1) Family wealth created from holding a single appreciating stock exposes families to undue risk that should be understood and managed due to the disproportionate allocation of wealth in a concentrated position.
2) Investors tend to hold onto concentrated positions due to emotional attachment, tax implications, or constraints around selling but there is a point where preservation of wealth and lifestyle outweigh continued wealth creation, especially near retirement.
3) Studies show diversified portfolios produce greater long-term wealth than concentrated positions, with significantly less risk. Over half of individual stocks in one study underperformed a diversified portfolio and all showed much higher volatility.
The document provides advice on finding an elder care attorney. It recommends 10 steps: 1) Identify prospective attorneys; 2) Schedule screening interviews; 3) Determine if the attorney is qualified; 4) Understand the attorney's network of professionals; 5) Discuss fees; 6) Contact references; 7) Prepare for the second interview; 8) Get specific on how issues would be addressed; 9) Select your elder care attorney; 10) Put the agreement in writing. The overall message is to find a qualified, experienced and affordable elder care attorney you feel comfortable working with.
June 2011 newsletter of Steve Stanganelli, CFP(R) Professional and principal of Clear View Wealth Advisors, a fee only financial planning firm serving individuals in Massachusetts. In this issue, Steve discusses how to manage retirement income distributions, the role of dividend paying stocks in a balanced portfolio, college planning tools for late starters and tax tips for those who are getting divorced.
1) Rebalancing a portfolio helps manage risk by restoring the proper allocation when asset classes drift apart due to differing returns.
2) A study found that a 50% stock/50% bond portfolio that was rebalanced annually from 2007-2012 earned an annualized return of 4.68% compared to 3.20% for an unrebalanced portfolio, an improvement of 1.48% annually.
3) While past performance is not guaranteed, rebalancing has historically provided lower volatility and higher returns than allowing a portfolio to drift over time.
1) The document discusses investment strategies for advisors in today's challenging market landscape characterized by a secular stock bear market, inflation threats, and low bond returns.
2) It introduces Emerald's alternative asset allocation approaches across three strategies - Hybrid, Concentrated Equity, and Global Cycle - that aim to preserve capital, provide growth, and avoid style-box thinking.
3) The strategies utilize various mutual funds and investment styles, including hedged funds, theme-based funds, and short positions, to capture upside while limiting downside in different market environments over timeframes of 3+ years.
You should carefully consider a fund's objectives, risks, charges and expenses before investing. Contact First Trust Portfolios to obtain a prospectus, which contains this information. The prospectus should be read carefully before investing. First Trust Portfolios offers various investment products including ETFs that use an enhanced indexing approach called AlphaDEX to overweight stocks based on investment potential beyond market capitalization weighting. AlphaDEX evaluates stocks using growth and value factors from the academic literature to seek alpha through a disciplined empirical process.
The document discusses four approaches to picking stocks that can deliver multibagger returns over the long run. The first approach is to buy stocks with low price-to-earnings ratios. An analysis showed that stocks with P/E ratios below 10x in 2000 generated significantly higher returns over the following 10 years compared to stocks with higher P/Es. The second approach is to buy stocks with low price-to-book value ratios, as these also tend to deliver higher long-term returns. The document provides some lists of currently undervalued stocks based on these criteria and urges further analysis before investing.
Enhanced Call Overwriting*
Systematically overwriting the S&P 500 with 1-month at-the-money calls, rebalanced on a monthly basis at expiration, outperformed the S&P 500 Index during our sample period (1996 – 2005). This “base case” overwriting strategy also generated superior risk-adjusted returns versus the index.
Overwriting portfolios with out-of-the-money calls tends to outperform at-the-money overwriting during market rallies, but provides less protection during market downturns. However, out-of-the money overwriting also results in relatively higher return variability and inferior risk-adjusted performance.
During the sample period, overwriting the S&P 500 with short-dated options, rebalanced more frequently, outperformed overwriting with longer-dated options, rebalanced less frequently. We discuss possible explanations for these performance differences.
We find that going long the market during periods of heightened short-term anxiety, inferred from the presence of relatively high S&P 500 1-month at-the-money implied volatility, has, on average, been a winning strategy. To a slightly lesser extent, having relatively less exposure to the market during periods of complacency – or relatively low implied market implied volatility – was also beneficial.
We create an “enhanced” overwriting strategy – whereby investors systematically overwrite the S&P 500 or Nasdaq 100 with disproportionately fewer (more) calls against the indices when risk expectations are relatively high (low).
Our enhanced overwriting portfolios handily outperformed the base case overwrite portfolios and the respective underlying indices, on an absolute and risk-adjusted basis. For example, the average annual return for the S&P 500 enhanced overwriting portfolio from 1997 – 2005 was 7.9%, versus 6.6% for the base case overwrite portfolio and 5.5% for the S&P 500 Index.
Overwriting with fewer calls when implied volatility is rich, and more calls when implied volatility is cheap, could improve the absolute and risk-adjusted performance of index-oriented overwriting portfolios.
This goes against the conventional tendency for investors to sell calls against their positions when implied volatility is high.
*Renicker, Ryan and Devapriya Mallick., “Enhanced Call Overwriting.”, Lehman,Brothers Global Equity Research Nov 17, 2005.
The document provides advice on finding an elder care attorney. It recommends 10 steps: 1) Identify prospective attorneys; 2) Schedule screening interviews; 3) Determine if the attorney is qualified; 4) Understand the attorney's network of professionals; 5) Discuss fees; 6) Contact references; 7) Prepare for the second interview; 8) Get specific on how issues would be addressed; 9) Select your elder care attorney; 10) Put the agreement in writing. The overall message is to find a qualified, experienced and affordable elder care attorney you feel comfortable working with.
June 2011 newsletter of Steve Stanganelli, CFP(R) Professional and principal of Clear View Wealth Advisors, a fee only financial planning firm serving individuals in Massachusetts. In this issue, Steve discusses how to manage retirement income distributions, the role of dividend paying stocks in a balanced portfolio, college planning tools for late starters and tax tips for those who are getting divorced.
1) Rebalancing a portfolio helps manage risk by restoring the proper allocation when asset classes drift apart due to differing returns.
2) A study found that a 50% stock/50% bond portfolio that was rebalanced annually from 2007-2012 earned an annualized return of 4.68% compared to 3.20% for an unrebalanced portfolio, an improvement of 1.48% annually.
3) While past performance is not guaranteed, rebalancing has historically provided lower volatility and higher returns than allowing a portfolio to drift over time.
1) The document discusses investment strategies for advisors in today's challenging market landscape characterized by a secular stock bear market, inflation threats, and low bond returns.
2) It introduces Emerald's alternative asset allocation approaches across three strategies - Hybrid, Concentrated Equity, and Global Cycle - that aim to preserve capital, provide growth, and avoid style-box thinking.
3) The strategies utilize various mutual funds and investment styles, including hedged funds, theme-based funds, and short positions, to capture upside while limiting downside in different market environments over timeframes of 3+ years.
You should carefully consider a fund's objectives, risks, charges and expenses before investing. Contact First Trust Portfolios to obtain a prospectus, which contains this information. The prospectus should be read carefully before investing. First Trust Portfolios offers various investment products including ETFs that use an enhanced indexing approach called AlphaDEX to overweight stocks based on investment potential beyond market capitalization weighting. AlphaDEX evaluates stocks using growth and value factors from the academic literature to seek alpha through a disciplined empirical process.
The document discusses four approaches to picking stocks that can deliver multibagger returns over the long run. The first approach is to buy stocks with low price-to-earnings ratios. An analysis showed that stocks with P/E ratios below 10x in 2000 generated significantly higher returns over the following 10 years compared to stocks with higher P/Es. The second approach is to buy stocks with low price-to-book value ratios, as these also tend to deliver higher long-term returns. The document provides some lists of currently undervalued stocks based on these criteria and urges further analysis before investing.
Enhanced Call Overwriting*
Systematically overwriting the S&P 500 with 1-month at-the-money calls, rebalanced on a monthly basis at expiration, outperformed the S&P 500 Index during our sample period (1996 – 2005). This “base case” overwriting strategy also generated superior risk-adjusted returns versus the index.
