Portfolio Transition Plan October 2015

Transcription

1 ab Portfolio Transition Plan October

2 Summary of Recommendations Objective: Reduce portfolio fees by utilizing low-cost index investments while maintaining an emphasis on downside risk management. The changes to the portfolio include: Replace the Market Vectors Emerging Markets Bond ETF with the DoubleLine Emerging Markets Income Fund to mitigate currency volatility and better manage the complex risk characteristics of emerging market debt. Replace most active equity strategies (34% of the portfolio) with low-cost ETFs, that offer exposure to factors or investment styles that are proven long-term sources of excess return. These factors include momentum, value, and low-volatility. Mitigate the impact that large currency movements may have on international investments through a dollar-hedged equity ETF. Fee Comparison Estimate¹: Total Portfolio Fees (%) Total Portfolio Fees ($) Current Portfolio 1.25% $99,850 Proposed Portfolio 1.05% $84,270 Please see the following pages for additional information. ¹Fee comparison estimate is based on the current and proposed target allocations and the total portfolio market value as of October 8,

3 Traditional Equity Mutual Funds Stumble: Is This A Trend? A large percentage of active managers failed to beat the S&P 500 in recent years Summary: Active Equity managers have underperformed their respective indices over the last few years 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage of Large Cap Managers Behind Their Benchmark (S&P500) 61.83% 81.28% 63.25% Trailing Returns vs. the S&P % 86.44% The re-emergence of a high participation rate of underperforming equity managers is noteworthy 5-Years 13.37% 15.45% Average US Large Cap Fund S&P500 3-Years 18.43% 20.41% 1-Year 10.50% 13.69% 0% 5% 10% 15% 20% 25% Data Source: S&P SPIVA U.S. Scorecard. Prepared by The Sardana Group. Past performance does not guarantee future results. 3

4 Exchange Traded Fund (ETF) Growth has been Explosive Assets in billion U.S. dollars , , , , , , Data Source: Deutsche Bank prepared by: The Sardana Group, UBS Institutional Consulting. 4

5 Newer Indexes not as "Passive" as their Predecessors ETF Revolution allows more targeted exposure to a wider index universe Market cap weighted Most common way to index Weightings within the ETF are determined by each company's market capitalization Minimal trading from the fund company is needed to manage the ETF Typically have the lowest cost Disadvantage: More weight is given to companies that may be the most over-valued Fundamentally weighted The weight of each holding is determined by "fundamental" factors such as a company's profits, dividends, book value, cash flow, or sales Fundamental weightings can lead to higher performance in comparison to market weighted ETFs, most notably if markets ultimately correct an imbalance to over-valued securities Since the ETF typically trades more (higher turnover), expenses can be higher Equal weighted Weightings within the ETF are done equally Generally allocates a higher percentage to smaller capitalization companies Higher frequency of trading to maintain equal weightings Expenses can be higher based on the level of trading required Minimum Volatility Currency Hedged Newer investment product that offers less volatile (standard deviation) investment returns The holdings of each ETF are screened based upon each companies historical volatility These products typically benefit investors during down markets However, they tend to sacrifice returns during upward trending markets Expense of ownership tends to fall between that of market and fundamentally weighted ETFs Newer investment product that offers a reduction in exposure to the effects of currency translation The holdings of each ETF are identical to that of the underlying index These products typically benefit investors during down markets These products offer a "directional" call on the currency through the use of forwards/futures Expense of ownership tends to be higher Past performance is no guarantee of future results. 5

6 Indexing Has To Be Done Carefully Because Not All ETFs are Created Equal Bottom Line: The recent introduction of low-cost intelligent index funds means organizations are no longer only limited to market-cap weighted indices. Since 2006, the fundamental- and equal-weighted ETFs significantly outperformed their market-cap weighted counterparts, net of fees. Exchange-Traded Fund (ETF) Factor Weighting Expense Ratio (%) Average Annual Performance (%) SPDR S&P 500 ETF Market-Cap 0.09% 7.33% PowerShares FTSE RAFI 1000 ETF Fundamental 0.39% 8.16% Guggenheim S&P 500 Equal Weight ETF Equal 0.40% 8.26% ishares MSCI USA Min. Vol. ETF Minimum Volatility 0.15% 6.95% Data Source: Informa Investment Solutions & Morningstar; Prepared by: The Sardana Group, UBS Institutional Consulting. Past performance is no guarantee of future results. 6

7 EAFE Currency Risk Mitigation Onset of Market Volatility Trend Reversal? Data Source: Morningstar as of 6/30/15. Source: Deutsche Bank. Date is indexed to 100 on 12/31/2013. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. It is not possible to invest directly in an index. Please review the attached fact sheet for more details. Past performance does not guarantee future results. 7

8 Portfolio Transition Replace Active Equity Managers with Indexed ETFs Asset Class / Investment Manager Current Target Allocation (%) Target Allocation (%) Cash 0.00% 0.00% Fixed Income 30.00% 30.00% Reinhart Intermediate Bond 8.00% 8.00% Bradford & Marzec Core Plus 7.00% 7.00% Dolan Capital Management 7.00% 7.00% Oppenheimer Senior Floating Rate Bond Fund 5.00% 5.00% Market Vectors Emerging Markets Bond ETF 3.00% 0.00% DoubleLine Emerging Markets Income Fund 0.00% 3.00% Equity 56.00% 56.00% NorthCoast All Cap Growth 13.00% 8.00% Stadion 10.00% 0.00% NFJ Dividend Value 5.00% 0.00% Horizon Research 5.00% 0.00% WHV International 6.00% 0.00% First Eagle 4.00% 0.00% Delaware Emerging Markets Fund 1.50% 0.00% Oppenheimer Developing Markets Fund 1.50% 0.00% RS Emerging Markets Fund 1.00% 0.00% ishares MSCI USA Minimum Volatility ETF 0.00% 7.00% PowerShares FTSE RAFI 1000 ETF 0.00% 7.00% PowerShares FTSE RAFI 1500 SMID ETF 0.00% 3.00% Deutsche MSCI EAFE Hedged Equity ETF 0.00% 7.00% ishares Core MSCI EAFE ETF 0.00% 7.00% ishares MSCI EAFE Min. Vol. ETF 0.00% 7.00% ishares Emerging Markets Min. Vol. ETF 0.00% 4.00% Global Demographics 6.00% 3.00% High Income Strategies 3.00% 3.00% Alternative Strategies 14.00% 14.00% Eaton Vance Gbl Macro Absolute Return Fund 4.00% 4.00% PIMCO All Asset All Authority Fund 4.00% 4.00% John Hancock Global Absolute Return Fund 2.50% 2.50% Wells Fargo Absolute Return Fund 2.50% 2.50% Cohen & Steers Internal Realty Fund 1.00% 1.00% Total % % 8

9 Portfolio Back-Test Trailing Returns as of June 30, 2015 The data above is obtained from Informa PSN. Returns are net of fees. Past performance does not guarantee future results. 9

10 Portfolio Back-Test Calendar Year Returns: The data above is obtained from Informa PSN. Returns are net of fees. Past performance does not guarantee future results. 10

11 Portfolio Back-Test Risk Statistics: Ten Years through June 30,2015 The data above is obtained from Informa PSN. Returns are net of fees. Past performance does not guarantee future results. 11

12 Portfolio Back-Test Growth of $1,000: Ten Years through June 30, 2015 The data above is obtained from Informa PSN. Returns are net of fees. Past performance does not guarantee future results. 12

13 zc00006 [printed: ] [saved: ] Presentation1 Disclosures applicable to accounts at UBS Financial Services Inc. 13