A Disciplined Management Strategy for Investment & Portfolio Development. Presented By Retirees in Search of Tranquility Committee February 15, 2005

Transcription

1 A Disciplined Management Strategy for Investment & Portfolio Development Presented By Retirees in Search of Tranquility Committee February 15,

2 Committee Members Faisal A. Kaud, Chair Diane devos Donavan Klimpel Judith Hunter Dennis Kistner Reuben Lorenz Peter Monkmeyer Paul Reichel Donald Sprang 2

3 Faculty Advisors Professor Steven Hawk, Chair & CEO, Northern Capital Management, LLC, Madison, WI. Mr. Paul Perry, Principal, Northern Capital Management, LLC, Madison, WI. 3

4 Investment Philosophy A Disciplined Approach For Developing and Managing an Investment Portfolio This philosophy was inspired and guided by the presentation of Professor Hawk and Mr. Perry in November 2003 and January

5 Presentation Objectives Develop and Manage Three Hypothetical Investment Portfolios Designed for Educational Purposes Implement the Investment Guidelines Learned Share Experience with Seminar Attendees 5

6 Portfolios Objectives The Enterprising Investor Beat the Market The Intelligent Investor Emulate the Market The Leisurely Nap Investor Buy & Hold 6

7 Major Considerations in Building Three Portfolios A. Allocate Assets among Stocks, Bonds & Cash B. Diversify Stock Allocation by: 1. Market Cap: large, medium, small 2. Investment Style: value, blend, growth 3. Market Sectors: e.g. energy, tech, autos 4. Geography: e.g. international 7

8 Stock Diversification by Market Cap and Style Leisurely Nap VALUE BLEND GROWTH Vanguard Tax-Managed Gr & Inc LARGE # 101 M Tax-Managed Int'l A # 127 R K E MEDIUM T Vanguard C Tax-Managed Small Cap A SMALL # 116 P S T Y L E 8

9 Stock Diversification by Market Sectors Vanguard Funds Top Three Sectors (% of Stock) Financial HealthcareHardware Ind.Matls. Con.Svcs T.Stock Mkt Idx # 85 22% 13% 10% Tax-Mgd Gr. & Inc# % 14% 11% Tax-Mgd Sm Cap # % 17% 14% 9

10 Stock Diversification by Geography Regional Exposure Vanguard Funds UK/W Eur Japan Asia Ex-Ja L.Amer. Other T.Int'l Stock Idx # % 21% 13% 2% 2% Tax-Mgd Int'l # % 24% 7% 10

11 Stock Portfolio Characteristics Vanguard Funds Rtn/Cat Std Dev Beta Risk/Cat P/E T.Stock Mkt Idx # 85 Above Avg Avg 17.4 Tax-Mgd Gr. & Inc# 101 Avg Avg 17.4 Tax-Mgd Sm Cap # 116 Avg Avg

12 Stock Portfolio Characteristics Vanguard Funds Holdings Turnover Mgr Ten/Yrs Index % T.Stock Mkt Idx # 85 3,358 9 Sauter 11.7 Wil.5000 Tax-Mgd Gr. & Inc# Sauter 9.3 S&P 500 Tax-Mgd Sm Cap # Sauter 4.8 Russ

13 Bond Diversification A. C) Diversify bond allocation by: 1. Duration: short, intermediate, & long 2. Credit Quality: high, medium, & low 3. Market Sectors: e.g. municipal, treasuries, corporations 4. Geography: e.g. international 13

14 Bond Diversification by Duration & Credit Quality Leisurely Nap SHORT INTERMEDIATE LONG Vanguard Vanguard C H Ltd-term Inter-term R I tax-exempt # 31 tax-exempt # 42 E G 90% 91% D H I Vanguard Vanguard T M Ltd-term Inter-term E tax-exempt # 31 tax-exempt # 42 Q D 9% 8% U A Vanguard Vanguard L L Ltd-term Inter-term I O tax-exempt # 31 tax-exempt # 42 T W 1% 1% Y AVERAGE MATURITY 14

15 Bond Diversification by Duration & Credit Quality Vanguard Funds Credit Qlty US Govt High Medium Duration Years Interm-T.Bond Idx# 314 AA 44% 13% 43% 6 Interm-Tax Exempt # 42 AAA 91% 8% 4.7 Ltd-T.Tax Exempt # 31 AA 90% 2% 2.6 Infl-Pro Securities # 119 AAA 98% 2% 5.4 PIMCO Foreign Bond D AAA 92% 7%

16 Bond Portfolio Characteristics Vanguard Funds Rtn/Cat Std Dev Beta Risk/Cat Interm-T.Bond Idx# 314 High High Interm-Tax Exempt # 42 Above Avg Avg Ltd-T.Tax Exempt # 31 Above Avg Avg Infl-Pro Securities # 119 High High PIMCO Foreign Bond D Below Avg Low 16