Overwriting portfolios with out-of-the-money calls tends to outperform at-the-money overwriting during market rallies, but provides less protection during market downturns. However, out-of-the money overwriting also results in relatively higher return variability and inferior risk-adjusted performance.
During the sample period, overwriting the S&P 500 with short-dated options, rebalanced more frequently, outperformed overwriting with longer-dated options, rebalanced less frequently. We discuss possible explanations for these performance differences.
We find that going long the market during periods of heightened short-term anxiety, inferred from the presence of relatively high S&P 500 1-month at-the-money implied volatility, has, on average, been a winning strategy. To a slightly lesser extent, having relatively less exposure to the market during periods of complacency – or relatively low implied market implied volatility – was also beneficial.
We create an “enhanced” overwriting strategy – whereby investors systematically overwrite the S&P 500 or Nasdaq 100 with disproportionately fewer (more) calls against the indices when risk expectations are relatively high (low).
Our enhanced overwriting portfolios handily outperformed the base case overwrite portfolios and the respective underlying indices, on an absolute and risk-adjusted basis. For example, the average annual return for the S&P 500 enhanced overwriting portfolio from 1997 – 2005 was 7.9%, versus 6.6% for the base case overwrite portfolio and 5.5% for the S&P 500 Index.
Overwriting with fewer calls when implied volatility is rich, and more calls when implied volatility is cheap, could improve the absolute and risk-adjusted performance of index-oriented overwriting portfolios.
This goes against the conventional tendency for investors to sell calls against their positions when implied volatility is high.
*Renicker, Ryan and Devapriya Mallick., “Enhanced Call Overwriting.”, Lehman,Brothers Global Equity Research Nov 17, 2005.
This document provides background information on capital markets and the history of stock exchanges. It discusses how capital markets help companies and governments raise long-term funds. It then gives a brief history of stock exchanges, noting that the Bombay Stock Exchange (BSE) established in 1875 is Asia's first stock exchange. It traces the origins of stock brokers back to the 12th century in France and discusses the earliest stock exchanges that emerged in the 13th-14th centuries in Belgium and Italy. The document emphasizes that the Dutch started the first joint stock companies and the first company to issue stocks and bonds was the Dutch East India Company in 1602 on the Amsterdam Stock Exchange.
1) A smaller investor can achieve diversification within their hedge fund portfolio with a relatively small number of managers, rather than needing to allocate to 30 or more funds.
2) Analyzing portfolio risk and returns over the 2008 financial crisis, a portfolio consisting of stocks, bonds, bills, and a bundle of just 5 hedge fund managers outperformed the market index and a portfolio using a broad hedge fund index.
3) By focusing due diligence resources on a smaller number of managers, investors can achieve hedge fund exposure and diversification benefits at a lower cost than allocating to many managers or a fund of funds.
There are three main categories of dividend theories: dividend relevance theories, dividend irrelevance theories, and theories related to dividends and uncertainty. Dividend relevance theories argue that a firm's dividend policy affects its value, as proposed by Walter and Gordon in their respective models. Dividend irrelevance theories, proposed by Modigliani and Miller, state that dividend policy does not impact firm value under certain assumptions. Theories of dividends and uncertainty suggest that investors prefer dividends in the present over future dividends due to uncertainty.
This document summarizes an investment analysis project from a finance class. The goals of the portfolio were to preserve capital during a recessionary period in 2009. The portfolio was diversified across multiple securities and had a beta of 0.29, lower than the market proxy, helping achieve the goal of capital preservation. Over 14 weeks, the portfolio value declined 3.07% while the market index rose 7.18%. Key concepts learned included diversification, market efficiency, and capital asset pricing model analysis. In conclusion, objectives and constraints like investment period are important considerations in portfolio formation and analysis.
The document provides an introduction to investments and covers key concepts such as risk and return, asset classes, diversification, and inflation. It explains that higher risk investments like shares and property have historically delivered higher returns than lower risk investments like cash and fixed interest. It emphasizes the importance of diversification across different asset classes and managers to reduce risk.
Here is how Mr. X can invest for his retirement goal through mutual funds and other instruments:
1. Continue investing Rs. 70,000 annually in PPF which provides tax-free returns and capital guarantee.
2. Start a monthly SIP of Rs. 15,000 in an equity diversified fund which has a good long term track record. This will help generate higher returns to build his retirement corpus over 19 years.
3. Start a monthly SIP of Rs. 5,000 in a debt fund to provide some capital protection along with returns.
4. He can increase his SIPs by at least 10% every 3 years to beat inflation.
5. Review his asset allocation and funds periodically for better
This fund focuses on about 20 large cap stocks and has outperformed its benchmark, the S&P CNX Nifty Index, over multiple time periods since inception. The fund has a quality bias, preferring value stocks with strong cash flows from sectors like energy, financials, technology and healthcare. Notable holdings include Infosys, RIL, and ICICI Bank. The fund's concentrated, high-conviction approach has helped deliver strong returns, though increased risk.
Tetuan Valley Startup School VI (Session 4)TetuanValley
Tetuan Valley is the first non-for-profit pre-accelerator program in Europe. Our goal is to promote local Entrepreneurship and regional development towards technology.
Twice a year we host a 6 week startup school, with focus on training and working on the implementation of a business idea. We have a portfolio of more than 70 top-notch mentors, participating to give the students a unique and valuable experience. All graduates of the startup school get exclusive access to the Tetuan Valley Alumni Network.
For further info please check tetuanvalley.com
This document summarizes the use of the private cost of capital model for valuing privately held companies. It discusses that privately held companies obtain capital from private rather than public markets, so their cost of capital should be based on expected returns in private capital markets. The Pepperdine Private Capital Markets Project surveys private capital providers to determine expected returns by type of capital and investment size. These expected returns are used to estimate cost of capital for privately held firms according to the private capital they would likely obtain.
99999999999999999999999999999999999999999999999Nata Rajan
This document summarizes key topics from Chapter 4 of the textbook "Fundamentals of Corporate Finance" on valuing stocks. It discusses different valuation methods like comparable companies, dividend discount models, and growth models. It also covers the efficient market hypothesis and anomalies like the small firm effect. Behavioral finance concepts like risk attitudes and probability beliefs are also introduced.
1. High-yield bonds carry higher risk than investment-grade bonds because they have a higher chance of defaulting and their prices tend to be more volatile. While they may offer higher returns, the trade-off is higher risk.
2. The document recommends that high-yield bonds and funds not be considered as replacements for investment-grade bonds due to their higher risks and mixed long-term performance relative to lower-risk investment grade bonds.
3. For more aggressive investors, the document suggests allocating no more than 5% of a portfolio to high-yield investments, due to concerns about the current economic environment and increased volatility in high-yield markets.
The book discusses Warren Buffett's approach to analyzing companies using financial statements. Buffett looks for companies with durable competitive advantages, such as unique products or low costs, that allow high returns on revenue of over 20%. He favors those with consistent earnings, low expenses for research, depreciation and interest, and strong liquidity with little debt. By identifying firms with these characteristics in their financial statements, Buffett has been able to achieve remarkable investment returns over decades.
The document describes two dynamic portfolio strategies - the Dynamic Asset Strategy (DAS) and Dynamic Income Strategy (DIS) offered by Parker/Hunter Asset Management. The strategies use exchange-traded products to dynamically allocate across global asset classes based on macroeconomic conditions, seeking competitive returns with lower volatility than the overall markets. Both strategies typically hold 10-20 positions across stocks, bonds, commodities and alternatives, with no single position over 25% of the portfolio. The DAS focuses on capital growth while the DIS emphasizes current income.
The HDFC Top 200 - Growth fund seeks long-term capital appreciation from a balanced portfolio of 60% equity and 40% debt. Managed since 1996 by Prashant Jain, the flagship fund has grown to over Rs. 11,381 crores in assets. It invests in large cap companies that are part of the BSE 200 index and targets stable, long-term growth. The fund's performance has been consistent, with returns of around 20% since inception and 17% over the last 3 years, outperforming its benchmark index.
