Q Dividend Plus + Strategy with Option Overlay

Transcription

1 Q Dividend Plus + Strategy with Option Overlay

2 MAI Firm Overview Independence and Innovation Who We Are Our heritage dates back to 1973 as an affiliate of IMG and we were later known as McCormack Advisors International which then became MAI Wealth Advisors in 2007 Privately held, independent SEC registered investment advisor Manages more than $3.5 billion in client assets* Headquartered in Cleveland, Ohio Team of 70+ employees *AUM as of December 31, 2013 Page 2

3 Dividend Plus + Strategy Strategy Highlights Strategy AUM $173MM* Seth Shalov Managing Director Lead Portfolio Manager Dividend Plus+ Strategy Strategy Inception April 2009 Portfolio Management Team of six portfolio managers *AUM as of March 31, 2014 Page 3

4 Risk Managed Liquid Alternative. MAI's Dividend Plus+ strategy is designed for: Investors for whom preservation of capital is a high priority, and Investors who want a low volatility equity alternative with liquidity and transparency, and Investors who are looking for a durable source of income without an embedded interest rate bet. Page 4

5 Dividend Plus + Strategy Overview Look to provide capital preservation with a gross annual targeted return of 7-9% and approximately half the volatility of the S&P 500. Strategy combines a portfolio of dividend growing stocks with an actively managed option overlay where we write both covered calls and cash secured puts around our holdings. Multiple sources of performance: Option Premium Income Dividend Income Stock appreciation Page 5

6 Dividend Equity Selection Process Our investment process is built around investing in high quality companies that consistently pay, and more importantly grow, their dividends. We not only focus on historical dividend growth but also projected dividend growth. Stock Universe: Equities Traded on US Exchanges (14,000) Security Characteristics; Liquidity & Market Cap (1,500) Dividend Characteristics; Free Cash Flow, Yield, Growth Rate (550) Qualitative Screen; Optionality and Fundamental Analysis (300) Watch list (125) Dividend Plus + Stock Portfolio (30-40 stocks) Page 6

7 Dividend Equity Characteristics Characteristics 13% 5-Year Dividend Growth Rate 1 6% Revenue Growth 2 11% Earnings Growth 2 5% Free Cash Flow Yield 3 19% Return on Equity 4 2.8% Indicated Dividend Yield 5 1 Past five years, as of 3/31/2014. Calculation excludes companies whose corporate actions, e.g. spin-outs, make growth rates not meaningful or comparable. 2 Estimated forward two fiscal years. Estimated earnings growth rate excludes one stock, an internally managed REIT. 3 Estimated current fiscal year excluding financials. 4 Return on average total equity, trailing year at March Source: Bloomberg. The current yield is calculated by dividing the amount of the Dividends Per Share (DPS) by the current Market Price Per Share of the stock. DPS are lagged 45 days. Past performance is no guarantee of future similar results. No assurance can be given that the strategy will be successful or that investors will not lose some or all of their capital. Information on this page is supplemental to the full Annual Disclosure provided at the end of this presentation. Page 7

8 Actively managed option overlay Strategically sell covered calls and cash-secured puts on each stock 9 weeks in duration Monitor each equity s fundamentals, technical indicators, and volatility profile Write Calls Individual Stocks Manage Delta Adjusted Exposure Write Puts Page 8

9 Option Overlay Example April 105 Covered Calls Feb 100 Feb 100 March 100 March 100 April 100 April Jan 95 Feb 95 March XYZ Daily Close March Feb 85 Feb 85 March 85 March Feb 80 Jan 80 Feb 80 Feb 80 April Feb 75 Cash Secured Puts Monthly Option Expiration Cycles Please see important information regarding options on page 18. Option trading entails significant risk and is not appropriate for all investors. Performance will depend significantly on market conditions and past performance is not indicative of future results. The above example is presented for illustration purposes only in order to facilitate discussion of the concepts, opportunities and risks associated with options overlay strategies and supplements the accompanying presentation. It should not be considered a recommendation to buy or sell any security. Page 9

10 Portfolio Construction and Characteristics dividend growing equities make up approximately 50% of the portfolio Cash will make up the remainder of the portfolio The portfolio has no leverage We will write approximately 200 options, both covered calls and cash secured puts, on our individual stocks Page 10

