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Exceeding Your Expectations
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Managing Risk (Hint: It’s Not What You Think)
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Agenda
• Investment Risks
• Business Risks
• Risk – Redefined?
2
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Today’s Presenters Robert A. DiMeo, Managing Director and Senior Investment Consultant • 25 years industry experience; co-author 3 investment books, numerous articles & whitepapers
• Previously directed Midwest institutional consulting effort for Kidder, Peabody
• Catholic Charities Advisory Board; previous Board of Directors for Investment Management Consultants Assn. and Governance Board Notre Dame High School
• Bradley University, BS; Wharton Business School IMCA Accreditation Program, CIMA®, College of Financial Planning, CFP
• Email – [email protected]
Adam Newell, CFA, CFP™, Director of Consulting – The Wealth Office™
• 13 years industry experience; 9 years with DiMeo Schneider
• Previously Senior Financial Planner with The Ayco Company of Goldman Sachs
• Provides investment counseling services to nonprofits, corporate executives, family trusts, and other substantial investors
• Member of DiMeo Schneider & Associates, L.L.C.’s Investment Committee as well as the Asset Allocation & Hedge Fund Research Sub-Committees
• Member of CFA Society of Chicago and Financial Planning Association
• Purdue University, BS; Chartered Financial Analyst (CFA); College of Financial Planning, CFP
• Email – [email protected]
3
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
About DiMeo Schneider & Associates, L.L.C. Founded in 1995
• Based in Chicago, IL • $40 Billion + Assets Under Advisement • Conflict-Free Consulting
• 250+ Institutions • 200+ Wealthy Families
60 Professionals
•8 Partners •29 Investment Consultants •25+ Professionals Participate in Research Efforts •Numerous CFA Charterholders, CIMAs, and CFPs •10 Member Investment Committee
4
Large Enough to Serve, Small Enough to Care
4 As of December 31, 2012
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Firm Recognition and Expertise
Top 40 Worldwide Consultants – Pension & Investment Special Report**
Top 10 Endowment/Foundation Consultants – Plan Sponsor Magazine*
Top 20 Fastest-Growing Registered Investment Advisors – Forbes***
*Top 10 Consultants by number of reported endowment/foundation consulting clients 2010 **Top 40 Consultants ranked by worldwide, institutional tax-exempt advisory assets under advisement as of November 2012 *** Top 20 Registered Investment Advisors in 2011, ranked by the most assets added since 2008
Client Survey Results (excerpt)
•95% of respondents believe we provide exceptional value for the fees we charge •98% rank the firm as above average/superior •98% of clients would recommend our services Details of 2012 survey available upon request
New Book!
5
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
6
Representative Client List
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Investment Risks
7
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Investment Risk – Rising Rates
• Are we in a bond bubble?
