Russell Luce • Foresters Equity Services
- Slicing the market: An active manager's view of a complex investment world by Ron Rowland
- Recession job losses finally recovered
- Profit with business valuation (Mark Miehe, SII Investments)
Russell Luce – Proactive Advisor Magazine – Volume 2, Issue 10
1. Job losses
recovered • pg. 6
Profit with
business valuation
pg. 3
Slicing the market
4 important pieces • pg. 4
June 12, 2014 | Volume 2 | Issue 10 First magazine focused on active investment management
Russell Luce
pg. 8
a winning
playbook
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3. POLLS
Text only
until you think you are ready to sell
to get a business valuation. A valua-
tion today will make you more prof-
itable tomorrow, and profitability is
the bottom line.”
urprisingly, it was when
we started thinking
seriously about succession planning
and the eventual sale of our business
that we started seeing the most
growth. Why? If you think about it,
it makes sense.
We brought other high-quality
reps into the business and their ef-
forts, combined with what we were
already doing, resulted in increases
to our production.
But also by knowing what makes
a business attractive to sell and most
valuable, we worked hard on im-
proving those areas with the idea our
business would be worth more when
we do sell. We have become very
focused on technology, for example.
As a result, our business has
become more efficient and more
profitable. You don’t have to wait
Profit with
business valuation
Mark Miehe
Madison, WI
SII Investments, Inc.®
President, Midwest Financial Group, Inc.
S“
Securities and advisory services offered through SII Investments, Inc.®
(SII), member FINRA/SIPC and a Registered
Investment Advisor. SII and Midwest Financial Group, Inc. are separate and unrelated companies.
Last week’s results
VIEWER RESPONSE
What is your biggest business
challenge in relation to
existing clients?
VOTE
-Results in next issue
This week’s poll
Have bond prices
surprised you
this year?
Yes
No
According to the 2013 Global Survey
of Financial Advisors, more than four
in five advisors globally said they seek
investment strategies/products that
help to manage risk (81%), manage
volatility (79%), and produce income
for clients (82%). Read more >
25%
62%
0% 0% 13%
Managingrisk
Managingexpectations
Producingincome
Managingvolatility
Other
June 12, 2014 | proactiveadvisormagazine.com 3
TIPS & TOOLS
4. ike many people, I can often be found in
the kitchen preparing meals. I prefer my
food on the hot and spicy side, which typ-
ically means the recipe includes an onion as one of
the ingredients. Unfortunately, I’ve never encoun-
tered a recipe that said to throw the whole onion
into the mix. The recipe always calls for you to slice,
dice, chop, or mince the darn thing first. That’s
where the fun begins, because there are many ways
to prepare an onion, and I’ve been known to try a
completely new way every now and then.
It’s a similar story for investments. The entire in-
vestment universe is immense, consisting of stocks,
bonds, commodities, and myriad alternatives. For
this discussion, we’ll keep things simple and only
talk about stocks. However, with tens of thou-
sands of stocks in the world, it might be easier
to get a handle on the situation if we sliced them
into smaller, more manageable pieces.
DIVIDING THE STOCK UNIVERSE
A common way to accomplish this task is to cat-
egorize each stock by its sector and industry. There
are many stock classification systems in use today,
with the Industry Classification Benchmark (ICB)
and the Global Industry Classification System
(GICS) among the most popular. Dow Jones and
FTSE maintain the ICB database, while MSCI and
Standard&Poor’sdevelopedtheGICSmethodology.
AN ACTIVE MANAGER’S VIEW OF A COMPLEX INVESTMENT WORLD
By Ron Rowland
L
the
proactiveadvisormagazine.com | June 12, 20144
Text only
5. Although each uses slightly different terminology,
both classify all stocks into ten major sectors and
further divide them into industries, groups, and
subsectors—four levels in all.
There are many investment products focusing
on the ten major GICS sectors. You’ll find indexes,
mutual funds, and exchange-traded funds (ETFs)
tracking the performance of each and providing
targeted exposure.
Now that we have a way to divide the uni-
verse into more manageable pieces, we still need a
method to help determine where to invest.
RELATIVE STRENGTH ANALYSIS
Relative strength analysis is one of the ap-
proaches an active manager may use and an effec-
tive way to gain insight into what is going on—or
what is working—in the market at any given time.
Relative strength is an easy to understand invest-
ment approach. In its simplest form, it compares
the total return of two securities over a predeter-
mined time period and then invests in the stronger
one, while avoiding the other.