17 Bond Portfolio Characteristics Vanguard Funds Turnover Mgr Ten/Yrs Index % Interm-T.Bond Idx# Volpert 9.9 Leh Intm Interm-Tax Exempt # Ryon 6.4 Leh Mu Ltd-T.Tax Exempt # Tynan 7 Leh Mu Infl-Pro Securities # Volpert 3.5 Leh Intm PIMCO Foreign Bond D 114 Mariappa 3.1 Leh Agg B 17

18 Market Timing Market Timing was considered but not exercised. 18

19 Stock Diversification by Market Cap & Style The Enterprising Investor STYLE Selected American Shares TR Price Equity Income 10% American Funds EuroPacific Gr ABN AMRO/Montag & Caldwell Gr Large 15% 5% 10% 45% Julius Baer Int'l Equity 5% Brandywine 5% MARKET Vanguard Mid-Cap Index Vanguard Mid-Cap Growth Medium CAPITALIZATION 5% 5% 20% First Eagle Global A 5% Vanguard Small Cap Index 15% Tamarack Enterprise A 10% Small 25% Value 15% Blend 60% Growth 15% 19

20 The Enterprising Investor S&P 500 Major Sectors Style/ Mkt CapCost BasisMarket ValueGain/LossGain/Loss 1/2/ /31/2004 $ % Large-Cap 35% ABN AMRO/Montag&Caldwell Gr. Lge Gr $ 10,000 $ 10,453 $ % Selected American Shares Lge Bld $ 10,000 $ 11,217 $ 1, % T.Rowe Price Eq-Income Lge Value $ 15,000 $ 16,637 $ 1, % Mid-Cap Stock 15% Brandywine Mid-Cap Gr $ 5,000 $ 5,655 $ % Vanguard Mid-Cap. Growth Mid-Cap Gr $ 5,000 $ 5,561 $ % Vanguard Mid-Cap. Index Mid-Cap Bld $ 5,000 $ 6,038 $ 1, % 20

21 The Enterprising Investor Small Cap 25% 1/2/ /31/2004 $ % Vanguard Small Cap Index Sml Cap Bld $ 15,000 $ 17,891 $ 2, % Tamarack Enterprise A * Sml Cap Bld $ 10,000 $ 11,018 $ 1, % Foreign/International 15% American Funds EuroPacific Gr A Foreign Stk $ 5,000 $ 5,570 $ % First Eagle Global A World $ 5,000 $ 5,571 $ % Julius Baer Int'l Equity Foreign Stk $ 5,000 $ 5,991 $ % Total Stock Investment 90% $ 90,000 $ 101,602 $ 11, % 21

22 The Enterprising Investor Style/Mkt CapCost Basis Mkt Value Gain/LossGain/Loss Bonds 10% 1/2/ /31/2004 $ % Vanguard S.Term Bd Idx Hi-Qlty - M 2.4 $ 10,000 $ 10,199 $ % Total Bond Investments 10% $ 10,000 $ 10,199 $ % Grand Total 100% $ 100,000 $ 111,801 $ 11, % 22

23 Stock Diversification by Market Cap and Style The Intelligent Investor VALUE BLEND GROWTH Vang. S&P 500 Idx. #40 L M Vang. Value Idx # 6 6% Vang. Gr Idx. #9 A A 10% Vang. Euro Stk Idx. #79 13% 35 % R R 3% G K Vang. Tot Int Stk Idx. #113 E E 3% T M C Vang. Mid Cap Idx. #859 4% E A 4% D P I S T Vang. Sm Cap Val Vang. Sm Cap Idx # 48 Vang. Sm Cap Gr M A Idx. #860 3% Idx, #861 13% A L. 3% 7% L L 13% 19% 20% TOT=52% STYLE 23

24 Bond Diversification by Duration & Credit Quality The Intelligent Investor SHORT INTERMEDIATE LONG Vang. Int-Tm Bd H Vang. Sh-Tm Bd Idx. # 314 C I Idx. # % R G 20% Vang, To Bd. Mkt. 48% E H Idx #84 D 18% I T M E Q D U A L L I O T W Y 20% 28% TOT=48% AVERAGE MATURITY 24

25 The Intelligent Investor Vanguard Index Funds Style/Mkt Cap Mkt Value Mkt Value Gain/LossGain/Loss 12/31/ /31/2004 $ % Growth 20% Growth Index #9 Large Growth $ 13,000 $ 13,936 $ % Small Cap Growth Idx #86Small Growth $ 7,000 $ 8,124 $ 1, % Blend 13% S&P 500 Index #40 Large Blend $ 6,000 $ 6,644 $ % Mid-Cap Index #859 Medium Blend $ 4,000 $ 4,814 $ % Small Cap Index #48 Small Blend $ 3,000 $ 3,596 $ % 25

26 The Intelligent Investor Vanguard Index FundsStyle/Mkt Cap Mkt Value Mkt Value Gain/LossGain/Loss 12/31/ /31/2004 $ % Value 13% Value Index # 6 Large Value $ 10,000 $ 11,529 $ 1, % Small Cap Value Idx #86Small Value $ 3,000 $ 3,707 $ % International 6% Euro Stock Index #79 Europ. Market $ 3,000 $ 3,626 $ % Total Int'l Stock Idx #113Int'l Market $ 3,000 $ 3,625 $ % Total Stock Investment 52% $ 52,000 $ 59,600 $ 7, % 26