• Perhaps, but let’s take a closer look at how bonds
react in rising rate environments…
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Rates Periodically Rise…
Dec 76
Oct 82
Oct 86
Oct 92 Oct 98
Jan 04
May 81
Aug 84
Mar 89Feb 95 Nov 00
Feb 07
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Yiel
d
Date
Interest Rate History (Jan 1976 - May 2012)
3 Month T-Bill5-Year Treasury10-Year TreasuryBeginning PeriodEnding Period
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
…With Surprisingly Positive Results
Dec 76 - May 81 Oct 82 - Aug 84 Oct 86 - Mar 89 Oct 92 - Feb 95 Oct 98 - Nov 00 Jan 04 - Feb 07Price Impact -7.6% -0.4% -3.0% -2.1% -2.7% -1.0%Yield Impact 10.2% 12.3% 9.2% 6.9% 6.9% 5.1%Net Impact 2.6% 11.9% 6.2% 4.8% 4.2% 4.1%
10.2% 12.3%
9.2%6.9% 6.9%
5.1%
-7.6%
-0.4% -3.0% -2.1% -2.7%-1.0%
-10%
-5%
0%
5%
10%
15%
Ann
ualiz
ed T
otal
Ret
urn
Price Impact on Barclays Aggregate Bond Returns(assumes monthly coupon reinvestment in the index)
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Investment Risk – Tracking Error
• Common belief is high tracking error is bad
• Not necessarily, though we need to help clients understand
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Category Number of funds
with 10-year records1,2
Number of 10 year top quartile funds
Number of 10 year top quartile funds
below median for a 3-year period
Percent of 10 year top quartile funds
below median for a 3-year period
Median consecutive years spent in bottom half
Percent of 10 year top quartile funds
below median for a 5-year period
Intermediate Bond 238 60 51 85% 1.00 60% High Yield Bond 94 24 21 88% 1.00 67% International Bond 186 47 41 87% 1.25 45% Large Cap Value 204 51 48 94% 1.50 65% Large Cap Core 334 83 78 94% 1.00 61% Large Cap Growth 716 179 159 89% 1.25 74% Mid Cap Value 52 13 12 92% 1.00 69% Mid Cap Core 95 24 21 88% 1.25 63% Mid Cap Growth 158 40 38 95% 0.75 63% Small Cap Value 63 16 16 100% 1.13 63% Small Cap Core 133 33 29 88% 1.00 61% Small Cap Growth 154 39 36 92% 1.25 59% Real Estate 51 13 10 77% 0.50 31% International Value 67 17 17 100% 1.00 76% International Core 203 51 45 88% 0.75 49% International Growth 42 11 11 100% 0.75 55% Emerging Markets 64 16 13 81% 1.25 50%
Total 2854 717 646 Weighted Average 90% 1.00 63%
Good Managers Can (& Will!) Look Bad 10-year top quartile funds1,2 (ending December 31, 2011) that fell below median during one or more 3- and 5-year periods
[1]Distinct Portfolio Only: Many fund families offer multiple versions of the same fund, but with variations on the fees that are charged and investor qualifications. The "distinct portfolio only" feature removes all duplicate options. Morningstar normally designates the oldest share class as the distinct portfolio. [1]Morningstar mutual fund data was used as it is less prone to biases compared to other databases. While the Morningstar data is not immune to survivorship bias, each mutual fund that survived the ten-year stretch was captured regardless of performance. In addition, the Morningstar data generates returns net of expenses.
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Is Indexing the Easy Solution?
• OK – So just index!
• Not so fast…
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Indexing Isn’t a “No-Brainer”!
Category 10 year index return
10 year index peer group rank
Median fund return
Median fund alpha
Top quartile fund return
Top quartile fund alpha
Intermediate Bond 5.8% 32% 5.4% -0.3% 5.9% 0.1% High Yield Bond 8.7% 8% 5.4% -3.3% 6.1% -2.5% International Bond 8.4% 15% 6.8% -1.6% 7.9% -0.5% Large Cap Value 3.9% 41% 3.5% -0.4% 4.5% 0.6% Large Cap Core 2.9% 41% 2.8% -0.2% 3.5% 0.6% Large Cap Growth 2.6% 44% 2.3% -0.3% 3.4% 0.8% Mid Cap Value 7.7% 16% 6.1% -1.6% 7.3% -0.4% Mid Cap Core 7.0% 13% 5.6% -1.3% 6.6% -0.4% Mid Cap Growth 5.3% 42% 4.6% -0.7% 6.3% 1.0% Small Cap Value 6.4% 61% 7.2% 0.8% 8.3% 1.9% Small Cap Core 5.6% 56% 6.0% 0.3% 7.4% 1.7% Small Cap Growth 4.5% 55% 4.7% 0.2% 6.1% 1.7% Real Estate 10.2% 32% 9.6% -0.6% 10.7% 0.5% International Value 5.0% 54% 5.2% 0.2% 6.8% 1.8% International Core 4.7% 33% 4.1% -0.5% 5.0% 0.4%
International Growth 4.3% 67% 5.7% 1.4% 7.0% 2.7% Emerging Markets 13.9% 37% 12.9% -0.9% 14.7% 0.9%
Index[1] returns compared to median and top quartile funds (10 years ending December 31, 2011)
Owning an index fund ≠ owning the index! [1] Indices: Barclays Aggregate Bond, Citigroup High Yield, Citigroup Non U.S. WGBI, Russell 1000 Value, S&P 500, Russell 1000 Growth, Russell Mid Cap Value, Russell Mid Cap, Russell Mid Cap Growth, Russell 2000 Value, Russell 2000, Russell 2000 Growth, Dow Jones Wilshire RESI, Citigroup PMI Value World ex U.S. , MSCI EAFE, Citigroup PMI Growth World ex U.S. , MSCI Emerging Markets.
