This quarter's activity focused on cash flow planning for future needs such as retirement withdrawals, college expenses, and other obligations. Cash flow planning can address a range of future needs and alleviate anxiety by providing a clear roadmap, though it requires an initial time commitment. Next quarter will focus on estate and legacy planning. The document also provides contact information and the location of important financial documents.
Strategic Cash Flow Planning and Estate Legacy Process
1. Strategic Wealth Management Process TM
Cash Flow and This Quarter: Cash Flow Planning
Retirement
This quarter’s activity, planning for future cash flow needs, can be a powerful tool in prepar-
Retirement and ing for your future. With a proper roadmap, we find that anxiety decreases and allows you
College Planning
to focus your efforts. Cash flow planning can address future needs ranging from retirement
Liability Driven withdrawals and college expenses to potential liability decisions such as taxes or other obli-
Investments
gations you may have in the near future. Though planning can require an initial time com-
(do you have spe-
cific payments that mitment from the client, future adjustments can easily be made with our model to allow for
need to be made?) dynamic adjustments.
Next Quarter: Estate & Legacy
84 South Fourth Street
Columbus, OH 43215
Mark Fissel, RFC Clint Edgington, CFA
www.BeaconHillAdvisory.com
2. Winter 2011 Newsletter
Economic Summary- Goldilocks Brings Investors A Great 2010
84 South Fourth Street
While it’s said that econo- We’ll likely find out that U.S. GDP
Columbus, OH 43215
mists and analysts make rose about 2.8% for the year once
P: 614.469.4685 predictions in order to give final numbers are out. Although
info@BHadvisory.com weathermen something to not a fast growth rate, we didn’t
www.BeaconHillAdvisory.com laugh at, a solid review of have the “double dip” recession
where we came from is neces- that many experts predicted and
sary in order to focus on the fu- most were concerned about. Euro-
ture. We laughably create mac- pean sovereign debt issues made
In This Issue: roeconomic projections down to investors jittery in the summer, and
the tenth of a percentage point, we continue to feel tremors due to
2010 Economic Summary 1
and the only promise we make those shocks. Corporate profits in-
Equity Market Recap 2 to our investors are that none of creased briskly, with large compa-
Fixed Income Recap 3 them will be completely accu- nies stockpiling record cash bal-
Alternatives Recap 4 rate. Although our past predic- ances rather than hiring. Unem-
tions have not all come to light, ployment has dropped slowly, but
Get Organized in 2011 7
the process of creating projec- remains stubbornly high at 9.8%.
Wealth Mgmt Process 8 tions and identifying areas of
concern brings significant value
to our processes and our clients’ portfo-
lios. Success is only measured by our port-
folios’ performance and, more impor-
tantly, in helping our clients meet their life
goals.
Just as Mama Bear’s porridge was “just
right”, the U.S. economy grew enough in
2010 to bring stability and profits, but not
enough to make central bankers turn off
the spigot of liquidity. This rising tide
lifted all risky asset classes in 2010.
www.BeaconHillAdvisory.com
3. Equity Markets — Low valuations were our friend
The equity markets enjoyed a tail-
wind of low valuations at the beginning
of the year due to jitters over a double dip
recession.
Equity markets rallied in the beginning of the
year due to healthy economic indicators.
The optimism faded during the summer as
bondholders became concerned Greece and
other European Union members would not
be able to fund their fiscal commitments and
still pay their bondholders. As expected, the
bondholders demanded higher rates to con-
tinue holding their debts, and higher rates
on a country’s debt only makes the funding
problem worse, a classic Catch 22.
Stronger members of the European Union stepped
in and backstopped debt, and continue to do so as We have seen signs that they are beginning to put
issues surface. Equities then climbed a “wall of cash to use through investments, acquisitions, divi-
worry” in the 3rd Quarter of the year, and had a dends, share buybacks, and dipping their toe in the
great 4th quarter due to robust holiday sales. Spe- hiring waters.
cifically, smaller company stocks continued their
outperformance over larger stocks for the third We tend to agree with the majority of the pundits
straight year. that are predicting a bullish equity market in 2011.