- Waddell & Reed Financial Inc. is a publicly traded investment management company with $1.5 billion in market capitalization and 84.7 million shares outstanding.
- They provide investment management services through distinct distribution channels serving retail, wholesale, and institutional clients. They have a dedicated network of over 2,000 financial advisors and a comprehensive family of mutual funds.
- As of Q1 2009, they have $47.6 billion in total assets under management, with 83% in equity funds and 13% in fixed income funds.
The document discusses the pension fund of ABN AMRO Bank and how it employs dynamic asset allocation (DAA) to meet pension promises and improve investment decision making. It outlines the stakeholders and their interests, the annual review process of the strategic investment policy where the board selects a policy based on risk-reward tradeoffs, and how experiences since 2007 show DAA provides a better match of risk-reward preferences than static mixes, particularly during downturns like 2008-2009. DAA has helped maintain the fund's funded ratio 10-20 percentage points higher than alternatives.
This document discusses distributions to shareholders, including dividends and stock repurchases. It covers theories of investor preferences for dividends, the residual model for setting dividend policy, and factors managers consider like signaling effects and maintaining a target capital structure. Stock repurchases, dividends, splits and dividend reinvestment plans are also summarized. The optimal use of these strategies depends on forecasted capital needs, target payout ratios and whether the company needs to raise new equity capital.
How to reduce portfolio risk through periodic re-balancing. The impact of dividends on total portfolio return. Thoughts on Social Security’s future.
Investment Styles: Large growth versus large value
Starting early and saving regularly provides substantial benefits over time. Delaying saving, even for just a short period, can significantly reduce the final fund value. For example, starting at age 30 instead of 35, saving $1,000 per month until age 55, results in over $250,000 more in the final fund value due to compound interest and time in the market.
This document discusses leverage in hedge funds. It defines leverage as using borrowed capital to amplify returns. While leverage can boost returns when asset prices rise, it also amplifies losses when prices fall. The author believes leverage is a valid tool when used judiciously but cautions against using too much leverage to boost low-return strategies. Typical leverage levels vary by strategy from 1x to 6x of gross assets. Analyzing balance sheets and understanding strategies is important for evaluating appropriate leverage levels.
The document is a cheat sheet for hedge funds. It provides summaries of key information about hedge funds in 3 sentences or less:
1) The first page summarizes common characteristics of hedge funds, who invests in them, and why investors may choose hedge funds for diversification, downside protection, and an absolute return focus.
2) Page 2 defines differences between hedge funds and mutual funds, such as flexibility, paperwork requirements, liquidity, and an absolute vs. relative return focus. It also summarizes reasons to invest in hedge funds.
3) Page 3 summarizes common hedge fund fees including an annual management fee typically between 1-2% of assets and an incentive fee usually 20% of profits
This document provides background information on capital markets and the history of stock exchanges. It discusses how capital markets help companies and governments raise long-term funds. It then gives a brief history of stock exchanges, noting that the Bombay Stock Exchange (BSE) established in 1875 is Asia's first stock exchange. It traces the origins of stock brokers back to the 12th century in France and discusses the earliest stock exchanges that emerged in the 13th-14th centuries in Belgium and Italy. The document emphasizes that the Dutch started the first joint stock companies and the first company to issue stocks and bonds was the Dutch East India Company in 1602 on the Amsterdam Stock Exchange.
1) A smaller investor can achieve diversification within their hedge fund portfolio with a relatively small number of managers, rather than needing to allocate to 30 or more funds.
2) Analyzing portfolio risk and returns over the 2008 financial crisis, a portfolio consisting of stocks, bonds, bills, and a bundle of just 5 hedge fund managers outperformed the market index and a portfolio using a broad hedge fund index.
3) By focusing due diligence resources on a smaller number of managers, investors can achieve hedge fund exposure and diversification benefits at a lower cost than allocating to many managers or a fund of funds.
There are three main categories of dividend theories: dividend relevance theories, dividend irrelevance theories, and theories related to dividends and uncertainty. Dividend relevance theories argue that a firm's dividend policy affects its value, as proposed by Walter and Gordon in their respective models. Dividend irrelevance theories, proposed by Modigliani and Miller, state that dividend policy does not impact firm value under certain assumptions. Theories of dividends and uncertainty suggest that investors prefer dividends in the present over future dividends due to uncertainty.
This document summarizes an investment analysis project from a finance class. The goals of the portfolio were to preserve capital during a recessionary period in 2009. The portfolio was diversified across multiple securities and had a beta of 0.29, lower than the market proxy, helping achieve the goal of capital preservation. Over 14 weeks, the portfolio value declined 3.07% while the market index rose 7.18%. Key concepts learned included diversification, market efficiency, and capital asset pricing model analysis. In conclusion, objectives and constraints like investment period are important considerations in portfolio formation and analysis.
The document provides an introduction to investments and covers key concepts such as risk and return, asset classes, diversification, and inflation. It explains that higher risk investments like shares and property have historically delivered higher returns than lower risk investments like cash and fixed interest. It emphasizes the importance of diversification across different asset classes and managers to reduce risk.
Here is how Mr. X can invest for his retirement goal through mutual funds and other instruments:
1. Continue investing Rs. 70,000 annually in PPF which provides tax-free returns and capital guarantee.
2. Start a monthly SIP of Rs. 15,000 in an equity diversified fund which has a good long term track record. This will help generate higher returns to build his retirement corpus over 19 years.
3. Start a monthly SIP of Rs. 5,000 in a debt fund to provide some capital protection along with returns.
4. He can increase his SIPs by at least 10% every 3 years to beat inflation.
5. Review his asset allocation and funds periodically for better
This fund focuses on about 20 large cap stocks and has outperformed its benchmark, the S&P CNX Nifty Index, over multiple time periods since inception. The fund has a quality bias, preferring value stocks with strong cash flows from sectors like energy, financials, technology and healthcare. Notable holdings include Infosys, RIL, and ICICI Bank. The fund's concentrated, high-conviction approach has helped deliver strong returns, though increased risk.
Tetuan Valley Startup School VI (Session 4)TetuanValley
Tetuan Valley is the first non-for-profit pre-accelerator program in Europe. Our goal is to promote local Entrepreneurship and regional development towards technology.
Twice a year we host a 6 week startup school, with focus on training and working on the implementation of a business idea. We have a portfolio of more than 70 top-notch mentors, participating to give the students a unique and valuable experience. All graduates of the startup school get exclusive access to the Tetuan Valley Alumni Network.
For further info please check tetuanvalley.com
This document summarizes the use of the private cost of capital model for valuing privately held companies. It discusses that privately held companies obtain capital from private rather than public markets, so their cost of capital should be based on expected returns in private capital markets. The Pepperdine Private Capital Markets Project surveys private capital providers to determine expected returns by type of capital and investment size. These expected returns are used to estimate cost of capital for privately held firms according to the private capital they would likely obtain.
99999999999999999999999999999999999999999999999Nata Rajan
This document summarizes key topics from Chapter 4 of the textbook "Fundamentals of Corporate Finance" on valuing stocks. It discusses different valuation methods like comparable companies, dividend discount models, and growth models. It also covers the efficient market hypothesis and anomalies like the small firm effect. Behavioral finance concepts like risk attitudes and probability beliefs are also introduced.
1. High-yield bonds carry higher risk than investment-grade bonds because they have a higher chance of defaulting and their prices tend to be more volatile. While they may offer higher returns, the trade-off is higher risk.
2. The document recommends that high-yield bonds and funds not be considered as replacements for investment-grade bonds due to their higher risks and mixed long-term performance relative to lower-risk investment grade bonds.
3. For more aggressive investors, the document suggests allocating no more than 5% of a portfolio to high-yield investments, due to concerns about the current economic environment and increased volatility in high-yield markets.