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
For Internal Use Only.
Range and average 3-year index6 peer group ranking for each asset class (Rolling three-year periods between January 1, 2002 and December 31, 2011
[1] Indices: Barclays Aggregate Bond, Citigroup High Yield, Citigroup Non U.S. WGBI, Russell 1000 Value, S&P 500, Russell 1000 Growth, Russell Mid Cap Value, Russell Mid Cap, Russell Mid Cap Growth, Russell 2000 Value, Russell 2000, Russell 2000 Growth, Dow Jones Wilshire RESI, Citigroup PMI Value World ex U.S. , MSCI EAFE, Citigroup PMI Growth World ex U.S. , MSCI Emerging Markets.
Where Does Indexing Make Sense?
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Investment Risk – False Diversification
• “Diversification is dead”
• “2008 proved diversification doesn’t work”
• Are the skeptics right?
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Large Cap Core Equity55%Domestic Core
Fixed Income30%
International Equity15%
Generic Diversification
Volatility Reduction Through Diversification
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Large Cap Core Equity
14%
Domestic Core Fixed Income
12%
Fund of HedgeFunds10%
InternationalEquity
9%U.S. TIPS8%
Foreign Developed
Bonds8%
Commodities8%
High YieldBonds
7%
Real Estate6%
Emerging Market Debt5%
Master Limited Partnerships
5%
Small CapCore Equity
4%
Emerging MarketsEquity
4%
Frontier Engineer™ Diversified Portfolio
Cumulative Return (Jan '96 - Jun '12) 191.6%Annualized Return 6.7%Annualized Standard Deviation 11.2%Sharpe Ratio 0.33
Cumulative Return (Jan '96 - Jun '12) 247.4%Annualized Return 7.8%Annualized Standard Deviation 9.0%Sharpe Ratio 0.54
Outcomes of modeling will vary with each use and over time and may not take the entire universe of available investments into consideration. IMPORTANT: The projections or other information generated by Frontier Engineer regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results
Past performance is no guarantee of future results. For illustrative purposes only. Not to be construed as a recommendation.
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
What Have You Done for Me Lately?
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Traditional Model Frontier Engineer Model
Last Ten Years:
Last Five Years:
vs.
Volatility Reduction: 1.4% per year
Volatility Reduction: 1.2% per year
Return Enhancement: 2.2% per year
Return Enhancement: 1.8% per year
Cumulative Return (Jul '02 - Jun '12) 78.5%Annualized Return 6.0%Annualized Standard Deviation 11.4%Sharpe Ratio 0.37
Cumulative Return (Jul '02 - Jun '12) 119.3%Annualized Return 8.2%Annualized Standard Deviation 10.0%Sharpe Ratio 0.64
Cumulative Return (Jul '07 - Jun '12) 9.8%Annualized Return 1.9%Annualized Standard Deviation 14.0%Sharpe Ratio 0.07
Cumulative Return (Jul '07 - Jun '12) 19.9%Annualized Return 3.7%Annualized Standard Deviation 12.8%Sharpe Ratio 0.22
Past performance is no guarantee of future results. For illustrative purposes only. Not to be construed as a recommendation.