An interesting divergence between economic Individual investors have finally started moving
growth amongst different regions and the perform- money back into the equity markets from fixed
ance of stock markets cropped up in 2010. While income, with equity investors injecting $42B net
1
the U.S.’s economic growth was lackluster, our new money into the equity markets in Q4, and we
stock markets outperformed most developing see this trend continuing. This, coupled with com-
countries’ stock. panies beginning to invest, acquire and hire cre-
ates a virtuous cycle. We are, however, never con-
How can this be? Valuation. The rampant predic- fident in our ability to find the next bubble (and
tions of a double dip at the beginning of 2010 kept there will be one) and the resulting pop. With
U.S. stock valuations compressed. Corporate prof- volatility at a low point, we will be discussing with
its rose very briskly and rewarded those whom in- our clients the value of market insurance while
vested in U.S. stocks. Corporations responded to skies are blue and costs are low.
the scare of market stress and the dislocation of
the capital markets in 2008 and 2009 very logically
by hoarding cash.
www.BeaconHillAdvisory.com pg. 2
4. New Year’s Resolution — Get Organized
In households throughout the world, it is often common Fire-Resistant Home Safe
that one spouse is more ‘financially attuned’ than the In a fire-resistant home safe, keep a copy of your will
other. Rather than both taking the lead on financial mat- and trusts, insurance policies, investment account num-
ters, one spouse usually drives that ship for the most bers, passwords, original powers of attorney for health
part. This can lead to a sticky situation if the aforemen- care and property (copies should be given to those peo-
tioned ‘captain’ were to pass away (or if both were to ple who are named as your agents) and a letter of in-
pass away). The reality is that you need to prepare your structions explaining your final wishes.
partner to manage his or her own financial affairs. Let’s
Home Filing System
go over some guidelines to get you started.
In your home filing system keep three years of state-
How to locate financial documents. ments for insurance payments, bank accounts, invest-
ment and retirement account. Also be sure to maintain
a.Needless to say, someone should know where things credit card and mortgage statements for the past year.
are located. Always keep an updated list outlining where In addition, it is highly recommended to maintain at
you keep financial documents and other matters. This least three years of tax returns (if not more).
should be left with a trusted individual, such as your at-
torney or financial advisor. Your list should include all Attorney’s Office
financial accounts, account numbers, passwords, institu- At your attorney’s office, you’ll want signed and wit-
tions and contact information. Included the location of nessed will and trust documents and copies of powers
your safe deposit box and it’s key and combination to of attorney.
your home safe. Include the locations of important pa-
Who to Call, Who to Trust
pers for annuities, appraisals, birth certificates, divorce
Make sure your loved ones know where to find detailed
decrees, insurance policies, mortgages, income tax re-
contact information for your accountant, attorney,
turns, retirement accounts, prenuptial agreements, ti-
banker, financial advisor, life insurance and other
tles for cars and estate documents. You should also in-
agents, doctors (if you have children) and veterinarian (if
clude any hiding places of other items.
pets need temporary care).
What to keep and where. Share Financial Responsibility Now
If you have yet to properly store important documents, You can help ensure a smooth transition by introducing
it is recommended that you do so, following these your spouse to trusted advisors during your lifetime.
guidelines. You can also get your spouse slowly involved in the fam-
ily’s finances in general, eventually bringing him or her
Bank Safe or Deposit Box completely up to speed.
This is where you will want to put your car titles, prop- This should bring com-
erty deeds, business agreements and partnerships and a fort and reassurance for
detailed home inventory of all valuables – including pic- everyone involved.
tures, videos and appraisals.
www.BeaconHillAdvisory.com pg. 7
5. Commodities and Currencies
(cont’d from page 5) Currencies
Likely surprising to most is that the U.S. Dollar appreci-
We do, however, question the wisdom of following the
ated slightly against a broad basket of other currencies
crowds headlong into gold. Unlike many investments,
in 2010. Concerns about the Fed’s liquidity actions
you can’t be a little bit wrong in a gold trade and make
and the spending of the U.S. Government in general
money. For example, if our fixed income investments
were offset by our economic growth. True to the ad-
face tailwinds this year, and interest rates jump up 1%,
age that “The Dollar is the worst currency, except for
we likely will not lose any money as our interest will
all the others”, the dollar was buoyed by the E.U.’s
offset the amount our bonds will go down. If you are
Euro and U.K.’s Pound Sterling’s depreciation due to
wrong with gold you lose money. We too, are nervous
their fiscal issues. Most Asian economies strength-
about the Federal Reserve printing massive amounts
ened.
of money. However, we choose to invest in profit gen-
erating enterprises that are not denominated in U.S.
We tend not to maintain a significant outlook on cur-
dollars, therefore giving us a cushion in case we are a
rencies, although we do position our portfolios to hold
little wrong and the U.S. Dollar rises.
non U.S. Dollar denominated assets.