The book discusses Warren Buffett's approach to analyzing companies using financial statements. Buffett looks for companies with durable competitive advantages, such as unique products or low costs, that allow high returns on revenue of over 20%. He favors those with consistent earnings, low expenses for research, depreciation and interest, and strong liquidity with little debt. By identifying firms with these characteristics in their financial statements, Buffett has been able to achieve remarkable investment returns over decades.
The document describes two dynamic portfolio strategies - the Dynamic Asset Strategy (DAS) and Dynamic Income Strategy (DIS) offered by Parker/Hunter Asset Management. The strategies use exchange-traded products to dynamically allocate across global asset classes based on macroeconomic conditions, seeking competitive returns with lower volatility than the overall markets. Both strategies typically hold 10-20 positions across stocks, bonds, commodities and alternatives, with no single position over 25% of the portfolio. The DAS focuses on capital growth while the DIS emphasizes current income.
The HDFC Top 200 - Growth fund seeks long-term capital appreciation from a balanced portfolio of 60% equity and 40% debt. Managed since 1996 by Prashant Jain, the flagship fund has grown to over Rs. 11,381 crores in assets. It invests in large cap companies that are part of the BSE 200 index and targets stable, long-term growth. The fund's performance has been consistent, with returns of around 20% since inception and 17% over the last 3 years, outperforming its benchmark index.
- Waddell & Reed Financial Inc. is a publicly traded investment management company with $1.5 billion in market capitalization and 84.7 million shares outstanding.
- They provide investment management services through distinct distribution channels serving retail, wholesale, and institutional clients. They have a dedicated network of over 2,000 financial advisors and a comprehensive family of mutual funds.
- As of Q1 2009, they have $47.6 billion in total assets under management, with 83% in equity funds and 13% in fixed income funds.
The document discusses the pension fund of ABN AMRO Bank and how it employs dynamic asset allocation (DAA) to meet pension promises and improve investment decision making. It outlines the stakeholders and their interests, the annual review process of the strategic investment policy where the board selects a policy based on risk-reward tradeoffs, and how experiences since 2007 show DAA provides a better match of risk-reward preferences than static mixes, particularly during downturns like 2008-2009. DAA has helped maintain the fund's funded ratio 10-20 percentage points higher than alternatives.
This document discusses distributions to shareholders, including dividends and stock repurchases. It covers theories of investor preferences for dividends, the residual model for setting dividend policy, and factors managers consider like signaling effects and maintaining a target capital structure. Stock repurchases, dividends, splits and dividend reinvestment plans are also summarized. The optimal use of these strategies depends on forecasted capital needs, target payout ratios and whether the company needs to raise new equity capital.
How to reduce portfolio risk through periodic re-balancing. The impact of dividends on total portfolio return. Thoughts on Social Security’s future.
Investment Styles: Large growth versus large value
Starting early and saving regularly provides substantial benefits over time. Delaying saving, even for just a short period, can significantly reduce the final fund value. For example, starting at age 30 instead of 35, saving $1,000 per month until age 55, results in over $250,000 more in the final fund value due to compound interest and time in the market.
This document discusses leverage in hedge funds. It defines leverage as using borrowed capital to amplify returns. While leverage can boost returns when asset prices rise, it also amplifies losses when prices fall. The author believes leverage is a valid tool when used judiciously but cautions against using too much leverage to boost low-return strategies. Typical leverage levels vary by strategy from 1x to 6x of gross assets. Analyzing balance sheets and understanding strategies is important for evaluating appropriate leverage levels.
The document is a cheat sheet for hedge funds. It provides summaries of key information about hedge funds in 3 sentences or less:
1) The first page summarizes common characteristics of hedge funds, who invests in them, and why investors may choose hedge funds for diversification, downside protection, and an absolute return focus.
2) Page 2 defines differences between hedge funds and mutual funds, such as flexibility, paperwork requirements, liquidity, and an absolute vs. relative return focus. It also summarizes reasons to invest in hedge funds.
3) Page 3 summarizes common hedge fund fees including an annual management fee typically between 1-2% of assets and an incentive fee usually 20% of profits
Warren Buffett recently discussed his win of a decade long wager in the 2017 Annual Report of Berkshire Hathaway. His winning claim was that an investment in a US equity index would outperform a selected group of hedge funds over the period. Although, over time, equity is a strong return generating asset class, the majority of investors are not in the privileged position where they not only have the luxury of time and emotional fortitude, but also sufficient excess capital to be able to fully invest in such a risky asset class to reap the reward that comes with time. The role of hedge funds in the portfolio construction of these investors is explored.
Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA
Do funds with few holdings outperform kaushikbfmresearch
This document summarizes a study that investigates the performance of mutual funds that hold a small number of stocks (10-30) in their portfolio, which are considered less diversified. The authors analyze funds over the period of 2001-2006 and compare their performance to benchmarks like the S&P 500 index. They find that on average, funds with fewer holdings underperform the market by about 20 basis points per month, or 2.4% annually. However, they also find that "Winner" portfolios outperform the market by 49.2% per year on average, while "Loser" portfolios underperform by 38.4% per year. Regression analysis indicates characteristics like fund turnover and concentration are positively related to
The document summarizes key investment management practices used by large university endowments to balance spending needs with long-term growth. It outlines four steps: 1) defining a spending rule to balance income and growth, 2) determining the required return to meet spending needs, 3) creating a policy portfolio to achieve the required return, and 4) testing the strategy through simulations. By studying top endowments, other long-term investors can learn strategies to effectively manage investments for both current and future spending requirements.
An investment in mid-cap stocks would have significantly outperformed large and small cap stocks over the long term between 1979 and 2009. Mid-caps have exhibited a consistent record of outperformance relative to other market caps across various time periods. They also provide a better risk-reward relationship than other caps, participating in market upswings while avoiding much of the downside. Mid-cap performance follows predictable patterns over economic cycles. The current market environment is favorable for mid-caps, and including a mid-cap allocation has historically improved portfolio performance with minimal increased risk.
The document presents a model showing that mutual fund managers have an incentive to distort new investments toward stocks their fund already holds large positions in near the end of quarters. This increases the fund's reported returns and attracts more inflows, allowing for greater distortion next quarter. However, the price impact is temporary, so each quarter starts with a larger return deficit until it cannot be overcome, explaining the empirical evidence of short-term persistence and long-term reversal in fund performance. The model also provides insights into why some funds underperform and explains behaviors of smaller and younger funds.
Hedge funds have evolved from an elite investment for wealthy individuals to an important tool for institutional investors like pensions and endowments. Over 65% of hedge fund assets are now owned by institutions rather than private investors. Adding hedge funds to investment portfolios can increase returns and lower risk by improving the probability of positive returns and reducing volatility. Studies estimate hedge funds could add $13.67 billion in annual returns to US public pensions and $1.73 billion to university endowments.
The document discusses Northwestern Mutual's general account investment portfolio, which generates investment earnings that contribute to the company's strong financial position and ability to pay dividends to policyholders. It maintains a balanced portfolio of 80% bonds and other fixed income, and 20% equities and high-yield bonds. These strategies and Northwestern Mutual's capital strength, mutual structure, and high customer retention allow it to achieve competitive returns over the long term.
Demystifying the Role of Alternative Investments in a Diversified Investment ...RobertWBaird
Alternative investments can potentially improve the risk-return profile of investment portfolios by increasing diversification and enhancing returns. They invest in less traditional assets and strategies than stocks and bonds. While alternatives may boost portfolio performance, they also carry higher fees and less liquidity, transparency and tax efficiency than traditional investments. For most investors, allocating 10-20% of a portfolio to alternatives can provide benefits while balancing their risks.
Beyond Boundaries...
Rethinking the foundation of a portfolio
Plato thought
beyond a cave.
Copernicus thought
beyond the earth.
Einstein thought
beyond space
and time.
The document discusses thinking beyond traditional boundaries when constructing an investment portfolio. It advocates taking a global perspective to potentially enhance returns and better manage risk. A broader investment approach that invests across multiple markets focusing on opportunities worldwide can provide both return opportunities and risk diversification benefits compared to a more narrow focus only on large U.S. companies. Investors are encouraged to discuss their portfolio allocations with a financial advisor to ensure adequate diversification globally.
