Investment Philosophy » Tenets 2008 abacusplanninggroup.com abacus planning group smart financial...

InvestmentPhilosophy » Tenets

2008

abacusplanninggroup.com

abacus planning groupsmart financial decisions

abacus

smart financial decisions

Advisory process

Implementation of

Investment Strategy

Establish/Define Client

Goals and ObjectivesOngoing Communication

Review, Research and Performance

Measurement

Education andAsset

AllocationStrategy

Investment/Fund Research

1

4

5

6

Investment Policy

Guidelines

2

3

2

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Advisory process

1 Establish/define Client

goals and objectives 2 Education/Asset

Allocation strategy

3 Investment Policy guidelines

4 Investment/Fundresearch

5 Investment strategy

implementation

5 Ongoingcommunication,review, research,and performancemeasurement

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Asset allocation is the primary determinant of returns 90% strategic 10% tactical

Extensive diversification across multiple asset classes

Protection against downside volatility – limit losses

Insulation against a variety of future scenarios

Written investment policy guidelines

Investment tenets

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Globalization of portfolios

Broad exposure to non-traditional investments

Low cost, tax-efficient investments

Asset location as well as asset allocation

Frequent rebalancing to target weights

Manage clients’ portfolios and emotionsgreed vs fear

Investment tenets

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What is asset allocation?Asset Allocation is the process of combining multiple asset classes in a portfolio in order to meet your investment objectives.

» US Large Company Stock

» US Small Company Stock

» International Stock

» Emerging Markets Stock

» Bonds

» Real Assets

» Absolute Return

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Source: Brinson, Hood, Beebower and Singer study of 91 large pension plans over 10 year period.

Why is asset allocation important?

Asset Class Selection 94%

Security Selection 4%

Market Timing 2%

Definitions

Asset Class SelectionHow assets are allocated in a portfolio.Market TimingShifting portfolio assets in and out of the market Security SelectionFinding “underpriced” companies or industries.

The vast majority of a portfolio’s returns variance is determined by asset class selection and only a small portion is determined by market timing and security selection.

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13%

12

11

10

9%

10% 11

12

13

14

15

16

17%

80% Stocks, 20% Bonds



100% Bonds

Minimum risk portfolio:25% Stocks, 75% Bonds

Morningstar, Inc.

Stocks and bonds: risk versus return1970 - 2006

risk

return

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As we add additional asset classes, the

efficient frontier shifts to the

“Northwest”. In this example, the

resulting Portfolio B offers a higher

expected return with lower expected

risk.

retu

rn

risk

Portfolio A

Portfolio B

Effects of adding multiple asset classes

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Stocks Real Assets BondsAbsoluteReturn

U.S. StocksInternational

StocksReal Estate

Natural Resources

GovernmentBonds

Corporate Bonds

ConvertibleBonds

Merger Arbitrage

OptionHedging

Large-Cap

Small-Cap

Large-Cap

Small-CapCore

Value

MortgageBacked

High-Quality

High-Yield

Domestic

International

Domestic

International

EmergingMarkets

Emerging Markets

Multiple layers of diversification

Client assets

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Global GDPGrowth

High (5.5%) .65

High .70 Low .25

High .75

Moderate .30 Low .25

High .75

Commodity Price Inflation

Impact of Productivity-driven offsets

Long-Run OECD Inflation (Non-Core)

4.5%3.0%

3.5%

2.0%

© 2008 Strategic Economic Decisions, Inc.

Low (3.5%) .35

High .45 Low .35

High .65

Moderate .55 Low .35

High .65

3.5%

2.0%

2.5%

1.0%

Insulate portfolios against various economic and market scenarios

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Non-traditional assets

12

Expand portfolio opportunity set

Low correlation with traditional asset

classes

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Benefits of reducing volatility

Lower Volatility Portfolio Higher Volatility

PortfolioYear Growth of $1,000,000 Annual Return Growth of $1,000,000

Annual Return

1 $1,120,000 12.0% $1,270,000

27%

2 $1,209,600 8.0% $1,079,500

-15%

3 $1,185,408 -2% $1,414,145

31%

4 $1,398,781 18% $1,725,257

22%

5 $1,468,721 5% $1,483,721

-14%

6 $1,615,593 10% $1,602,419

8%

7 $1,664,060 3% $1,313,983

-18%

8 $1,780,545 7% $1,576,780

20%

9 $2,012,015 13% $1,955,207

24%

10 $2,132,736 6% $1,857,447 -5%

Average Annual Return 8% 8%Compound Annualized Return 7.9% 6.4%

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$1

$10

1926 1936 1946 1956 1966 1976 1986 1996 2006

$0.55

$1.39

$3.03

Compound annual return

Stocks 5.1%Municipal bondsGovernment bondsTreasury bills

1.4%

0.4%–0.7%

$100

$54.83

$.10

Stocks, bonds, and bills after taxes and inflation

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Investment policy guidelines