11 Options Position Summary 100% 90% 80% 7.9% 8.5% 8.8% 11.4% 11.7% 13.6% 15.6% 10.2% 10.2% 11.7% 70% 60% Assigned 50% Unprofitable 40% 80.7% 79.9% 77.7% 74.2% 78.1% Profitable 30% 20% 10% 0% Average Past performance is no guarantee of future similar results Notes: 1) Analysis by MAI is for a representative account for full calendar years since commencement of trading operations in ) Profitable means the representative account collected net contract income from the position expiring worthless, bought back and rolled out, or from assignment. Unprofitable means that the contract was closed at a loss through buying back puts or calls and rolling them out in time. Page 11

12 Investment Performance and Attribution Analysis % Return Stock Appreciation Dividend Income Option Premium Average Average Past performance is no guarantee of future similar results Notes: 1) Analysis by MAI is for a representative account for full calendar years since commencement of trading operations in ) All figures represent gross contribution to performance Information on this page is supplemental to the full Annual Disclosure provided at the end of this presentation. 3) Dividend Income includes dividends accrued during that period. It does not include money-market income. 4) Option premium includes contract income earned on closed positions. This figure is net of trading commissions and costs to roll contracts. Page 12

13 Drawdown Zephyr StyleADVISOR Drawdown May March 2014 Zephyr StyleADVISOR: MAI Wealth Advisors, LLC 0% -2% -4% -6% -8% -10% Dividend Plus+ Composite NET S&P 500 HFRI Equity Hedge Index -12% -14% -16% Apr 2009 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Mar 2014 Past performance is no guarantee of future similar results. MAI composite performance for the most recent period is preliminary. All performance includes dividends and is net of fees and expenses. Information on this page is supplemental to the full Annual Disclosure provided at the end of this presentation. Page 13

14 Low Volatility Dividend Plus+ standard deviation is about 7% since inception Zephyr StyleADVISOR Risk / Return May March 2014 (Single Computation) 20% Zephyr StyleADVISOR: MAI Wealth Advisors, LLC Dividend Plus+ annualized return is about 9% since inception 15% Return 10% Dividend Plus+ Composite NET S&P 500 Market Benchmark: HFRI Equity Hedge Index 5% 0% 0% 2% 4% 6% 8% 10% 12% 14% Standard Deviation Past performance is no guarantee of future similar results. MAI composite performance for the most recent period is preliminary. All performance includes dividends and is net of fees and expenses. Information on this page is supplemental to the full Annual Disclosure provided at the end of this presentation. Page 14

15 Performance History Since Inception Zephyr StyleADVISOR Manager Performance May March 2014 (Single Computation) Zephyr StyleADVISOR: MAI Wealth Advisors, LLC Dividend Plus+ Composite NET HFRI Equity Hedge Index Apr 2009 Dec 2009 Jun 2010 Dec 2010 Jun 2011 Dec 2011 Jun 2012 Dec 2012 Jun 2013 Mar 2014 Past performance is no guarantee of future similar results. MAI composite performance for the most recent period is preliminary. All performance includes dividends and is net of fees and expenses. Information on this page is supplemental to the full Annual Disclosure provided at the end of this presentation. Page 15

16 Performance (as of 3/31/14) QTD 1 Year 3 Years Inception to Date 1 Dividend Plus+ 1.23% 7.86% 6.75% 9.43% HFRI Equity Hedge 1.35% 10.38% 3.69% 8.46% S&P % 21.86% 14.66% 19.31% 1 Calculated from market close on April 30, 2009 Income Generated Q Open Options Positions April May Total Option Premium 1.22% Dividend Income 0.33% Total 1.55% Calls Puts Total Past performance is no guarantee of future similar results. MAI composite performance for the most recent period is preliminary. All performance includes dividends and is net of fees and expenses. Income generated and open option positions data is for a representative account and is supplemental to the full Annual Disclosure provided at the end of this presentation. Page 16

17 Conclusion & Outlook Outlook for 2014 The universe of dividend paying companies continues to expand We expect volatility to approach more normal levels Options market is growing broader and deeper We are well-positioned for an increase in short term rates Conclusion Three sources of portfolio performance Actively managed options overlay Dividend growing equities Durable portfolio income No concentrated bets Page 17

