Slides of the Month – January 2014

Overview: We are often asked the question: “How we are going to manage volatility in the current environment where fixed income is generally unattractive?” We view liquid alternative investments as an important tool in managing portfolio risk. In light of what we view as a poor environment for client exposure to fixed income, alternatives provide the opportunity to generate attractive total returns without adding significant equity risk. Examples of alternatives which we utilize for clients include equity long/short and market neutral strategies. The goal of these strategies is to achieve returns with lower correlations to the equity markets and in turn reduce portfolio volatility.

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Experience Insight Impact

biegelwaller.com

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Likelihood of Running Out of Money in 30 Years Given a 10% Annual Return and a 6%

Withdrawal Rate

Experience Insight Impact

Benefits Of Reducing Portfolio Volatility

23%

10%

1%

0%

5%

10%

15%

20%

25%

20% 15% 10%

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Annualized Volatility of Portfolio

Source: National Association of Personal Financial Advisors Study “Investing in Retirement”, Francis Armstrong, 2002.

• Central to our risk-managed investment process is the element of controlling portfolio volatility.

• Reducing the expected volatility of a portfolio’s return significantly lowers the risk of that portfolio running out of money during the withdrawal period of retirement.

• For example, assuming a 10% annual return and a 6% withdrawal rate, reducing portfolio volatility from 20% to 10% reduces the risk of running out of money from 23% to 1% over a 30-year period.

Conclusion: Implementing volatility reducing strategies in constructing

portfolios can help clients achieve long- term goals.

Long/Short & Market Neutral Strategies

Experience Insight Impact3

• We employ a number of liquid equity long/short strategies in client portfolios with a goal of reducing portfolio volatility and limiting downside losses.

• These strategies utilize both long and short stock positions in order to generate returns with varying degrees of net equity exposures. Having a “long” position means the investor owns a security and profits when the price rises. A “short” position in a security profits when the price goes down.

• Our experience has shown equity long/short strategies with fundamental and/or quantitative research efforts provide meaningful upside potential while limiting exposure to the downside.

• For example, in 2013 one market neutral strategy we implemented returned +11.1% vs. -2.03% for the US Barclays Aggregate Index (a proxy for the bond market).

Headwinds For Fixed Income

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Experience Insight Impact

• After 30-years of generally falling interest rates (shown on the left), we see the return potential for traditional fixed income facing more challenging headwinds going forward.

• In this environment, alternatives are an option to replace some of a fixed income allocation within a client portfolio.

• This chart shows the yield of the 10 year treasury note since the 1960’s. As shown since the early 1980’s, yields have been falling (and prices rising); hence the math is running out on the opportunity set within fixed income.

Slides of the Month – Disclaimer

Opinions expressed in this commentary may change as conditions warrant and is for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. Consider seeking advice from a professional before implementing any investing strategy.

Experience Insight Impact

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