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Investment Risk – “Madoff” • Traditional manager research is easy…or is it?
Securities lending during 2008 crisis Artio Global
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Due Diligence Can Prevent Being Fooled!
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Due Diligence More Crucial with Alternatives
Prime Brokers Counterparty Risk Disaster Recovery Key Man Provisions Liquidity Terms Legal Counsel
Ownership Structure Risk Management Back Office Cash Management Auditors NAV Calculation
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Practice Management/Business Risks
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
RISK: Not Growing Your Practice
Growth is Not Optional in a People Business
• Recruit • Retain
• Reward
• Stimulate
• Promote
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And it’s just more fun!
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
RISK: Bogged Down by Your Practice
1. Where do you add value?
2. What are your energy zappers?
3. What are your energy creators?
4. Do you regularly invest time working on, rather than in, your business?
24
What pressure points can you relieve today, this month, this year?
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Stop Being Bogged Down by Your Practice
1. Staffing – time for an Executive Assistant, COO???
2. Research – can you truly add value?
3. Structure – partners (actual or strategic)
4. Mindset – think BIG Extrapolate growth and factor into decisions • Hire • Train • Manage • Procure
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
RISK: Ignoring Business You Can Land
All of us know corporate CFOs or sit on nonprofit boards/committees.
Recurring revenues for life of relationship!
26
High Net-Worth: Advisor introduces $300 million private client Nonprofit: Advisor introduces $15 million religious institution Retirement Plan: Advisor introduces $100 million 401(k) plan
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Add Revenues!
Under $10mm Solution - Streamlined: Disciplined Portfolio Advisor™
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
28
Disciplined Portfolio Advisor™
Disciplined Portfolio Advisor™
Institutional-Quality Management -Proprietary Asset Allocation and Portfolio Rebalancing Methodology -Depth & Breadth in Manager Research and Selection -Objective & Conflict-Free Investment Consulting for over 15 years
Broadly Diversified Portfolios -12 distinct asset classes (traditional, non-traditional, and alternatives) focusing on risk management -Efficient blend of active and passive (index) managers -“Best of Breed” multiple money manager approach – no proprietary investments/products
Model Line-up Characteristics
-10 Models (5 taxable and 5 tax exempt) across an array of risk/return objectives -Combination of Institutional share class mutual funds and low-cost ETFs -Extremely competitive fee structure -Access to premier fund managers at low minimums
Resources and Communication for You
-Quarterly conference calls address portfolios, economic issues, and future strategy -Portfolio ‘Fact Sheets’ and DPA Guide detailing portfolio metrics, performance, allocations, and fees -Flash Memos and Client Conferences
Disciplined Portfolio
Advisor™
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
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Add Revenues!
Over $10mm Solution - Customized: High Net Worth Solution
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
30
Comprehensive & Customized
Our Approach Combines:
Investment Expertise…
Client
CPA
Estate Attorney
Insurance
Investment
… with Wealth Management
IPS
Manager Research
Asset Allocation
Alternatives
DiMeo Schneider & Associates, LLC. does not provide tax or legal advice.
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Meaningful Recurring Revenue
Annual Aggregate
DSA Referral Referral
YE New Assets AUM @ YE Gross Fees Revenues Revenues
1 $ 50,000,000 $ 50,755,013 $ 157,820 $ 47,346 $ 47,346
2 $ 50,000,000 $ 103,570,882 $ 418,004 $ 125,401 $ 172,747
3 $ 50,000,000 $ 158,531,288 $ 688,751 $ 180,991 $ 353,738
4 $ 50,000,000 $ 215,723,306 $ 970,492 $ 223,252 $ 576,990
5 $ 50,000,000 $ 275,237,550 $ 1,263,673 $ 267,229 $ 844,219
6 $ 50,000,000 $ 337,168,311 $ 1,568,759 $ 312,992 $ 1,157,211
7 $ 50,000,000 $ 401,613,709 $ 1,886,231 $ 360,613 $ 1,517,824
8 $ 50,000,000 $ 468,675,848 $ 2,216,595 $ 410,167 $ 1,927,991
9 $ 50,000,000 $ 538,460,979 $ 2,560,373 $ 461,734 $ 2,389,726
10 $ 50,000,000 $ 611,079,667 $ 2,918,109 $ 515,395 $ 2,905,120
$ 500,000,000 $ 14,648,808 $ 2,905,120
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500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Risk Redefined?