18 Dividend Plus + Strategy Important Information Past performance is no guarantee of future results. This material is for informational purposes only. Material should not be considered a recommendation to purchase or sell any particular security or shares in any particular investment fund. It should not be assumed that any security transactions, holdings, or sectors discussed were or will be profitable or that the investment recommendations or decisions we make in the future will be profitable. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. About Anticipated Performance and Risk Performance will depend significantly on market conditions; there is no assurance that the Strategy will achieve its investment objectives. The extent of potential option income depends on premiums as they exist during the option cycle. Investors should note that option contracts do not expire at calendar month-end. As such, there tends to be some short-term, month-to-month performance unevenness as it relates to unexpired option positions held at month end. Under most conditions, this is time premium which has not yet decayed, and will affect performance in the following month(s). Option trading entails significant risk and is not appropriate for all investors: Covered Calls Short Puts Loss of Principal Though the Strategy s cost basis may be lower than if the Strategy only purchased the shares, the Strategy can still lose money if the stock falls below its modified cost basis (price of shares less covered call premium). This is basically the same market risk facing anyone who owns equities. If the Strategy sells puts and the stock falls below the strike price the Strategy may be assigned the shares. This could result in the Strategy owning the stock at a price that is below the current market price adjusted for the premium the Strategy received. Opportunity Loss The Strategy expects to typically sell calls at higher strike prices than current market value, however the stock could rise above the strike price and the Strategy can be assigned on its position. The Strategy could lose the stock at the strike price even if the stock is higher-causing it to potentially leave some money on the table. The Strategy attempts to mitigate this risk by generally selling calls higher than current stock levels with holding periods of less than 9 weeks. Additionally, the Strategy may seek to roll the calls forward to potentially prevent the loss of a stock position. When the Strategy sells puts it might miss opportunities to purchase shares at even lower price levels. Risk Factors include exposure to financial and market risks that accompany investments in stocks and options. More information, including Form ADV Part II, is available from MAI. Additional information about option trading can be found in the updated Options Disclosure Document (Characteristics and Risks of Standardized Options) located on the Options Clearing Corporation Website Copies are available for review with this presentation. Option risks include, but are not limited to, the possibility of an imperfect correlation between the movement in the options prices and that of the securities/indices hedged (or used for cover), which may render a given hedge unable to achieve its objective; possible loss of the premium paid for options; and potential inability to benefit from the appreciation of an underlying security above the exercise price. Premium realized through the sale of options is characterized as short term capital gains and is not distributable as quarterly income. About Dividend Growing Equities Performance It is important to remember that dividends are not guaranteed and a company s future ability to pay dividends may be limited. ADRs are receipts for the shares of a foreign-based company traded on a U.S. stock exchange. Call is an option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time. 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 effort to potentially generate increased income from the asset. Put is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. Cash Secured Put is a put for which the writer deposits an amount of cash equal to the option s exercise price. Index Option is an option providing exposure to the movement of the stock market. A call option is out-of-the-money if the stock price is below its strike price and a put option is out-of-the-money if the stock price is above its strike price. The spread to strike price is the difference between the current price of the security and the strike price. Strike Price is the price at which a specific options contract can be exercised. Page 18

19 Annual Disclosure Presentation Dividend Plus+ Strategy Performance Notes: Year Ending Dec. 31 (unless noted otherwise) Total Firm Assets USD millions MAI Dividend Plus + Strategy Composite Composite Past performance is no guarantee of future similar results. Performance for MAI and the indices includes dividends reinvested. MAI Wealth Advisors, LLC ( MAI ) claims compliance with the Global Investment Performance Standards (GIPS ) and has prepared and presented this report in compliance with the GIPS standards. MAI has been independently verified for the periods 12/31/ /31/2012. Verification assesses whether (1) the firm has complied with all the composite construction requirements of the GIPS standards on a firm-wide basis and (2) the firm s policies and procedures are designed to calculate and present performance in compliance with the GIPS standards. The MAI Dividend Plus+ Strategy Composite has been examined for the periods 4/30/ /31/2012. The verification and performance examination reports are available upon request. Annual Performance Results Benchmarks Assets S&P 500 Citi 3-Mo. T-Bill USD millions # of Accounts Net Index Index , % 32.39% 0.05% 14.28% , % 16.00% 0.07% 7.39% , % 2.11% 0.08% -8.38% , % 15.06% 0.13% 10.45% 2009 (4/30-12/31) 1, % 29.70% 0.10% 18.44% Standard deviation of monthly returns HFRI Equity Hedge Index 3yrs ending 2013 The Composite includes separately managed, fully discretionary, fee-paying accounts and limited partnerships under management in MAI s strategy to invest in dividend paying companies with an options overlay of cash secured put contracts and covered call contracts. The objective of the Dividend Plus+ strategy is to achieve performance through stock appreciation, dividend income and option premium. MAI s focus on large-cap total return-oriented stocks and target equity weighting, typically in the 45-55% of total assets range, limits the Strategy s ability to fully participate in sharply rising stock markets. However, these factors as well as the option premium generated by selling cash secured puts and covered calls provide significant downside protection in sharply falling markets. When price change, dividends and interest income are coupled with the premium generated from the option writing activity; MAI believes the Strategy can achieve its objective with less downside deviation than traditional equity investment strategies, in effect, managing volatility. New accounts with a value of at least $100,000 at time of funding are included the first full month after they are fully invested; accounts are removed from the composite if they fall 20% or more below the minimum size at the end of a month. The strategy inception was April 30, 2009; the composite was created in May Internal composite dispersion is not presented as there are <5 accounts. MAI is an independent investment advisor registered with the Securities and Exchange Commission. It was originally established as Investment Advisors International, Inc (IAI) in 1973, and was an affiliate of International Management Group (IMG). In 2000, McCormack Advisors International, LLC (McCormack) was formed to succeed to IAI s business as a joint venture between IAI and a major integrated financial institution. In 2002, the joint venture was dissolved and the firm returned to its roots as a provider of independent financial advice. McCormack became fully independent of IMG in On Jan. 31, 2007, BC Investment Partners, LLC (BC), also independently owned, acquired McCormack and renamed the merged firm MAI. MAI has retroactively applied the GIPS calculation and methodology so that it could meet the five year requirement to begin claiming compliance as of Dec. 31, For GIPS purposes MAI includes discretionary and non-discretionary accounts in Total Firm Assets; MAI includes assets subadvised by another firm as long as MAI has discretion over the selection of the subadvisor. The firm maintains a complete list and description of composites, which is available upon request. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are also available upon request. 3 yrs ending 2012 MAI Dividend Plus+ Composite 5.87% 7.72% S&P 500 Index 12.11% 15.30% Citi 3-Mo. T-Bill Index 0.01% 0.01% HFRI Equity Hedge Index 7.96% 8.91% Page 19