Beyond Boundaries...
Rethinking the foundation of a portfolio
Plato thought
beyond a cave.
Copernicus thought
beyond the earth.
Einstein thought
beyond space
and time.
The document advocates thinking beyond traditional boundaries when constructing an investment portfolio. It suggests that taking a broader global perspective can enhance returns through additional opportunities and aid risk management. Investors are encouraged to ensure their portfolio is not too dependent on one market or asset class, and to consider allocating a greater percentage globally in line with 21st century business.
Why You Should Invest In The Market ShortLisa Brugman
This document provides an overview of investing basics for women, including:
1) It outlines the agenda which includes investment basics like stocks, bonds, mutual funds and annuities as well as why investing in the market is important.
2) It discusses how stocks, bonds, and mutual funds can help women achieve their financial goals like retirement, and how investing early and consistently can make a significant difference over the long run.
3) It emphasizes that maintaining a balanced portfolio with both stocks and bonds tailored to one's goals, timeframe, and risk tolerance is important for successful investing.
Case Problem 15.2 Jim and Polly Pernelli Try Hedging with Stock In.docxcowinhelen
Case Problem 15.2 Jim and Polly Pernelli Try Hedging with Stock Index Futures
Jim Pernelli and his wife, Polly, live in Augusta, Georgia. Like many young couples, the Pernellis are a two-income family. Jim and Polly are both college graduates and hold high-paying jobs. Jim has been an avid investor in the stock market for a number of years and over time has built up a portfolio that is currently worth nearly $375,000. The Pernellis’ portfolio is well diversified, although it is heavily weighted in high-quality, mid-cap growth stocks. The Pernellis reinvest all dividends and regularly add investment capital to their portfolio. Up to now, they have avoided short selling and do only a modest amount of margin trading.
Their portfolio has undergone a substantial amount of capital appreciation in the last 18 months or so, and Jim is eager to protect the profit they have earned. And that’s the problem: Jim feels the market has pretty much run its course and is about to enter a period of decline. He has studied the market and economic news very carefully and does not believe the retreat will cover an especially long period of time. He feels fairly certain, however, that most, if not all, of the stocks in his portfolio will be adversely affected by these market conditions—although some will drop more in price than others.
Jim has been following stock index futures for some time and believes he knows the ins and outs of these securities pretty well. After careful deliberation, Jim and Polly decide to use stock index futures—in particular, the S&P MidCap 400 futures contract—as a way to protect (hedge) their portfolio of common stocks.Questions
a. Explain why the Pernellis would want to use stock index futures to hedge their stock portfolio and how they would go about setting up such a hedge. Be specific.
1. What alternatives do Jim and Polly have to protect the capital value of their portfolio?
2. What are the benefits and risks of using stock index futures to hedge?
b. Assume that S&P MidCap 400 futures contracts are priced at $500 × the index and are currently being quoted at 769.40. How many contracts would the Pernellis have to buy (or sell) to set up the hedge?
1. Say the value of the Pernelli portfolio dropped 12% over the course of the market retreat. To what price must the stock index futures contract move in order to cover that loss?
2. Given that a $16,875 margin deposit is required to buy or sell a single S&P 400 futures contract, what would be the Pernellis’ return on invested capital if the price of the futures contract changed by the amount computed in question b1?
c. Assume that the value of the Pernelli portfolio declined by $52,000 while the price of an S&P 400 futures contract moved from 769.40 to 691.40. (Assume that Jim and Polly short sold one futures contract to set up the hedge.)
1. Add the profit from the hedge transaction to the new (depreciated) value of the stock portfolio. How does this amount compare to the $375,000 portfol.
2012 Economic and Stock Market Outlook - Dec. 2011RobertWBaird
Risk on S&P 500 to 1000, reward to 1400. Election and European debt uncertainties are dominant risks in first half. Headwinds could abate later in year. GDP outlook limited to 2% growth due to lack of income gains. Europe in recession. Volatility unlikely to decrease; manage portfolios for risk and return.
The Truth about Top-Performing Money Managers - Dec. 2011RobertWBaird
Virtually all top-performing money managers experience periods where they underperform their benchmarks and peers, especially over periods of 3 years or less. The study found that 85% of top managers underperformed by at least 1% over a 3-year period at some point, and 81% fell below their peer median as well. However, sticking with top managers pays off long-term - investors who abandon managers after short-term underperformance miss out on future gains, as many managers recover to outperform again. The study shows investors would have earned higher returns by staying invested after periods when managers fell from high ratings, rather than abandoning them.
The Quest for Yield: The Roles of Dividend and Interest Income - Dec. 2011RobertWBaird
This document discusses investors' increasing focus on yield in light of historically low interest rates. It outlines two key considerations when evaluating yield-generating investments: 1) current market conditions have pushed yields to low levels, making high past yields difficult to achieve; and 2) pursuing higher yields often requires taking on greater risk. The document emphasizes balancing yield objectives with the associated risks and volatility to avoid chasing returns without understanding risks.
Extension of Tax Cuts, Estate Changes Highlight Final Bill of 2010RobertWBaird
The Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 extended several expiring tax provisions, including extending the 2001 and 2003 tax cuts through 2012. It also increased the estate tax exemption to $5 million per individual for 2011-2012, reduced the top estate tax rate to 35%, and made the exemption portable between spouses. Additionally, it reduced the employee portion of the payroll tax from 6.2% to 4.2% for 2011 and extended Alternative Minimum Tax relief for 2010-2011.
Year-End Tax Planning and Financial Planning Ideas - Dec. 2011RobertWBaird
This document provides year-end tax and financial planning ideas for private wealth management clients. It discusses reviewing capital gains and losses to realize losses to offset gains, considering realizing gains to use up losses, and avoiding wash sales. It also recommends ensuring adequate tax withholdings and payments to avoid penalties, accelerating or deferring income and deductions as needed, and completing charitable donations by year-end to take the deduction. The tax rates for 2012 are expected to remain the same as 2011 but could change significantly after that.
- Inflation has remained moderate at around 3.8% annually on average over the past 20 years. GDP growth in Q2 2011 was a lackluster 1.0% annualized, lower than expected. Unemployment remains stubbornly high despite government efforts to create jobs. Volatility surged in Q3 due to uncertainty in Europe and other factors. Commodities retreated with oil at its lowest levels in 2011 and gold finishing the quarter positive but down in September.
Health Care Act Includes Variety of Tax Changes - Dec. 2011RobertWBaird
The document summarizes key tax provisions and changes contained in the Patient Protection and Affordable Care Act (ACA). It outlines new taxes such as a 3.8% tax on investment income exceeding $250,000 and an additional 0.9% Medicare tax on wages over $200,000/$250,000. It notes these will significantly increase marginal tax rates for many and could incentivize Roth conversions. The ACA also increases penalties for non-qualified withdrawals from HSAs and MSAs, limits health FSA contributions, and penalties those without minimum health insurance as of 2014.
Estate and Gift Tax Laws: New Rules - Dec. 2011RobertWBaird
The document summarizes new rules for estate and gift taxes under legislation passed in December 2010. It outlines increases to the estate and gift tax exemption amounts to $5 million per person and $10 million per married couple. The top tax rate was lowered to 35%. Executors can elect to apply the new rules retroactively for those who died in 2010. Other changes include reunifying the estate and gift tax systems, and allowing portability of unused exemptions between spouses. However, the changes only apply through 2012 unless extended by Congress.
The document discusses how many private foundations focus primarily on the tax benefits of philanthropic giving and the logistical requirements of setting up a foundation, rather than clearly defining their mission. It argues that this lack of mission focus is influenced by the IRS requirement that foundations pay out 5% of their assets annually in grants. To maximize their impact, foundations should separately define their mission, create spending policies aligned with the mission, and set investment strategies accordingly, even while meeting the 5% requirement. Clearly communicating the mission can help foundations avoid unclear donor intent derailing their goals.