Benchmarks for 2010 review
Equity Market
“Large U.S. Companies”- S&P 500 Total Return
“Small U.S. Companies”- Russell 2000 Total Return
“Foreign Developed”- MSCI Europe, Austrialia, Far East Total U.S. Dollar return
“Foreign Emerging”- MSCI Emerging Markets Total U.S. Dollar return
Fixed Income
“U.S. Aggregate Bond”- BarCap U.S. Agg. Bond Total Return
“U.S. High Yield Bond”-BarCap U.S. High Yield Bonds
“Foreign Developed”-BarCap Global Aggregate Bond ex-U.S. U.S. Dollar return, unhedged, Total Return
“Foreign Emerging”- JP Morgan Emerging Bonds Plus U.S. Dollar return, unhedged
Alternatives
“Short Bias”- DJ Credit Suisse Short Bias Hedge Fund
“Market Neutral”- DJ Credit Suisse Market Neutral Hedge Fund
“Long/Short”-DJ Credit Suisse Market Neutral Hedge Fund
“Event Driven”- DJ Credit Suisse Event Driven Hedge Fund
“Global Macro”-DJ Global Macro Hedge Fund
“Venture Capital”-Cambridge U.S. Venture Capital
“Private Equity”-Cambridge U.S. Private Equity
“REITS”-FTSE NAREIT All Equity
“Private Commercial”-NCREIF Property Index
Alternatives II
“Agriculture”-Roger’s International Commodity-Agricultural
“Energy”-Roger’s International Commodity-Energy
“Metals”-Morningstar Metals Commodity Total Return
“Gold”-spot price in U.S. dollars
1. Injected into conventional mutual funds and ETFs http://www.lipperweb.com/Handlers/GetReport.ashx?reportId=4150 Free registration required
2. http://www.lipperweb.com/Handlers/GetReport.ashx?reportId=4143 Free registration required
3. Many have concerns about the municipal markets now, however, that market is too localized and fragmented to be included in this brief review.
4. With a typical minimum investment of $1M, a diversified Private Equity portfolio of 10 investments, with Private Equity/Venture being 5% of a portfo-
lio this would require a $200M portfolio.
5.Gold is included in the “Metals” Index, but we have broken it out for the readers convenience.
6. There are many one sided arguments for the value of gold. For a fascinating, balanced, philosophical discussion on the value of gold, see http://
www.oaktreecapital.com/MemoTree/All%20That%20Glitters%2012_17_10.pdf
GDP info: Bureau of Economic Analysis
Unemployment data: U.S. Bureau of Labor Statistics
www.BeaconHillAdvisory.com pg. 6
6. Fixed Income - Money kept pouring in
Still scared from the Great Recession of As you can see in the graph, the last quarter of
2008, individual investors that missed the 2010 was difficult for the fixed income market due
2009 run-up poured cash into fixed in- to concerns over Quantitative Easing 2 described
2
come, to the tune of $236B through November above. This reaction should not be shocking, in
searching for yield on their assets. The Fed, nerv- fact, we have been surprised it has not yet hap-
ous of a double dip recession, continued its cam- pened. What is startling was the speed and depth
paign to keep interest rates low. Only in No- of the reaction.
vember when they announced the purchase
of another $600B in treasuries (“Quantitative
Easing 2”) did bondholders get concerned
over the Federal Reserve paying the federal
debt by printing money and the spurring infla-
tion. As inflation hurts the value of their
bonds, they responded by demanding higher
rates, which increased interest rates along
most maturities.
Consistent with risk being rewarded, high
yield bonds (“junk”) outperformed the overall
market. Europe’s sovereign debt issues held
down foreign developed bonds while Emerg-
ing market bonds appreciated due to currency
appreciation and rapid economic growth.
We believe many of the tailwinds bonds enjoyed in 2010 will turn to headwinds in 2011. They will cer-
tainly no longer provide the boost that they did.
3
Our concerns are:
• Individual investors will move out of fixed income when the appetite for equities returns, which
has begun. Individual investors were net redeemers of bond funds in November for the first time
in a year2.
• Economic growth will increase the return investors demand for fixed income, which will decrease
prices.
• Many of the “levers” that sovereign governments pull to keep rates low have been exhausted.
Keep in mind that a shock to high quality bonds will not result in near the losses from a shock to equi-
ties. Therefore, there is still value to having a fixed income component to buffer our more conservative
investors, and to “keep powder dry” for our more aggressive investors during the inevitable rainy day.