However, selecting the time period is a huge
variable. Are active money managers interested in
identifying the securities with the greatest relative
strength over the past week, month, year, or some
other time frame?
Analyzing different intervals will often reveal
that the strongest securities of the past week
have little overlap with the strongest of the past
year. Choosing too short of a period can pro-
duce false starts, whipsaws, and excessive trading.
Meanwhile, too long of a period can miss new op-
portunities and prolong a stay in fading trends.
As the graph illustrates, relative strength is
determined by intermediate-term momentum.
The numbers represent the annualized value of the
current trend. Performing relative strength analysis
on ETFs tracking the ten major sectors plus Real
Estate quickly reveals where the market’s strengths
and weaknesses reside.
Earlier this year, using an intermediate time
frame of about a couple months, Utilities and
Energy were the two strongest sectors. However, the
Utilities sector had been at the top for many weeks
and Energy was climbing. This suggests market
strength was rotating into Energy. Now, Energy re-
mains strong, although Real Estate is even stronger.
The Technology, Materials, and Industrials sec-
tors are all sitting above the halfway point, and are
all showing positive performance trends over the
period being evaluated.
This brings up another point: a relative strength
ranking alone doesn’t tell us if the various catego-
ries are trending upward, downward, or sideways.
Being on top could mean a sector is falling slower
than the lower ranked categories. It is easy to over-
come this limitation by including a neutral invest-
ment, such as a money market fund, in the mix.
Another way is to quantify the relative strength
calculations. The numbers in the graph represent
the annualized value of the current trend. Those
with positive results are trending up, and those
with negative results are trending down. Currently,
all categories are trending up and shaded in green.
The importance of analyzing relative strength
and the trending of sectors—and groups within
sectors—cannot be underestimated. Large in-
stitutional funds will at times move en masse via
“sector rotation,” as they assess major macro trends,
continue on pg. 11
Real Estate 32
30
25
25
25
23
22
21
20
16
13
Energy
Technology
Materials
Industrials
Utilities
Cons Staples
Health Care
Financials
Discretionary
Telecom
China 25
25
23
23
23
22
20
17
17
16
12
Emerging Mkts
USA
Japan
EU
World Equity
EAFE
UK
Canada
Pacific x-Japan
Latin America
Mid Value 26
23
23
23
23
21
20
14
10
6
0
Large Value
Large Blend
Large Growth
Mid Blend
Mega Cap
Mid Growth
Small Value
Small Blend
Small Growth
Micro Cap
High Beta 30
29
28
24
22
21
20
20
19
16
10
Value
Growth
Revenue
Momentum
Low Volatility
Div Growth
Buyback
Current Yield
Spin Off
Small Size
SECTOR ANALYSIS STYLE ANALYSIS
GLOBAL ANALYSIS FACTOR ANALYSIS
Source: investwithanedge.com June 12, 2014 | proactiveadvisormagazine.com 5
6. TOPPING THE CHARTS
-7
-6
-5
-4
-3
-2
0
-1
1
0 12 24 36 48 60 72
Months from peak
%declinefrompeak
Sep ‘48
Jul ‘53
Apr ‘57
Apr ‘60
Apr ‘70
Jul ‘74
Apr ‘80
Jul ‘81
Jun ‘90
Feb ‘01
Jan ‘08
Recession job losses finally recovered
he headlines of last Friday (6/6)
trumpeted the fact that all of
the jobs lost in the recession and
its aftermath have finally been
recovered. The employment report showed
a monthly gain in May of 217,000 jobs,
just above consensus projections.
With this gain, eight million-plus jobs
have been “created” since the depths of the
recession and a new all-time record of jobs
has been set of 138.4 million—surpassing
the previous jobs’ high set in January
2008. The further good news included
the fact that May represented the fourth
straight month of more than 200,000
new jobs, the first time a streak of that
length has occurred since the late 1990s.
Also, the unemployment rate remained
at 6.3%, the lowest level since September
2008, according to the WSJ.
There is much debate among
economists on whether jobless rates
can be expected to fall to the “normal”
benchmark of a healthy economy,
thought to be in the area of 5.0-5.5%.
T
Source: Bespoke Investment Group
Or are we, as some have suggested, in a “new
normal” environment, where continued
jobless rates above 6.0% should be expected?