Investment Strategy Considerations in a Rising Tax Environment - Dec. 2011RobertWBaird
1) Taxes significantly reduce investment returns, so adjusting asset allocation models to account for taxes can lead to superior portfolios and greater wealth accumulation.
2) Investors should find their "tax equilibrium" - a balance between tax considerations and other factors in portfolio construction.
3) With rising income tax rates anticipated, investors need to reconsider the tax costs of their portfolios and possibly adjust allocations to more tax-efficient assets. Estate taxes also require consideration for high-net-worth families seeking to maximize wealth transfer.
Investing in a Rising Rate Environment - Dec. 2011RobertWBaird
- Rising interest rates can negatively impact bond prices in the short-term but a focus on total return, which includes interest income, provides a more accurate picture of bond performance over time.
- An analysis of periods from 1994-2006 when the Federal Reserve raised rates found that while bond prices fell in the majority of months, interest income was positive every month and total returns were positive in 64% of months.
- Diversifying across different types of bonds can help mitigate the effects of rising rates as different bond segments perform variably depending on economic conditions. Professional bond managers employ strategies to offset negative impacts and maximize total returns.
Closed-End Funds: Opportunities and Challenges in a Unique Market - Dec. 2011RobertWBaird
This document provides an overview of closed-end funds, comparing them to mutual funds and ETFs. Some key opportunities of closed-end funds include the potential to buy funds trading at a discount to their net asset value, access to higher investment income, and exposure to illiquid markets through professional management. Potential challenges include funds trading at a premium, volatility from leverage, distributions including return-of-capital rather than income, and lower market liquidity compared to other investment vehicles. The document discusses these opportunities and challenges in more detail.
Hedge Funds: A Look Back and A Look Ahead - Dec. 2011RobertWBaird
Hedge funds have proven to be worthy financial instruments over the past 20 plus years, and have contributed to the growth of the modern financial industry. The addition of a well diversified group of hedge funds to a traditional portfolio has been shown to be an effective way to potentially increase returns, while also preserving capital during adverse market environments. Going into 2010, the hedge fund industry appears to be healthier than it has been in more than a decade, albeit much smaller in terms of assets than it was at its peak two years ago.
Factors to Consider When Unwinding a Roth ConversionRobertWBaird
A Roth recharacterization allows a taxpayer to unwind a Roth conversion by transferring assets from a Roth IRA back to a Traditional IRA. The recharacterization period lasts until the tax return due date including extensions, typically October 15 of the following year. Reasons for recharacterizing include a decline in the converted assets' value, an inability to pay the resulting tax liability, or an expected lower future tax rate for beneficiaries. The recharacterization process requires adjusting the amount transferred to account for any gains or losses attributable to the recharacterized amount.
Does Passion Have a Place in Wealth Management? - Dec. 2011RobertWBaird
The document discusses whether passion-driven collections have a place in wealth management strategies. It notes that while collections are significant assets for many high-net-worth individuals, they are often not included in wealth plans. Some collectibles have performed as well or better than stocks over long periods. Due to low correlation, collectibles can provide important portfolio diversification that reduces risk. However, collectibles also introduce risks like illiquidity, price volatility, and opportunity costs. Incorporating collectibles precisely into asset allocation strategies can be difficult due to poor data.
Active vs. Passive Money Management - Dec. 2011RobertWBaird
This document discusses the differences between active and passive investment management approaches. It notes that both approaches have merits and drawbacks, so the best strategy depends on an investor's individual needs and preferences. Active management aims to outperform benchmarks by closely managing investments, but has higher fees, while passive management tracks market indexes at lower cost but without potential for above-average returns. The document examines factors like market efficiency, manager performance, fees, time horizons, and tax considerations that influence whether active or passive is more appropriate for different investors and asset classes. It emphasizes the importance of thorough due diligence to identify managers more likely to outperform average peers.
Solution Manual For Financial Accounting, 8th Canadian Edition 2024, by Libby...Donc Test
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Lecture slide titled Fraud Risk Mitigation, Webinar Lecture Delivered at the Society for West African Internal Audit Practitioners (SWAIAP) on Wednesday, November 8, 2023.
Seminar: Gender Board Diversity through Ownership NetworksGRAPE
Seminar on gender diversity spillovers through ownership networks at FAME|GRAPE. Presenting novel research. Studies in economics and management using econometrics methods.
In a tight labour market, job-seekers gain bargaining power and leverage it into greater job quality—at least, that’s the conventional wisdom.
Michael, LMIC Economist, presented findings that reveal a weakened relationship between labour market tightness and job quality indicators following the pandemic. Labour market tightness coincided with growth in real wages for only a portion of workers: those in low-wage jobs requiring little education. Several factors—including labour market composition, worker and employer behaviour, and labour market practices—have contributed to the absence of worker benefits. These will be investigated further in future work.
Falcon stands out as a top-tier P2P Invoice Discounting platform in India, bridging esteemed blue-chip companies and eager investors. Our goal is to transform the investment landscape in India by establishing a comprehensive destination for borrowers and investors with diverse profiles and needs, all while minimizing risk. What sets Falcon apart is the elimination of intermediaries such as commercial banks and depository institutions, allowing investors to enjoy higher yields.
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Financial Assets: Debit vs Equity Securities.pptxWrito-Finance
financial assets represent claim for future benefit or cash. Financial assets are formed by establishing contracts between participants. These financial assets are used for collection of huge amounts of money for business purposes.
Two major Types: Debt Securities and Equity Securities.
Debt Securities are Also known as fixed-income securities or instruments. The type of assets is formed by establishing contracts between investor and issuer of the asset.
• The first type of Debit securities is BONDS. Bonds are issued by corporations and government (both local and national government).
• The second important type of Debit security is NOTES. Apart from similarities associated with notes and bonds, notes have shorter term maturity.
• The 3rd important type of Debit security is TRESURY BILLS. These securities have short-term ranging from three months, six months, and one year. Issuer of such securities are governments.
• Above discussed debit securities are mostly issued by governments and corporations. CERTIFICATE OF DEPOSITS CDs are issued by Banks and Financial Institutions. Risk factor associated with CDs gets reduced when issued by reputable institutions or Banks.
Following are the risk attached with debt securities: Credit risk, interest rate risk and currency risk
There are no fixed maturity dates in such securities, and asset’s value is determined by company’s performance. There are two major types of equity securities: common stock and preferred stock.
Common Stock: These are simple equity securities and bear no complexities which the preferred stock bears. Holders of such securities or instrument have the voting rights when it comes to select the company’s board of director or the business decisions to be made.
Preferred Stock: Preferred stocks are sometime referred to as hybrid securities, because it contains elements of both debit security and equity security. Preferred stock confers ownership rights to security holder that is why it is equity instrument
<a href="https://www.writofinance.com/equity-securities-features-types-risk/" >Equity securities </a> as a whole is used for capital funding for companies. Companies have multiple expenses to cover. Potential growth of company is required in competitive market. So, these securities are used for capital generation, and then uses it for company’s growth.
Concluding remarks
Both are employed in business. Businesses are often established through debit securities, then what is the need for equity securities. Companies have to cover multiple expenses and expansion of business. They can also use equity instruments for repayment of debits. So, there are multiple uses for securities. As an investor, you need tools for analysis. Investment decisions are made by carefully analyzing the market. For better analysis of the stock market, investors often employ financial analysis of companies.
The Hidden Cost of Holding a Concentrated Position - Dec. 2011
1. The Hidden Cost of
Holding a Concentrated Position
Why diversification can help to protect wealth
By Baird’s Advisory Services Research
Executive Summary
Family wealth created by holding a single stock that appreciates
substantially in value over time is fairly common. For example,
senior company executives receive stock or stock options as part of
their compensation, investors benefit from superior appreciation
of one stock relative to the rest of their portfolio, or family members
inherit a large position in a single stock. Regardless of how the
concentrated position is acquired, it results in a disproportionate
allocation of wealth, which exposes the family to undue risk that
should be understood and managed.
Whether investors understand the risks of holding a concentrated
position or not, there is a tendency to hold onto these positions.