We foresee continuing to earn our return (and take our risk) on the credit side rather than through in-
terest rate risk.
www.BeaconHillAdvisory.com pg. 3
7. Hedge Funds, Private Equity, and Real Estate- Worth the costs?
Hedge Funds (Equity based only)
In a year with rising asset classes worldwide, and their
Equity based hedge fund managers had diffi-
usual comfort getting into commodities (which had a
culty adding value due to high correlations
great year), we would not have expected such low re-
among stocks. Hedge fund index returns should be
turns.
viewed skeptically from a data perspective for reasons
too lengthy and boring to discuss in this brief review We continue to research hedge funds and like the con-
(i.e. survivorship bias). cept of Event Driven hedge funds and certain fixed
income hedge funds (which we did not review here).
Short Bias hedge funds bet against stocks by
However, we can’t justify our clients paying the typical
“shorting” stocks them. They had an uphill battle dur-
fee structure of 2% of Assets plus 20% of all gains for
ing a year when equities increasing by double digits.
what has historically been middling returns. We do
Market Neutral funds have approximately the same
not hold hedge funds in the vast majority of our port-
amount of “long” exposure (owning a stock) as they do
folios and do not foresee including them in the near
in short exposure. They only provide returns when the
future.
manager successfully determines stock winners and
losers. As most stocks were winners in 2010 that was
a difficult proposition and we can see that they did not Private Funding
succeed as a group. Long/Short mutual funds tend to Private Equity and Venture Capital do appear to have
be net long, but also have short positions. They strug- rebounded well in 2010. Many data issues also occur
gled to provide returns as well, although their larger with private funding, and these index returns should
long bias helped. These three categories performance also be taken with a grain of salt. However, this data is
is not exciting and, in effect, investors simply got what somewhat stale (as it always is for PE and Venture)
we would have predicted based on how much long and the ending date is 6/2010. Economic conditions
exposure they had. and activity have improved since then, so it is probable
that this understates performance considerably.
Event driven hedge funds attempt to profit
from mispricing of securities due to specific
events. An example is share class arbitrage,
which is shorting expensive classes of a
company while buying the cheaper class of
the same company- hoping for the gap to
close. Assuming that their return was
somewhat independent of general asset
returns, they may have added value.
Surprisingly, Global Macro funds, which
scour the globe to look for mispricing in all
asset classes (equities, currencies, com-
modities) did not yield compelling returns.
www.BeaconHillAdvisory.com pg. 4
8. Although the definitions are murky at best, Venture separate asset class. Interestingly, the dichotomy be-
Capital typically focuses on start up funding, while Pri- tween the returns of REITS and privately held real estate
vate Equity typically focuses on later stage funding and was astounding. There are several arguments that can
events (i.e. taking a company private, etc.). We do not be made for REITS currently, the most compelling is that
hold private funding for our investors primarily due to they are able to raise capital easily, which is still difficult
the large amount of capital needed to invest in a diversi- for private real estate investors. However, we would
fied manner.4 speculate that the dichotomy is mostly due to the gen-
eral liquidity of REITS and investors quickly crowding into
Real Estate
the space to pick up yield. This is not possible or advis-
Although extremely localized and fragmented, we do
able in private real estate.
review nationwide commercial real estate assets as a
Due to the massive inflows to REITS, REIT yields have compressed from over 5% at the beginning of the year
to just over 3%. We do continue to hold a position in REITS for the majority of our investors and, a large por-
tion of our investors hold private commercial real estate. We do have a concern that the investors can flee
the REIT space as quickly as they crowded into it and are considering trimming or adjusting our exposure.
Commodities and Currencies- Global
Growth lights a fire under commodities
Commodities
Commodities benefitted generally from
expectations of renewed global growth,
and specifically from emerging markets (Brazil,
India, and China especially) requiring signifi-
cant resources to continue building their infra-
structure and satisfying their emerging middle
class populations.
The majority of Metals have risen because
they are an input to production and China’s
export restrictions on certain “rare earth”
5
metals caused prices to spike. Gold, however,
has risen as investors have become nervous of
worldwide currency devaluations. Unlike most assets, there are no reasonable ways to
We keep a commodity investment in our portfolios to value gold. Gold has value because it always has and we
act as a hedge. We do not foresee maintaining a large assume it always will. It does not generate profits or
position. In the long term, commodities do not bring a interest, and is not used substantially as an input to pro-
lot of return but they do react positively at times we duce anything that generates profits or interest. It is no
longer linked to any currencies. There obviously is value,
need it most (i.e. Oil Embargo, etc.).
it is just impossible to value. Therefore, we cannot as-
6
certain or argue that it is overvalued or undervalued.
www.BeaconHillAdvisory.com pg. 5