CONCENTRATED POSITIONS

Transcription

1 NORTHCOAST ASSET MANAGEMENT CONCENTRATED POSITIONS Private Client Advisor

2 N ORTHC OAST A SSET M ANAGEMENT An established leader in the field of quantitative investment management, specializing in proprietary research and constructing institutional-caliber portfolios designed for the individual investor. E XPERIENCE Founded in 1988 $1.7 + billion in AUM (as of 9/30/2017) S TABILITY Proprietary, quantitative, and tactical investment management Legacy of preserving capital during the bear markets of and 2008 P ERFORMANCE Long-term portfolio performance Exclusive Agreement with Investor s Business Daily ETF Partnership with BlackRock ishares Recognized as a Financial Times Top 300 Registered Investment Adviser (2014, 2015) 2

3 N ORTHC OAST F IRM V ALUES S YSTEMATIC I NVESTMENT P ROCESS Daily quantitative research Active portfolio construction & security selection Disciplined, rules-based risk controls D YNAMIC R ESEARCH T EAM 7 member Investment Committee - expertise in quantitative research Career experience with Research Affiliates, Pyramis, and Numeric Certified designations include CFA, FRM, MBA, MS with concentrations in computer science, engineering, statistics, and computational finance I NSTITUTIONAL I NFRASTRUCTURE 30 Professionals (including Portfolio Management, Research, Trading, Investor Relations, Operations, & Compliance) Manage 19 separate account strategies across multiple asset classes Access to institutional quality options trading 3

4 N ORTHC OAST P ORTFOLIO M ANAGEMENT Institutional skill set in global tactical asset allocation and security selection Patrick Jamin CFA, FRM Chief Investment Officer Julia Zhu CFA, FRM SVP Market & Security Research Yaqiu Li SVP Portfolio Construction Slava Malkin Senior Vice President Jason Krugly Vice President Sumanth Amarchinta Vice President Partner, Numeric Investors (European / World Fundamental Statistical Arbitrage) Partner, Portfolio Manager, Standard Pacific Capital; Global Long/Short Equity Fund Senior Quantitative Analyst, Invesco; Global Quantitative Fund M.B.A., Harvard Business School, Baker Scholar, Arthur Sachs Scholar M.S. Telecommunications, Ecole Nationale Superieuredes Telecommunications de Paris Ingenieur de I Ecole Polytechnique, Ecole Polytechnique Vice President, Research Affiliates - Quantitative research; equities and asset allocation Associate, First Quadrant Conducted research on GTAA and tactical currency allocation Master of Economics, Yale University, PhD Candidate M.B.A. with concentration in Finance, University of Southern California Climate Modeling National Key Lab of Atmospheric Science, Chinese Academy of Sciences M.S. Quantitative and Computational Finance & M.S. in Statistics, Georgia Tech PhD Candidate CFA Level III Candidate Quantitative currency trading strategies BNP Paribas Portfolio Manager of global macro strategies Research in Global Tactical Asset Allocation strategies Deutsche Asset Management M.S. in Statistics, Harvard University Research experience with Bank of America, Merrill Lynch, Credit Suisse, Deutsche Bank M.S. in Financial Engineering, Baruch College B.S. & M.S. in Computer Science, Polytechnic Institute of New York University Senior Investment Analyst, Pyramis Global Advisors - Quantitative research M.S. in Computer Engineering, Rochester Institute of Technology B.S. in Electrical Engineering, Roorkee Indian Institute of Technology 4 4

5 C ONCENTRATED P OSITIONS O VERVIEW Even if you re on the right track, you ll get run over if you just sit there. - Will Rogers NorthCoast offers institutional-caliber customized portfolio solutions for the individual investor - investors with a large portion of their assets in one stock need to assess the following: Why work with NorthCoast? Potential downfall of staying concentrated and benefits of diversification Roadblocks Solutions 5

6 W HY U S? NorthCoast s experienced portfolio management team analyzes and utilizes a variety of research data, service providers and sub-advisors to best manage a concentrated portfolio. Accessible Timely Comprehensive Active Qualified Strategies previously only available to ultra high net worth clients (>$5MM) Real time monitoring of options markets Option spread optimization Active management of derivatives portfolios Institutional quality market access Please see additional disclosure information at the end of this document regarding the services utilized for this strategy. 6

7 R ISK & RETURN C ONSIDERATIONS Risk Improvements Punishing losses less likely Likely to reduce portfolio volatility in normal market conditions Return Improvements Diversification may increase expected return Investors can capitalize on the benefits of asset allocation and rebalancing Hedging Concentration yields a better range of outcomes Concentrated stock Broad-based index Reduce downside risk Maintain upside potential Concentrated stocks can carry twice as much downside risk as upside benefit when compared to broad benchmarks Source: NorthCoast. Stylized example based on a hypothetical index of 15% volatility, and a stock of 25% volatility, assuming normal distribution of returns. Please see additional disclosure information at the end of the document. Key question: If you had this wealth in your bank account, would you invest it all in a single stock? 7

8 R OADBLOCKS Behavioral biases lead to suboptimal decision making Loss aversion Familiarity Anchoring Overconfidence Unrealistic Expectations Tax consequences encourage procrastination Tax Deferral Income or Capital Gains Pre-Tax Compounding Regulations restrict options SEC Restrictions Employer Restrictions Vesting 8