Corporate executives may face insider selling constraints or concerns
about how a sale would affect the market price of their company’s
stock. Other investors simply have an emotional attachment to the
stock. Many investors are concerned about the tax implications
of selling.
Despite these seemingly valid reasons, there is a critical point for
most investors and families where the desire for wealth, income
and lifestyle preservation outweighs the need for further wealth
creation. This is especially true when investors approach retirement
or life events during which they will more heavily rely on their
accumulated wealth.
The goal of this paper is to educate investors about the hidden risks
associated with holding significant wealth in concentrated positions,
and to suggest strategies to help mitigate and manage those risks.
2. The Risk/Reward Implications The results of this study showed
Defining Concentrated of a Concentrated Position that over half of the individual
Position Investors who have benefited from stocks underperformed our 60/40
A concentrated position occurs holding a concentrated position often diversified portfolio, and that all of
when an investor owns shares believe that past performance will the individual stocks showed much
of a stock (or other security continue indefinitely, and may find it higher volatility. The average stock’s
type) that represent a large difficult to imagine a downside. While volatility was nearly four times that
percentage of his or her overall it’s tempting to believe a successful of the diversified portfolio. There is
portfolio. The investor’s wealth stock will remain that way, studies no perfect way to know which stocks
becomes concentrated in the show that investments in a diversified will be the winners over the long
single position. Depending on portfolio will produce greater term, and the cost for being wrong
the volatility of the stock, and
long-term wealth than investments can be high. For example, the return
the size of the client’s portfolio, a of 160 stocks failed to keep pace
in a concentrated position, with
position is often considered to be with inflation over the period, and
significantly less risk.
concentrated when it represents 104 of the 272 stocks were down
10% or more of one’s portfolio. In order to better understand the 20% or more in value at the end of
risk/reward tradeoff of holding a the decade.
concentrated stock position, Baird
constructed a hypothetical diversified In fact, the 60/40 diversified portfolio
portfolio1 consisting of 60% equities returned 45% cumulatively over the
and 40% fixed income and compared decade while the S&P 500 was down
it with the 272 individual stocks that 26%. A good example is General
remained consistently in the S&P 500 Electric. The chart below compares
Index for the 10-year period of March the performance of General Electric’s
31, 1999 to March 31, 2009. stock to the diversified portfolio over
Concentrated Equity Position: “What If” Analysis
Ten-year Performance: Stock vs. Diversi ed Portfolio
Growth of a $100,000 Investment Over the Past 10 Years
$200,000 Diversi ed Portfolio
$175,000
GE Diversified
$150,000 $144,908 Portfolio
$125,000 10-year (7.1%) 3.8% Higher
$100,000 Annualized Return Return
$75,000
10-year 28.3% 10.6% Less
GE Annual Volatility Volatility
$50,000 $47,657
$25,000 Diversified Portfolio (total=100%)
9 0 1 1 2 3 4 5 6 7 8
r 9 ep 99 ar 0 ep 00 ar 0 ep 0 ar 0 ep 02 ar 0 ep 03 ar 0 ep 04 ar 0 p 05 ar 0 ep 06 ar 0 p 07 ar 0 p 08 ar 0
9 Equity
Ma S M S M S M S M S M S M Se M S M Se M Se M
Large Cap Growth 12.0%
GE Diversi ed Portfolio
Large Cap Value 14.0%
Source: FactSet Research Systems; Baird analysis. Mid Cap 8.5%
The following indices are used to represent the diversified portfolio: Large Cap Growth: Russell Small Cap 3.5%
1000® Growth Index; Large Cap Value: Russell 1000® Value Index; Mid Cap: Russell Midcap® International 14.0%
Index; Small Cap: Russell 2000® Index; International: MSCI EAFE; Taxable Fixed Income:
Lehman Intermediate US Govt/Credit Index. Satellite: MSCI Emerging Markets Index, Barclays Taxable Fixed Income 40.0%
Capital US Corporate High Yield bond Index, DJ-AIG Commodity Index, DJ Global Real Estate
Index. Russell® is a trademark of the Frank Russell Company. Satellite 8.0%
-2-
3. this 10-year period. GE declined at a In Table A, Investment I averages a
7.1% annual rate with 28.3% volatility, 10% return but is the more volatile
while the diversified portfolio generated investment, increasing 50% one year and
a modestly positive annual return of decreasing 30% the next. Investment II
3.8% with much less volatility (10.6%). also averages a 10% return; however, it
Importantly, this is not an isolated case. is less volatile, up 15% and 5% in the
Baird has calculated similar results for two years, respectively.
dozens of companies, including Procter
As Table B shows, Investment II, the less
& Gamble, Cisco Systems, J.P. Morgan
volatile of the investments, generates
Chase, Disney, Coca-Cola, and Merck.
a much higher compounded growth
In many of the “what-if ” analyses we
rate of 9.9%, compared with 2.5% for
conducted, the diversified portfolio
Investment I. As a result, a $1,000,000
outperformed the single stock position,
investment in Investment II grows to
and in all cases the diversified portfolio
$1,207,500 in two years. That’s over
had lower volatility.
$150,000 more than Investment I,
So why does a diversified portfolio simply because of the investment’s
oftentimes outperform a single stock lower volatility. In summary, the more
position? The answer lies in the lower an investment’s return fluctuates year by
volatility. As our study and others like year (i.e., the higher the volatility), the
it have indicated, greater volatility in a greater the drag on the compounded
portfolio reduces compounded growth growth rate and the lower the future
rates and future wealth. The example wealth. Thus, controlling volatility and
in the tables below illustrates this point risk through proper diversification does
through two hypothetical investments matter in portfolio management.
that generate the same average annual
While investors may be tempted to
return of 10%, but with varying levels
hold a concentrated stock position in
of volatility.
the hope of greater profit, they may fail
to understand that they are not being
compensated for taking this risk. In
TABLE A:
theory, stocks are riskier investments that
Averages Can Be Misleading should provide higher returns than less-
Investment Year 1 Year 2 Average Volatility risky investments like Treasury securities.
I 50% -30% 10% 40% However, the risk/reward premium
turns against the investor when too
II 15% 5% 10% 5% few stocks are owned, and especially
TABLE B:
Why Volatility Matters
Investment Original Investment Year 1 Year 2 Compounded Growth Rate
I $1,000,000 $1,500,000 $1,050,000 2.50%
II $1,000,000 $1,150,000 $1,207,500 9.90%
-3-
4. when the investor holds a single or positions. A few of the most common
Do Today’s Low Capital Gains large, dominant position. Returns reasons investors don’t sell are
Tax Rates Matter? become too reliant on the fortunes of summarized in Table C below.
It’s widely agreed that tax one company (exposing the investor
Although many of these reasons are
considerations, while important, to significant company-specific
valid in the eyes of the investor, the
should not be the only reason for fundamental risks) and to a single
logic supporting diversification is
making an investment decision. industry (exposing the investor to
compelling. We will now turn to
Nevertheless, investors who sector-specific risks). As a result, it is
some ways an investor can successfully
currently own a large stock clear that investors should choose to
diversify and minimize the risk of a
position should consider the diversify a concentrated stock position
concentrated position.
potential future of capital gains whenever possible.
tax rates when contemplating The True Tax Consequences
a sale. Why Are Some Investors of Selling
Reluctant to Sell?
At 15%, today’s top long-term One of the biggest objections to selling
capital gains tax rate is lower Despite this compelling argument,
a large appreciated stock position is
than it has been since the 1930s. we have found many investors
the need to pay income tax on the
In 2011, this rate will sunset and are reluctant to sell concentrated
gain. With a cost basis that can be as
revert to the pre-2003 rates,
generally 20%2, unless Congress
TABLE C:
and the president act to keep
rates as they are today. According Why Investors Don’t Sell
to the budget recently proposed The Rationale for Holding The Logic of Diversifying
by President Obama, this top rate They want to avoid a “certain loss” due to the tax This is perhaps the most prevalent of all reasons
would increase to 20% after 2010. consequences of selling. to hold, yet often, over longer time horizons, an
investor can recoup the tax cost and continue to
Clearly, an increase in the capital
build wealth with a lower risk portfolio.
gains rate will result in a much
greater tax burden for those who They assume the future will be like the past. Even if the stock has been successful in the past,
no one can predict the future.
sell large concentrated positions.
