Managing Association Investments After the Great Recession

Transcription

1 Managing Association Investments After the Great Recession Thursday, May 20, :00 3:00 pm Eastern Time Hosted by ASAE Business Services, Inc. and Capital Advisory Group Your Presenters: J. Timothy Jester, CAIA, AIF Senior Consultant and Director of Research Capital Advisory Group CapGroup Tim Jester joined CapGroup in 2005 as a Senior Consultant. He presently leads the firm's research team as the Director of Investment Research, and is responsible for providing technical support in the areas of asset allocation and portfolio strategy design, investment manager due diligence, and alternative investments. Tim has nearly three decades of experience in institutional investment services, including 5 years as a principal of a Commodity Trading Advisor. Tim has a M.S. in Industrial Management from Georgia Tech. He has also earned the Accredited Investment Fiduciary and Chartered Alternative Investment Analyst professional designations. Jay V. Kloepfer Executive VP & Director of Capital Markets and Alternatives Research Callan Associates Inc. Jay Kloepfer joined Callan in 1998, and directs the development of Callan's annual capital market projections. He oversees Callan's Capital Markets, Hedge Fund, and Private Markets research groups. Jay is a regular instructor at the "Callan College" and is a shareholder of the firm. Jay previously was a Senior Economist and the Western Regional Manager for Standard & Poor's DRI. During his 11 years with DRI, Jay was actively involved in the development of DRI's domestic research capabilities. Jay earned a B.S. with honors in Economics from the University of Oregon and an M.A. in Economics from Stanford. Clifford W. Draughn, CIMA President Excelsia Advisors Investment Committee Episcopal Diocese of Georgia Cliff Draughn serves on the investment committee of a mid-sized nonprofit, and was instrumental in steering the investment and spending activities during the crisis of He is also President and Chief Investment Officer of ExcelsiaAdvisors. Cliff received his B.S. in Business Administration from the University of North Carolina at Chapel Hill. Cliff is involved in and supports numerous charitable entities in the Savannah area including the Savannah Music Festival. 2 1

2 Overview Why the market experienced such a dramatic recovery in Offer insights to the problems the global economy faces for the next several years. Identify investment strategies that can achieve investment objectives with less risk. Help reduce risk in an organization s portfolio. Examine diversification strategies that can be implemented by associations and nonprofits of any size. Q&A 3 Polling Question How close is your portfolio to returning to its level of 2007? 0 to 10% higher 0 to 10% lower More than 10% lower 4 2

3 2010 Economic Environment and Capital Markets Review Jay V. Kloepfer Callan Associates Inc. 5 Bigger Than the Average Bear Stocks were up 18.5% per year from Bear market began in 2000 and large cap stocks were negative for the decade. Earnings were negative in Q for first time in history. The market has improved sharply since March 2009, but The long-term cycle may have another bear in it. Did we use all our dry powder in 2009? Source: Callan Associates 6 3

4 The Current Economic Environment Recovery Under Way, But How Strong? The economy began to grow in mid 2009, but unemployment will not begin to decline until late Steep recoveries usually follow steep recessions but this one will be weaker. Lower oil prices offer some cushion. Fed has been doing all it can; major fiscal stimulus is (still) coming. 7 Hard Landing for the U.S. Economy (Real GDP - annual percent change) *2010 estimate - Global Insight Source: Global Insight 8 4

5 Inflation Concerns Evaporated as the Capital Markets Seize Up Soaring energy prices drove inflation above 5% in The recession actually led to deflation in The recession has led to excess capacity in the developed world and inexpensive goods continue to come from the emerging economies, so inflation is not a problem for the short and intermediate period. Will massive stimulus and flood of liquidity lead to inflation in the future? What s missing? Aggregate demand. 9 So, Is Rising Inflation an Emerging Threat? Economic theory says inflation HAS to take off: Unprecedented global stimulus Unprecedented government spending. Commodity prices itching to rise at the first sign of growth. Dollar must weaken, furthering pressure on inflation. Practical reality: The U.S. and the rest of the world face very slow recoveries. Interest rates may rise sharply without a surge in inflation. Inflation is a very real threat, but it could be up to five years off. 10 5

6 Are We Ripe for the Reappearance of Stagflation? Rapid growth during the 1960s led to full employment and rising wages. Unwillingness to raise taxes to pay for expanded social benefits and an unpopular war ballooning deficit. Built-in inflation expectations crept higher: Higher union participation enabled workers to push for wage increases. Cost pressures forced companies to seek higher prices; expectations allowed them to attain the increases. Leading up to the 1970s, government policy was stimulative; Fed action was weak and politicized. At the same time, the economy was running at full capacity. Monetary policy was hugely accommodative, spurring sustained inflation. Commodity shocks quickly flowed through to core inflation intensifying existing cost pressures. Black not applicable to today Red applicable to today 11 Themes to Explore in Setting the Expectations Inflation No longer negative in How large is the risk? How far out? What to do about it? Has equity already used up its bounce? Treasury yields are low, low, low. 12 6

7 Capital Market Expectations Equity returns for the next 10 years are likely to be muted compared to historical returns. Very low current yields and massive government spending will lead to poor returns for bonds. Nonprofits must plan for lower returns as a balanced portfolio will likely return only around 7%. Source: Callan Associates Inc. 13 Questions? To submit your questions: 1. Type your questions in the box located in the lower left corner. 2. Click the Send button. 14 7