What is not up for debate is the
extensive length of time it took for the
labor market to recover those lost jobs.
According to Bespoke Investment Group,
this was the longest post-recession jobs
recovery since WWII, at 75 months. Few
would argue that labor markets have totally
healed, with the long-term unemployed
still a major issue and the labor force
participation rate remaining near the
lowest levels since the late 1970s.
MONTHS TO REGAIN PRIOR PEAKS IN EMPLOYMENT: 1945–2014
6 proactiveadvisormagazine.com | June 12, 2014
Text only
7.
8. Text only
Russell Luce, principal of Planning Legacies Financial Group,
balances the demands of his successful advisory practice
with his advocacy for special needs children. In both,
Luce maintains a proactive and optimistic outlook.
8 proactiveadvisormagazine.com | June 12, 2014
9. Proactive Advisor Magazine: Russell,
how has your personal journey affected
your philosophy around financial
planning and investment management?
Russell Luce: Our family has two special
needs children and has faced some serious med-
ical issues. I am a firm believer in the saying that
10% of life is what happens and 90% is how you
deal with it. This belief carries through to the
way I approach financial matters for my clients
and is one of the reasons I am an advocate for
active investment management. I am not one
for sitting around and letting things happen to
my personal portfolio or those of my clients.
What do you mean?
In today’s investment environment, clients
can no longer afford to stay with a buy-and-
hold approach and stick their heads in the
sand, hoping everything will work out for the
best. It should be about taking charge and not
letting the market dictate returns. With active
management, we should be able to avoid a good
part of the losses in worst-case market years,
perhaps even making money in a severe market
downturn with the proper strategies.
How did you come to that belief about
active management?
The paradigm really shifted for me two to
three years ago when I began investigating dif-
ferent third-party managers and their platforms
and strategies. Inherently, I knew after the 2008
period that there had to be a better way.
I was looking for a way to bring a more
repeatable process into play and had some
eye-opening discussions with managers about
active management. I might as well be from
Missouri, as it took me quite a bit of asking
“show me” questions, but I am well-satisfied
that they were answered.
How do you define active management?
To my mind, it is pretty simple. There are
two ways to manage money: buy-and-hold and
active management. In buy-and-hold, there is
a very infrequent adjustment of the portfolio.
You basically take what the market and your
allocations give you.
Active management is totally different.
Portfolio strategies are looked at daily, weekly,
monthly. Adjustments are made as needed.
Third-party active managers may also employ
analysts, portfolio managers, and traders
to make sure their strategies stay on track.
Portfolio allocations are not done by some
emotional factor, but by specific quantitative
triggers or models.
How do you explain this to clients?
I used to be a pretty decent baseball player,
and I like to use sports analogies. I will ask a
client their favorite sport and more often than
not they will say football. In that case, I ask,
“What is the top of the mountain in football?”
Then, I explain to the client that they are like
the owner of a pro football team and their goal
is to win the Super Bowl.
I say, “You’ve hired me to be the general
manager and that means I have to put the best
team in place in every regard. First of all I need
to pick a world-class coach, who needs to pick
the best assistant coaches, the best players, and
have a winning playbook. Our coach is the
third-party active manager and they select the
best analysts and strategists to formulate the
playbook that strives to meet the goals we have
laid out. So our job as an entire team effort is to
get you, Mr. Client, to that Super Bowl, or, in
your case, having a winning retirement plan.”
Clients start nodding their heads and really
understand that.
continue on pg. 10
a winning
playbook
Russell Luce
By David Wismer
Russell Luce
Memberships:
• Million Dollar Round Table
• National Association of Insurance
and Financial Advisors
• Society of Financial Professionals
• International Association of Registered
Financial Consultants
Married to wife, Linda, and father
of five children
Enjoys golf, reading and saltwater fishing
Devoted volunteer in special
needs community
June 12, 2014 | proactiveadvisormagazine.com 9
10. excellent, very visual tools to look at how the over-
all portfolio is doing versus expected outcomes.
What materials do you use to further
explain active management
to clients?
I like to use a presentation that shows how
markets have performed over the years, how
they tend to act. About 60% of the time mar-
kets are in a positive mode, about 20% of the
time going sideways, and about 20% of the
time in a negative or bear market.
Even though most people know that the his-
tory of the market is to tend to move higher, they
are unaware that about 40% of the time it is not
doing so. I explain that this is one of the reasons
to use active management, to be well-positioned
for those times the market might not be going up.