Under this scenario, investors They are overconfident in the stock’s prospects There is a misperception that can occur when an
(especially if it is their employer). investor works for a company and has been very
should be aware that they will
successful there. Again, no one can predict the future.
likely need more time in the
They are lured by the possibility of a big win and feel While one may view situations like Enron and
future to recoup the tax expense
their stock is immune from a significant downfall. WorldCom where stocks totally collapsed as isolated
of the sale – all else being equal, events, owners of these equities never anticipated
suggesting a sale sooner rather what happened to them.
than later. They fear they will regret selling the stock if the price By focusing on the long-term potential and lower
continues to rise. risk of the new, diversified portfolio, an investor can
overcome these regrets.
They cannot bring themselves to sell the stock at a The stock may never reach those levels again; it’s
price below its former high. They are waiting for the better to put the money to work in a more prudent,
stock to “come back.” diversified strategy.
They feel loyal to a stock they inherited from a In fact, diversifying that position may be a wiser way
trusted family member. to maintain that legacy.
They are legally restricted from selling. Even when selling the stock outright is not an
option, there can be other alternatives. For more
information see sidebar, “Solutions for Restricted
Stock Holders.”
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5. low as zero, the tax implications in tolerances, greater volatility in that
Solutions for Restricted dollar terms of a sale can seem single stock, lower tax costs, and
Stock Holders significant. However, we have already higher lifestyle spending needs.
In some cases, corporate insiders shown how a diversified portfolio can
may be prevented from selling build greater wealth with less risk Selling and Diversifying
due to regulatory constraints, than a single-stock position. In the Diversifying a concentrated position
such as prohibition from selling study referenced above, 104 of the 272 doesn’t mean making a minor
during blackout periods or when stocks were down 20% or more in adjustment to the portfolio. After
in possession of material non-
value at the end of 10 years – roughly all, the goal is to significantly reduce
public information. The Securities
equivalent to a payment of 15% the volatility caused by a concentrated
and Exchange Commission
(SEC), recognizing that corporate federal and 5% state long-term capital position, so the diversification will
insiders were greatly restricted gains. Hypothetically, had an investor need to be meaningful. Selling a
by these rules, created a pre- sold a position in one of those 104 portion (i.e., partial sale) of a
planned sell program under Rule names at the beginning of the decade concentrated position is better than
10b5-1. By adhering to strict SEC and lost 20% to long-term capital
guidelines, insiders entering into
doing nothing. However, investors
gains taxes, they would have been no must remember the end goal of
10b5-1 programs are allowed to
execute pre-programmed sales worse off had they placed the proceeds reducing volatility and risk to their
when they would not otherwise under a mattress for the 10 years, wealth, which will often require
be allowed to do so. and would have been considerably significant, if not total, reduction
In all cases, owners of stock they better off had they invested the of the concentrated position.
cannot readily sell should take proceeds in a diversified portfolio
a careful look at how the stock
Determining how much, if any,
despite the significant up-front tax bill.
position fits into their overall to continue holding requires a
portfolio strategy, and make sure The longer an investor’s time horizon, thoughtful, unbiased review of the
they diversify around the position. the more likely he or she will be able investment prospects for the stock.
For example, if an executive has to recoup the entire tax cost. Much It may be that the best approach for a
10% of his portfolio in company depends on the size of the tax bill, portfolio is a complete liquidation –
stock, the remaining 90% can which in turn is a function of capital and given the potential influence of
be invested in a way that helps
gains tax rates. Investors should keep emotion, a trusted outside advisor
counterbalance the additional
risk of that position – perhaps
in mind that current capital gains tax may need to assist an investor in
with more low-risk securities rates are lower than they have been making this decision.
like Treasury bills. The goal is to for the past 70 years. (See sidebar,
minimize the portfolio’s overall
If the investor is not restricted from
“Do Today’s Low Capital Gains Tax
volatility level in order to preserve selling, the fastest way to reduce the
Rates Matter?” on page 4.)
as much wealth as possible. In volatility and risk in the portfolio is
these cases, a personal Investment Some of the factors to consider to execute the sale in one transaction
Policy Statement can also be when deciding whether to sell and reinvest the proceeds to create a
a valuable tool in defining risk include age and health, current balanced portfolio. This is a good
parameters and establishing portfolio assets and how well these way to bring the risk level of the
investment guidelines.
assets are diversified, cash flow portfolio down quickly and efficiently.
requirements, and expected portfolio However, for a variety of reasons,
contributions and withdrawals. The this isn’t always feasible so a staged
optimal sale amount increases with sale may need to be considered.
longer time horizons, lower risk
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6. Staged Sales As a result, open window periods are
Special Considerations for not an issue and regulatory oversight
Selling a large position at one time can
Stock Options is greatly reduced. These arrangements
sometimes lead to downward pressure
Quite often, investors mentally are binding and will often require the
on the stock price, further reducing
account for stock options approval of the company, so they’re
the portfolio’s value. At other times,
differently than stocks. In reality, not for everyone, but they can be a
it may be too difficult emotionally
stock options are equity holdings valuable strategy. (See “Solutions for
for the investor to sell in one large
and can constitute a concentrated Restricted Stock Holders” on page 5.)
position. However, they present transaction. In these types of cases, a
special considerations that require staged sale may be most appropriate.
Other Ways to Diversify
additional planning.
In a staged sale, the investor sets a
There are tax consequences to For stock owners unable to divest,
goal of selling a certain number of
exercising both incentive stock there are several alternatives that may
shares of the stock by a certain date.
options (ISOs) and non-qualified be appropriate:
stock options (NQSOs). One of
For example, the investor wishes to
sell 12,000 shares of the stock over • Exchange funds allow qualified
the greatest is a tax trap that can
occur when an investor exercises the next 18 months. The investor is investors to exchange a concentrated
ISOs. For example, an investor may willing to sell shares every quarter, position for a more broadly
exercise ISOs and inadvertently meaning there will be six sales during diversified portfolio of stocks
trigger the alternative minimum this period. At the end of each quarter, without incurring an immediate tax
tax. If the stock subsequently liability. Essentially, investors
the investor then would commit to
plummets, the investor could be
selling 2,000 shares. By making this contribute their appreciated stock to
left with a large AMT bill yet little
to no equity in the stock itself. commitment, the investor has set the a limited partnership in exchange for
The more volatile the stock, the schedule and won’t be swayed by an interest in a diversified portfolio.
greater the possibility an investor emotion, market fluctuations or other After a period of time, generally
might get caught in this trap. events that otherwise might keep him seven years, the investor can
As a result, advance planning or her from selling. The emotion has withdraw a pro rata share of the
is crucial. Investors should been removed from the transactions portfolio. Exchange funds can be
consult their investment and tax illiquid, do not eliminate capital
with a set plan, agreed to by all
advisors before taking action to gains, can be costly, and provide less
involved, that every three months
diversify a concentrated stock
2,000 shares will be liquidated. diversification than a broadly
option position.
diversified portfolio.
In some cases, executives may be
prevented from selling at certain times • Charitable Remainder Trusts
because they possess insider informa- (CRTs) help further an investor’s
tion such as knowledge of corporate philanthropic goals, while providing
strategy, earnings reports or other an immediate tax deduction. The
non-public information. Timing sales investor transfers the appreciated
between these events (known as “open stock to the trust, and in return
window” periods) can be difficult receives an annual income stream
and leaves insiders open to regulatory from the trust. The trust can diversify
scrutiny. In these circumstances, staged the portfolio, but any taxes on the
selling through a 10b5-1 plan is one gain are deferred until the income
solution. These plans specify how stream is passed to the donor. At the
much and when a stock will be sold. trust’s termination, the remaining
The sales are executed automatically, assets pass to a charity the investor
with no further investor involvement. chooses. The investor cannot reverse
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