8 Polling Question Have you invested in any alternative investments? Yes No 15 Investment Strategies that Reduce Risk & Achieve Financial Objectives Cliff Draughn Excelsia Advisors Investment Committee, Episcopal Diocese of Georgia 16 8

9 The essence of investment management is the management of risks, not the management of returns. Benjamin Graham 17 The Damage Done by Large Losses 18 9

10 How Can Downside Risk be Reduced? Prudent and Effective Diversification Traditionally done with Stocks and Bonds Large and small cap Growth and value International and emerging markets Bonds Forced Reevaluation of Theories of Diversification Source: Callan Associates 20 10

11 Expand the Universe 21 Case Study The Yale Endowment earned 11.8% for the ten years ending June 30, 2009 The average nonprofit earned 2.1% over the same period Source: Yale University; Callan Associates 22 11

12 Benefits of Hedge Funds Cumulative Returns for 20 Years Ended December 31, Hedge Funds (Callan Broadly Diversified Hedge Fund of Funds) S&P (100.0) Source: Callan Associates 23 Types of Hedge Fund Strategies Hedged Equity (Equity Long/Short) Market Neutral Equity Convertible Arbitrage Global Macro Merger Arbitrage 24 12

13 Issues with Hedge Funds High Minimums $1 million or more Expenses Liquidity Quarterly or annually Transparency Regulatory Investor Requirements 25 Growth in Hedge Fund Strategies in Mutual Funds Source: Turner Investment Partners 26 13

14 Examples TFS Market Neutral Managed by TFS Capital Can own stocks and go short May lag when stocks appreciate dramatically Has done better during weak stock markets PIMCO All Asset All Authority Uses multiple PIMCO Mutual Funds Will use funds that benefit from a decline in stock prices May invest in a number of esoteric strategies such as convertible bonds 27 Do Mutual Funds Work as Well as Hedge Funds? Source: Callan Associates Performance Evaluation Program; Credit Suisse 28 14

15 Implementation With the help of our Investment Advisor we assembled a module of six mutual funds with differing and complementary strategies Expected risk and return of the module was similar to that of a balanced fund (60% equities and 40% bonds) Allocated 10% with 6% coming from equities and 4% from bonds 29 Back-testing the Module Returns for Calendar Years Group: Broadly Diversified Hedge FoF Style (10.0) (20.0) (30.0) (40.0) B (1) A (36) B (1) A (61) C (57) A (18) C (70) B (92) C (50) A (4) C (58) B (100) Index of Hedge Fund of Funds 5th Percentile (10.17) th Percentile (15.56) Median (19.97) th Percentile (23.37) th Percentile 4.46 (29.51) Module 1 A (10.07) S&P:500 B (37.00) HFR:FOF Index C (21.39) Source: Callan Associates Performance Evaluation Program 30 15

16 Back-testing the Module Returns for Calendar Years Group: Broadly Diversified Hedge FoF Style (10.0) (20.0) (30.0) (40.0) B (1) A (36) B (1) A (61) C (57) A (18) C (70) B (92) C (50) A (4) C (58) B (100) th Percentile (10.17) th Percentile (15.56) Median (19.97) th Percentile (23.37) th Percentile 4.46 (29.51) Module 1 A (10.07) S&P:500 B (37.00) HFR:FOF Index C (21.39) Source: Callan Associates Performance Evaluation Program 31 Conclusions Investors should seek to diversify investments beyond just stocks and bonds The universe of alternative investment options available to small and mid-sized organizations has expanded dramatically Investors should seek to include a wide variety of strategies within the alternatives sector to optimize risk-adjusted returns 32 16

17 Questions? To submit your questions: 1. Type your questions in the box located in the lower left corner. 2. Click the Send button. Tim Jester Senior Consultant & Director of Research CapGroup Jay Kloepfer Executive VP & Director of Capital Markets and Alternatives Research Callan Associates Cliff Draughn President and CIO Excelsia Investment Advisors Disclosures Capital Advisory Group, LLC (CapGroup) is an SEC-Registered Investment Adviser. This presentation is being made for educational purposes only, and the information contained herein should not be construed as investment advice or as an offering for providing investment advisory services. The performance of investment models or modular portfolios used in this presentation may not represent the actual performance of any CapGroup client portfolio and are used to illustrate the back-tested performance of a specific asset allocation strategy and/or investment management product combination. Such model or modular portfolios are constructed with the benefit of hindsight and should not be construed as a predictor or indicator of similar performance in the future; past performance may not be indicative of future results and no level of returns is guaranteed. Further, the illustrated performance includes the reinvestment of dividends and other investment earnings and does not reflect the deduction of separate account investment manager fees, trading fees, custody costs nor the investment advisory fees charged by CapGroup which would have the effect of decreasing the illustrated returns. Generally, CapGroup s advisory fee ranges from.10 % (10 basis points) to.95% (95 basis points) based on the size of the account. For example, a portfolio that earned 9% per year for ten years before CapGroup s deduction of fees at the highest rate of.95% would experience a cumulative return of 137% before the deduction of CapGroup s versus a cumulative return of 117% after the deduction of CapGroup s fee. Certain information contained herein concerning product performance, performance trends and comparisons is based on or derived from information provided by independent third party sources. CapGroup believes the sources from which such information was obtained are reliable; however, CapGroup cannot guarantee the accuracy of such information. Information pertaining to CapGroup s advisory operations, services, and fees is set forth in CapGroup s current disclosure statement, a copy of which is available upon request