32
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
33
Our Challenge to You
• What is Risk? • Volatility….that’s NOT risk!
• The risk is how you react!
Magnitude of Decline Average Frequency -5% or more 3X/year
-10% or more 1X/year -15% or more 1X every 2 yrs -20% or more 1X every 3.5 yrs
Source: The unmanaged Dow Jones Industrial Average 1 Assumes 50% recovery of lost value Past results are not predictive of results in future periods.
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
34
Remember: There is Always a Crisis 1/5/11: Republicans assume control of the House of Representatives
1/14/11: Arab Spring begins as riots collapse Tunisia’s government
2/22/11: Fighting rages in Libya and Moammar Gadhafi refuses to resign
3/11/11: 9.0 magnitude earthquake strikes Japan and causes deadly tsunami
5/1/11: U.S. Special Forces kill Osama Bin Laden
7/31/11: After coming within hours of a technical default on U.S. Treasuries, Congress and the President reach a deal on raising the U.S. debt ceiling
S&P 500 Index: 2011 Performance
8/6/11: Standard & Poors downgrades U.S. Treasury debt to AA+ from AAA
9/17/11: ‘Occupy Wall Street’ protests begin in Manhattan, NY
10/5/11: Apple, Inc., founder Steve Jobs dies
10/27/11: European leaders agree to a framework for a coordinated Greek bailout
11/30/11: Global Central Banks announce coordinated efforts to relieve funding pressures in Europe
Source: www.yahoo.com/finance
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Thank You & Next Steps
More Information: Bob DiMeo – [email protected] Adam Newell – [email protected] Kevin Koykar – [email protected]
35
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Appendix –Index Definitions
36
Cash - Citigroup 90 Day T-Bill TIPS - Barclays US Treasury TIPS Aggregate Bond - Barclays US Aggregate Bond Index; High Yield – Citigroup High Yield Foreign Bond - Citigroup WGBI (Non-US) Emerging Debt - JPMorgan GBI-EM Global Diversified Unhedged Index Large Value - Russell 1000 Value Large Core - S&P 500 Large Growth - Russell 1000 Growth Small Value - Russell 2000 Value Small Core - Russell 2000 Small Growth - Russell 2000 Growth International - MSCI EAFE Emerging Markets - MSCI EM REITs - FTSE NAREIT Equity REITs Commodities - DJ UBS Commodity MLP - Alerian MLP Balanced - 30% Barclays US Aggregate Bond Index, 35% S&P 500, 15% Russell 2000, 15% MSCI EAFE, 5% FTSE NAREIT Equity REITs
500 West Madison Street, Suite 1700 | Chicago, IL 60661 | 312.853.1000
Disclosure
37
This presentation is intended to provide general information and does not purport to make any recommendations regarding your particular investment objectives, financial situation, or specific needs. Prior to making any investment decision, you should assess or seek advice on whether any part of this presentation is appropriate to your individual financial circumstances and investment objectives. DiMeo Schneider & Associates, L.L.C. does not provide legal or tax advice. The information in the presentation is deemed reliable but DiMeo Schneider & Associates, L.L.C. does not guarantee its accuracy.
2013 NFP STRATEGY SUMMIT INTERNAL USE ONLY. Not for public distribution.
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