Russell, thank you. Any final thoughts?
Clients tend to spend more time planning
vacations and holidays than how they are going
to be spending the rest of their lives. As a parent
of special needs children, I especially know how
important it is to secure your financial future.
Investing the time and effort to work with a
qualified financial professional is one of the
most important things you can do for yourself
and your family.
continued from pg. 9
Going back to the sports analogy, what
is in your playbook? What types of active
strategies do you tend to use for clients?
It depends, of course, on the client’s overall
objectives, risk profile, and total financial plan. I
tell everyone that there are three enemies facing
their money: time, inflation, and taxes. We
need consistent income and asset growth over
time to overcome those, while retaining capital.
I tend to use an active, multi-strategy ap-
proach across multiple asset classes and sectors
that has strong risk management. I utilize a
blended approach that has the ability to be
actively managed in each strategy component,
to go to cash if need be, and can be leveraged
if the environment calls for it. Allocations may
change on a monthly basis and most of the
strategies are quantitatively driven.
I tell clients we are trying to consistently hit
singles and doubles, not going for the home run.
And progress is measured very specifically against
each client’s personalized objectives, not broad
market indices. Our third-party managers provide
Russell Luce is an investment advisor representative of and offers
securities and advisory services through Foresters Equity Services, Inc.,
a registered investment advisor, member FINRA, SIPC. Planning Legacies
Financial Group is located at 9233 Sproat Avenue, Oak Lawn, IL, 60453.
10 proactiveadvisormagazine.com | June 12, 2014
11. Read a fund’s prospectus and summary prospectus (if available) carefully before investing. It contains the fund’s investment objectives,
risks,charges,expensesandotherinformation,whichshouldbeconsideredcarefullybeforeinvesting.Obtainaprospectusandsummary
prospectus(ifavailable)atguggenheiminvestments.com.
There can be no assurance that any investment product will achieve its investment objective(s). There are risks associated with investing, including the entire loss of principal invested. Investing involves market
risk. The investment return and principal amount of any investment product will fluctuate with changes in market conditions. Shares of the funds are not deposits of, or guaranteed or endorsed by, any financial
institution; are not insured by the Federal Deposit Insurance Corporation (FDIC), the federal reserve board, or any other agency.
The referenced funds are distributed by Guggenheim Funds Distributors, LLC. Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC (“Guggenheim”), which
include Security Investors, LLC, (“SI”), the Investment advisor to the referenced funds. Guggenheim Funds Distributors, LLC is affiliated with Guggenheim and SI. x0515 #12524
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the implications of Fed policy, and business and
economic cycles in their decision-making.
This was in full force earlier this year, as large
funds rotated out of the sub-groupings of high-
er-beta Internet and Biotech stocks and into less
volatile larger caps across several different sectors.
Active managers, within the parameters of their di-
versified strategies, need to monitor these rotations
on a continual basis.
FURTHER SLICING AND DICING
Much like the onion that can be sliced and
chopped many different ways, so can the market,
and active managers have many different strategies
that do just that. Instead of dividing by sectors,
what if stocks were categorized based on geograph-
ical regions or various fundamental and technical
factors? Once again, there are indexes, mutual
funds, and ETFs that make this possible.
The nine-square Morningstar style box is anoth-
er way to slice the market. It separates stocks into
three sizes—large, medium, and small—and further
divides them into Value, Growth, or Blend buckets.
I like to take it one step further by adding Mega
Cap and Micro Cap categories.
The same relative strength analysis can be uti-
lized against this universe, and doing so reveals the
market is currently favoring Mid Cap Value and
Large Cap Value stocks, while Small Cap Growth
and Micro Cap stocks have been out of favor. Some
active strategies utilize these eleven buckets to im-
plement the most appropriate portfolio allocations.
Also, it is possible to chop up the stock market
based on a single quantitative factor, such as beta,
yield, volatility, size, revenue, momentum, and
many others. There are investment vehicles track-
ing these, too.
Relative strength is just one tool available to
active managers. This tool, combined with the
ability to slice and dice the market along many
different lines, provides the ability to identify
and overweight the strongest areas of the market
and to avoid the weakest. Of course, investors
could always take the passive approach of throw-
ing the whole unsliced onion in and hoping
for the best—definitely not a recipe favored by
active managers.
continued from pg. 5
11June 12, 2014 | proactiveadvisormagazine.com 11