27 The Intelligent Investor Vanguard Index FundStyle/Mkt Cap Mkt Value Mkt Value Gain/LossGain/Loss 12/31/ /31/2004 $ % Bond 48% Short Term Bd Idx #132Hi-Qlty Shrt-2.4 $ 20,000 $ 20,339 $ % Interm Term Bd Idx #31Hi-Qlty Inter-6.0 $ 10,000 $ 10,522 $ % Total Bd Mrkt Index #84Med Qlty Inter-3. $ 18,000 $ 18,763 $ % Total Bond Investmen 48% $ 48,000 $ 49,624 $ 1, % Total Portfolio 100% $ 100,000 $ 109,225 $ 9, % 27

28 Leisurely Nap Tax Sheltered Style/M.Cap Cost Basis Mkt Value Gain/Loss Gain/Loss Vanguard Funds 12/31/ /31/2004 $ % International - Growth Total Int'l Stock Idx # 113 Lge Int'l Gr $ 10,000 $ 12,084 $ 2, % Blend Total Stock Market Idx # 85 Lge Blend $ 40,000 $ 45,006 $ 5, % Bond Interm-Term Bond Idx #314 Hi Qlty Intm $ 30,000 $ 31,566 $ 1, % Infl-Prot Securities # 119 Hi Qlty Intm $ 10,000 $ 10,827 $ % Bond - Foreign PIMCO Foreign Bond D Hi Qlty Intm $ 10,000 $ 10,311 $ % Total $ 100,000 $ 109,794 $ 9, % 28

29 Leisurely Nap - Taxable Vanguard Funds Style/M.Cap Cost Basis Mkt Value Gain/Loss Gain/Loss 12/31/ /31/2004 International - Blend Tax-Mgd Int'l Stock # 127 Lge Int'l Bld $ 15,000 $ 18,033 $ 3, % Blend Tax-Mgd Gro & Inc # 101 Lge Blend $ 30,000 $ 33,250 $ 3, % Tax-Mgd Small-Cap # 116 Sml Blend $ 15,000 $ 18,425 $ 3, % Bond Interm-TermTax Exempt # 42 Hi Qlty Mu In $ 20,000 $ 20,648 $ % Ltd.Term-Tax Exempt # 31 Hi Qlty Mu Sh$ 20,000 $ 20,305 $ % Total $ 100,000 $ 110,661 $ 10, % 29

30 Risk vs. Investment Strategy Portfolio Enterprising Intelligent Leisurely Nap ---Taxable ---Tax Sheltered Volatility S&P Investment Strategy Balanced Conservative Conservative Conservative Conservative 30

31 Portfolios & Major Idx Returns Portfolios Return % Enterprising 11.8 Intelligent 9.2 Leisurely Nap - Tax Shelter. 9.8 Leisurely Nap - Tax Mgd 10.7 Major Indexes DJIA 3.2 S & P Russell Wilshire Leh.Bros Aggr.Bond 4.3 Leh.Bros Muni Bond 4.7 MSCI EAFE

32 Risk/Return Information RiskGrades Web Site a standardized measure of volatility of an asset relative to a basket of global equities. measures RiskGrade of individual assets & calculates RiskGrade values(returns) for a group of assets held as a portfolio as well as Vanguard S&P idx fund. Returns are for past 12 months. 32

33 Risk/Return Information RiskGrades Web Site investments above the red line indicate sufficient return for their level of risk. as returns increase, the higher the risk. provides What If analysis to view impact of change(s) on portfolio s risk profile. the service is free to registered users. 33

34 Risk/Return The Enterprising Investor 34

35 Risk/Return The Intelligent Investor 35

36 Risk/Return Leisurely Nap Tax Sheltered 36

37 Risk/Return Leisurely Nap - Taxable 37

38 Conclusion A disciplined investment process allows for a thorough analysis & understanding of: 1) Asset Allocation Stocks, Bonds & Cash 2) Portfolio Diversification by market sectors, market capitalization, style & geography 3) Time Horizon, Risk Tolerance & Est.Returns 4) A reasonable strategy to address the unpredictability (forecasting) of the market. 38

39 Conclusion Resources are available to facilitate the construction of a personal portfolio. Performance of three hypothetical portfolios showed: Three Hypothetical Portfolios earned better returns than Dow, S&P 500, and Wilshire 5000 with less risk. The Committee gained valuable knowledge, had great experience and fun. 39

40 Sources of Information Wall Street Journal Morningstar Mutual Funds-User s Guide 2004 Morningstar FundInvestor

41 Mutual Funds Resources Market Index Statistics Mutual Fund Data 41

42 Mutual Funds Resources moneycentral.msn.com/investor Mutual Fund Screening moneycentral.msn.com/investor

43 Mutual Funds Resources Bonds Real Estate Investment Trusts

44 Mutual Funds Resources Portfolio Tracking cbs.marketwatch.com moneycentral.msn.com/investor