15

Investment objective

Investment management

Investment directives

Asset allocation

Rebalancing

Return objectives and risk

tolerance

Portfolio monitoring

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World stock market capitalization

Capitalization calculated at year-end 2006. Estimates are not guaranteed. © 2007 Morningstar, Inc. All rights reserved. 3/1/2007

43%

27%

12%

9%

5%

4%

16

» United States

» International/European

» Japan

» United Kingdom

» Other Pacific

» Canada

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Annualized Volatility

*Unhedged in local currency. All data from January 1, 1973 through December 31, 2005

Source: “Home Country Bias: Where Traditional Asset Allocation Falls Short” Alliance Bernstein March 2006

Home Country BiasLocal Markets are more volatile

0

5

10

15

20

25

Canada J apan UK US

Local Index MSCI World index*

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0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

APG INDUSTRY AVERAGE

\\ US Large-Cap Stock

\\ US Small-Cap Stock

\\ International Large Cap Stock

\\ International Small Company Stock

\\ Emerging Markets Stock

\\ Fixed Income

\\ Real Assets

\\ Absolute Return

apgcosts » smart

Industry average

The lower the costs, the more you keep

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Source: Gobind Daranani, Ph.D. and Chris Cordaro

$5,118,229

$5,035,322

$5,208,722

$5,485,881

Pro-Rata

Bonds in

Stocks in

Based on TaxEfficiency

Managing asset location

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Source: Gobind Daranani, Ph.D. and Chris Cordaro

Mutual fund tax-efficiencyTax Efficient Taxable Account

Vanguard Municipal Bonds FundsDFA US Large CompanyDFA US Large-Cap ValueArtisan InternationalDFA International Large-CapGatewayHarbor InternationalDFA Emerging MarketsDFA International Small CapDFA Two Year Global BondDFA MicrocapCalamos Growth and IncomeMergerPIMCO Foreign BondDFA Real Estate SecuritiesPIMCO Total ReturnPIMCO Diversified IncomeCohen and Steers International RealtyPIMCO Commodity Real Return

Tax Inefficient Tax Deferred Accounts20

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Benefit of looking often and rebalancing as needed

Excess return associated with various rebalancing ranges and time periodsOver a ten year period from January 1, 1992 to December 31, 2004.

Source: “Opportunistic Rebalancing: A New Paradigm for Wealth Managers” Gobond Daranani Journal of Financial Planning January 2008

Look intervals in market days

Rebalance Bands 250 125 60 20 10 5

5% 0.27 0.22 0.19 0.20 0.21 0.20

10% 0.30 0.25 0.27 0.24 0.27 0.26

15% 0.29 0.33 0.33 0.35 0.35 0.32

20% 0.31 0.36 0.38 0.40 0.45 0.43

25% 0.17 0.30 0.27 0.32 0.37 0.44

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Money changes everything

22

Region of the brain where signals of

fear and anger are generated. Very

quick observation and response

mechanism; “flight or fight”.

This region saves you

from the lion but kills you

in the market.

Where you are

processing moves in the

stock market.

Where you should be

processing moves in the

stock market.

Region of the brain

where pieces of

information are

categorized, and stored

allowing for the

processing of themes

and long-term plans.

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Growth of $1,000

Dimensional Fund Advisors (DFA)The S&P data are provided by Standard & Poor’s Index Services Group. US bonds and bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

Performance of the S&P 500 Index January 1970-December 2007

Dangers of market timing

$54,118

$49,604

$40,194

$25,217

$16,993

$9,015

One-Month T-Bills5.96%

Missed 25 Best Days

7.74%

Missed 15 Best Days

8.86%

Missed 5 Best Days10.21%

Missed 1 Best Day

10.82%

Total Period

11.07%

Annualized Compound

Return

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SmallStocks

Small Stocks

1994 1995 1996 1997 1998 19991991 1992 1993

LT Gov’t Bonds

2000

Small Stocks

2001

LT Gov’t Bonds

2002

Small Stocks

2003 2004 2005

Int’lStocks

SmallStocks

LT Gov’tBonds

SmallStocks

LargeStocks

30 DayT-Bills

LT Gov’tBonds

30 DayT-Bills

30 DayT-Bills

LT Gov’tBonds

LT Gov’tBonds

LT Gov’tBonds

SmallStocks

LargeStocks

IntlStocks

LT Gov’tBonds

30 DayT-Bills

LT Gov’tBonds

LargeStocks

Small

StocksLT Gov’t

Bonds30 DayT-Bills

30 DayT-Bills

LargeStocks

26

2006

Int’lStocks

Int’lStocks

Int’l Stocks

Int’l Stocks

Int’l Stocks

Int’l Stocks

SmallStocks

LT Gov’tBonds

LargeStocks

LargeStocks

SmallStocksSmall

Stocks

LargeStocks

LargeStocks

Int’l Stocks

SmallStocks

SmallStocks

LT Gov’t Bonds

LargeStocks

LT Gov’tBonds

LT Gov’tBonds

30 DayT-Bills

30 DayT-Bills

Int’lStocks

30 DayT-Bills

LargeStocks

Large Stocks

Large Stocks

LargeStocks

SmallStocks

Int’lStocks

Int’lStocks

30 DayT-Bills

Asset class and Chaos Theory

\\ Large stocks \\ Small stocks \\ International stocks \\ Long-term Gov. bonds \\ Treasury bills