20 Annual Disclosure Presentation Dividend Plus+ Strategy Performance Notes: Composite returns are presented net of the highest MAI advisory fee charged to any account in the composite, 1% annually. MAI s fee schedule for separate accounts and limited partnerships in the Dividend Plus + Strategy is 1% annually. Actual investment advisory fees incurred by clients may vary depending on, among other things, the applicable fee schedule and portfolio size. Additional information regarding policies for calculating and reporting returns is available upon request. Individual account performance varies from the composite return. The largest account in the composite is a partnership which also incurs operational expenses such as administration and legal expenses that separate accounts do not incur. These expenses are reflected in the composite results but booked on a cash basis versus the accrual method used in the actual partnership. Returns reflect the reinvestment of dividends and other earnings, and are net of commissions and transaction costs. Index Definitions: The S&P 500 Index includes 500 companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large cap segment of the market, with approximately 75% coverage of U.S. equities, is used as a proxy for the total market. S&P 500 is a registered trademark of Standard & Poor s Financial Services LLC., a subsidiary of The McGraw-Hill Cos. The Citi 3-Month Treasury Bill Index consists of the last three three-month Treasury bill issues. It is used as a proxy for cash equivalents. The Hedge Fund Research, Inc. Equity Hedge Index is presented as an alternative investment index. According to HFR, Equity Hedge strategies maintain positions both long and short in primarily equity and equity derivative securities. Equity Hedge - EH strategies maintain positions both long and short in primarily equity and equity derivative securities. A wide variety of investment processes can be employed to arrive at an investment decision, including both quantitative and fundamental techniques; strategies can be broadly diversified or narrowly focused on specific sectors and can range broadly in terms of levels of net exposure, leverage employed, holding period, concentrations of market capitalizations and valuation ranges of typical portfolios. EH managers would typically maintain at least 50% exposure to, and may in some cases be entirely invested in, equities - both long and short. EH is further subdivided into sub-strategies: Equity Market Neutral, Fundamental Growth, Fundamental Value, Quantitative Directional, Sector - Energy/Basic Materials, Sector - Technology/Healthcare, Short-Biased, Multi-Strategy. One cannot invest directly in an index; performance of an index does not reflect fees or expenses. The strategy employed by the Partnership s adviser uses securities that may not be present in the above indexes such as ADRs and options. Additionally, the Adviser uses dividend screening techniques which result in an investable universe that does not fundamentally match the S&P 500 Index or other well known indices. The MAI strategy is not included in the HFR Index. Page 20

21 Contact Information MAI Wealth Advisors, LLC 1360 East Ninth Street, Suite 1100 Cleveland, OH Phone: Scott D. Roulston, Managing Director Seth Shalov, Managing Director Page 21