hypothetical $100,000 Portfolio Year 1 Year 2 Average Compound Value at End Return Return Return Return of Year 2 -13.4% $75,000 Portfolio #1 50% -50% 0% $99,000 -0.5% Portfolio #2 10% -10% 0% For illustrative purposes only.

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