HighestReturns

LowestReturns

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Behavioral financeDaily stock returns and sunshine

Time period: January 1, 1927 - December 31, 1989Methodology: Classify trading by (%) of cloud coverover New York City

0 - 20% = Sunny Optimistic100% = Cloudy/Rainy Depressed

Time period Sunny Cloudy Difference1/2/27 - 7/5/62 0.032% -0.016% 0.048%7/6/62 - 12/31/89 0.065% -0.028% 0.093%

How can sunshine affect stock returns, other thanby purely behavioral reasons? 25

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Growth Portfolio

Expected

return

8.18%Worst 1 in 40

22.67%

Moderate Growth

Expected

return

7.46%Worst 1 in 40

18.36%

Aggressive Growth

Expected return

8.64%Worst 1 in 40

25.10%

Balanced Growth

Expected

return

7.29%Worst 1 in 40 -

16.40%

Higher potential risk

Higher potential return

Model portfolios risk vs return

Conservative Growth

Expected return

6.42%Worst 1 in 40

11.44%26

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Expected Return 6.42%

Range (8.44%) – 24.37

Worst 1 in 40 years (11.44%)

$114,400 in losses per million invested

Conservative asset allocation

6%

7%13%

50%

10%

Large capSmall capPrivate EquityInternational Large International SmallEmerging MarketsFixed IncomeReal AssetsAbsolute Return

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Balanced growth asset allocation

Expected return 7.06%

Range (9.97%) – 27.74%



10%8%

40%

17%

8%

10%

3%

Large cap

Small cap

Private Equity

International Large

International Small

Emerging Markets

Fixed Income

Real Assets

Absolute Return

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Moderate growth asset allocation


Range (12.27%) – 32.43%



10%10%

30% 4% 12%

10%

20%

4%


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Growth portfolio asset allocation


Range (14.43%) – 37.50%



10%10%

20%

24%

12%

15%4%5%

Large cap

Small cap

Private Equity

International Large

International Small

Emerging Markets

Fixed Income

Real Assets

Absolute Return

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Aggressive growth asset allocation


Range (16.70%) – 41.07%



10%15%

10%

5% 16%13%

26%

5%


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Portfolio returns1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 10 YEARS 5 YEARS 3 YEARS

BALANCED PORTFOLIO 8.7% 14.3% 6.2% 3.5% -2.0% 24.3% 12.8% 8.7% 14.1% 8.4% 9.7% 13.5% 10.4%

MODERATE GROWTH PORTFOLIO 9.0% 16.8% 5.0% 2.3% -4.2% 27.4% 13.8% 9.4% 15.6% 8.1% 10.0% 14.7% 11.0%

GROWTH PORTFOLIO 9.4% 20.0% 3.3% 1.0% -6.8% 30.9% 15.0% 10.4% 17.4% 8.2% 10.4% 16.1% 11.9%

AGGRESSIVE GROWTH PORTFOLIO 9.8% 22.8% 2.3% -0.3% -8.7% 33.2% 15.7% 10.9% 18.6% 8.1% 10.7% 17.0% 12.4%

S&P 500 TOTAL 28.6% 21.1% -9.1% -11.9% -22.1% 28.7% 10.9% 4.9% 15.8% 5.5% 5.9% 12.8% 8.6%

LEHMAN AGG BOND 8.7% -0.8% 11.6% 8.4% 10.3% 4.1% 4.3% 2.4% 4.3% 7.0% 6.0% 4.4% 4.6%

70% S&P 500 / 30% LEHMAN BOND 23.4% 16.0% -5.0% -7.2% -12.3% 20.3% 8.9% 4.2% 12.6% 5.9% 6.1% 10.2% 7.5%

ANNUAL RETURNS THROUGH 12/31/2007

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

10 YEARS 5 YEARS 3 YEARS

BALANCED PORTFOLIOMODERATE GROWTH PORTFOLIOGROWTH PORTFOLIOAGGRESSIVE GROWTH PORTFOLIOS&P 500 TOTAL LEHMAN AGG BOND70% S&P 500 / 30% LEHMAN BOND

Annual Return

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