9 S OLUTIONS Y IELD E NHANCEMENT PROBLEM: Clients want to begin to liquidate their position, but because of low cost basis they are reluctant due to tax ramifications. SOLUTION: Systematically selling calls against the concentrated position generates additional yield, reduces beta, and enables selling with tax efficiency. Dividends continue to accrue. Hypothetical Covered Call Overlay 20% 15% Stock Covered Call Strategy Portfolio Performance 10% 5% 0% -5% -10% -15% -20% -20% -18% -16% -14% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Stock Performance Covered Call Strategy Annualized Yield: 9.4% Beta reduced by 44% Source: SpiderRock The chart above is for informational purposes only and represents an illustrative overlay strategy. Please see additional disclosure at the end of this document. 9

10 S OLUTIONS D OWNSIDE H EDGING PROBLEM: Client is nervous about equity market conditions, but does not want to liquidate due to tax ramifications. SOLUTION: Hedge the downside by selling call options and buying protective puts at No-Cost. Systematically liquidate using option premiums to pay taxes. Hypothetical 'No-Cost' Collar Overlay 20% 15% Stock 'No-Cost' Collar Strategy Portfolio Performance 10% 5% 0% -5% -10% -15% No-Cost Collar Strategy Annualized Yield: 2.7% Beta reduced by 67% -20% -20% -18% -16% -14% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Source: SpiderRock Stock Performance The chart above is for informational purposes only and represents an illustrative overlay strategy. Please see additional disclosure at the end of this document. 10

11 C ONCLUSION Behavioral biases can be overcome with education, but taxes and regulations are bigger roadblocks facing concentrated positions. NorthCoast offers solutions to overcome these hurdles by seeking to achieve the following outcomes: Protect the value of concentrated positions Work harmoniously with restrictions Keep tax-efficiency in mind, pay taxes with option premiums Convert progressively to usable cash Diversify the position into a basket of securities To move forward, please contact your NorthCoast Advisor at or privateclientadvisors@northcoastam.com 11

12 Appendix 12

13 I MPORTANT D ISCLOSURE I NFORMATION The information contained herein has been prepared by NorthCoast Asset Management LLC ("NorthCoast") on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. NorthCoast has not sought to independently verify information obtained from public and third party sources and makes no representations or warranties as to accuracy, completeness or reliability of such information. All opinions and views constitute judgments as of the date of writing without regard to the date on which the reader may receive or access the information, and are subject to change at any time without notice and with no obligation to update. This material is for informational and illustrative purposes only and is intended solely for the information of those to whom it is distributed by NorthCoast. No part of this material may be reproduced or retransmitted in any manner without the prior written permission of NorthCoast. NorthCoast does not represent, warrant or guarantee that this information is suitable for any investment purpose and it should not be used as a basis for investment decisions. PAST PERFORMANCE DOES NOT GUARANTEE OR INDICATE FUTURE RESULTS. This material should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or investment products or to adopt any investment strategy. The reader should not assume that any investments in companies, securities, sectors, strategies and/or markets identified or described herein were or will be profitable and no representation is made that any investor will or is likely to achieve results comparable to those shown or will make any profit or will be able to avoid incurring substantial losses. Performance differences for certain investors may occur due to various factors, including timing of investment. Investment return will fluctuate and may be volatile, especially over short time horizons. INVESTING ENTAILS RISKS, INCLUDING POSSIBLE LOSS OF SOME OR ALLOF THE INVESTOR'S PRINCIPAL. The investment views and market opinions/analyses expressed herein may not reflect those of NorthCoast as a whole and different views may be expressed based on different investment styles, objectives, views or philosophies. To the extent that these materials contain statements about the future, such statements are forward looking and subject to a number of risks and uncertainties. 13

14 I MPORTANT D ISCLOSURE I NFORMATION The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. All advisory services are offered by NorthCoast Asset Management LLC and SpiderRock Advisors, LLC both SEC Registered Investment Advisors. NorthCoast Asset Management partners with SpiderRock Advisors, a firm focused exclusively on options trading, to manage option overlay portfolios for clients. SpiderRock Advisors utilizes proprietary options trading technology. SpiderRock Advisors, through its parent company, SpiderRock Holdings offers institutional quality trading technology and trades nearly 5% of all daily listed options volume in the United States with partners such as Fidelity, JP MorganChase, Goldman Sachs and others. Options involve risk and are not suitable for all investors. Please refer to Characteristics and Risks of Standardized Options ( and the SpiderRock Advisors ADV, which includes specific Risk Statements and Disclosures, Privacy Policy, and Terms & Conditions, copies of which can also be obtained by contacting NorthCoast, or online via 'Covered Call : A covered call is an options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. Costless Collar (Zero-Cost Collar) no cost Collar: The costless collar, or zero-cost collar, is established by buying a protective put while writing an out-of-the-money covered call with a strike price at which the premium received is equal to the premium of the protective put purchased. 14

15 I MPORTANT D ISCLOSURE I NFORMATION Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact there are frequently sharp differences between hypothetical performance results and actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, all of which can adversely affect actual trading results. The statements contained herein are based upon certain expectations and assumptions of SpiderRock and NorthCoast, that existed at the time of preparation, of which many are beyond their control. These are subject to a number of risks, uncertainties and factors, including, but not limited to those described in the respective disclosure documents. Should one or more of these risks or uncertainties materialize, or should underlying expectations not occur or assumptions prove incorrect, actual results, performance or achievements of NorthCoast or SpiderRock may vary materially from those described explicitly or implicitly. No representation is made that these statements reflect current market conditions. 15