LYNDHURST INVESTMENT CONSULTING, INC.

Transcription

1 LYNDHURST INVESTMENT CONSULTING, INC. Presentation to: NATIONAL ASSOCIATION OF INSURANCE & FINANCIAL ADVISORS THE IMPORTANCE OF April 16, 2009

2 Headlines, Facts and Views A decade of astonishing economic growth driven by speculation Banks and investors calling in their loans early Prices of commodities fall precipitously It became impossible to borrow money even on top-grade securities Businesses began to fail at an alarming rate The debt crisis severely pinched General Electric The unemployment rate spikes Market conditions more or less demoralized investors No hope or reason for any marked change Everything looks very discouraging just now Everyone is becoming so suspicious Banks are throwing out securities

3 Headlines, Facts and Views Oh by the way those headlines, fact and views are referring to The Panic of 1893 Those facts came from the book Spencer Trask Enigmatic Titan by David S. Worth

4 How We Got Here I believe that a combination of technology, creativity and motivation set the stage for this destructive period. It was ultimately manifested in these widely identified areas: liquidity, real estate and spending. Liquidity The Federal Reserve reduced the Federal Funds Rate by 5.5% over a three year period. Residential Real Estate From 1930 to 1997, U.S. house prices grew by 0.7% annually. From 1998 to 2006, U.S. house prices rose 8.0% annually. Spending Total indebtedness in the U.S. economy reached an unprecedented 350% of GDP. Also, in 2004, the SEC allowed investment banks to decide how much money to hold as reserves, and to raise leverage to as much as 40-to-1 from 12-to-1. From After the Panic, Innovation by Glenn Hutchins in the March 30, 2009 Fortune Magazine

5 What I am Watching The Concerns 1. This recent stock market rally It is way too much, way too fast in my opinion March 9 th through April 9 th represented the steepest 23-day advance since 1933 (Birinyi Associates in April 13, 2009 Bloomberg.com) 2. The next wave of home foreclosures $300 billion of Alt-A and Option ARM mortgages are scheduled to reset this summer Alt-A loans made in 2005 had a cumulative default rate of 4.2% up from 0.6% a year earlier Approximately 80% of Adjustable Rate Option ARMs are currently negatively amortizing Foreclosure-related filings increased 24% in the first quarter 2009 versus the first quarter 2008 (according to RealtyTrac)

6 What I am Watching The Concerns 3. China s outlook & U.S. Treasury investment program China s electricity output (-7.9% in December 2008), steel production (-8.5% in December 2008) and exports (-17.5% in January 2009) are declining (sources: National Bureau of Statistics; General Customs Administration) Two-thirds of China s $1.95 trillion in foreign reserves are believed to be in U.S. securities (April 13, 2009 Bloomberg.com) China was sellers of U.S. Treasury bonds in January & February 4. The trend in global trade Global trade is predicted to decline 9% this year, most since WWII (predicted by the World Trade Organization) 1,000 container & commodity carriers are sitting at anchor with no cargoes (April 7, 2009 Bloomberg.com) During the first 13 weeks of 2009, U.S. railroads saw a 16.7% decline in total carloads (Association of American Railroads)

7 What I am Watching The Positives 1. The stock market leads Typically six to nine months ahead of economic releases 2. Cash is at an 18-Year high $8.85 trillion in cash & equivalents is equal to 74% of the market value of U.S. companies, the highest ratio since 1990 (Federal Reserve data compiled by Leuthold Group) 3. Increasing consumer savings rate In the 1980s, the consumer savings rate was 12% It is now 1% but saw a significant increase during the fourth quarter At the end of 2008, personal disposable income covered 75% of household liabilities In 1991, it was 114% coverage of household liabilities 4. Big companies continue to invest in Research & Development R&D expenditures were flat overall in the fourth quarter compared with a year earlier, even as revenue dropped 7.7% (Wall Street Journal)

8 Sources of Information Websites Advisorperspectives.com Bloomberg.com FT.com Investmentnews.com Morningstar.com NYTimes.com TheNational.ae Publications Forbes Fortune Institutional Investor Investment News Wall Street Journal Barron s Financial Times Global Finance Latin Finance Manager Perspectives PIMCO TCW Investment Third Avenue First Eagle Tweedy Browne Greenspring Fund Frontier Market A. Gary Shilling

9 What I Tell Clients It is ok to be angry I certainly have been It is perfectly fine to be cautious but it is not fine to stay paralyzed The best time for investment is in times of maximum pessimism It is never too late to make the right decision Participate & Protect is the most effective approach Focus on singles and doubles don t try to get it all back at once Simplify the investment plan now is not a time to get cute It is important to truly understand an investment strategy Big firm does not mean better firm in fact it can be a detriment

10 Considerations that I have for Strategies 1. I am looking for firms that know how to run the business of portfolio management 2. I attempt to avoid the huge firms and the huge funds 3. I attempt to avoid the funds that are appearing everywhere in the media 4. I am trying to identify the undiscovered strategy 5. I look for non-style box driven portfolio managers 6. I look for complementary strategies not overlapping ones 7. I look for manager s that concentrate the number of positions 8. I am thinking about how to build with each strategy 9. I am looking for performance consistency 10. I am looking at absolute risk analysis not simply statistical measures

11 My Mutual Fund Research Process Utilize Morningstar.com Snapshot Page Total Assets, Expense Ratio, Yield, Star Rating Performance Page Calendar Years, Year-to-Date, Quarterly Portfolio Pages Market Cap Ranges, Quality Ranges, Percent Foreign, Percent Cash, Number of Holdings, Turnover, Top 25 Holdings Management Bios, Time on the Fund Utilize the Web Google the Firm Google the Mutual Fund Google the Portfolio Managers Utilize the Fund Company s Webpage Look for Firm Information Look for Investment Process Presentations Look for Portfolio Commentaries Utilize the Fund Company Request a complete presentation and firm disclosure documents Request any regulatory documents regarding the firm Request the last four written newsletters and portfolio characteristic reports

12 Questions for the Fund s Representative 1. How has last year impacted the firm s business model? Is survivability an issue Have there been layoffs Do you have the resources to implement the firm s growth strategy 2. How are you not Madoff? What are your risk controls Who are your independent service providers and auditors Have you received any legal or regulatory complaints 3. How has the investment team been impacted? How is the team s morale Have there been any changes to the team How has the decision-making process been impacted 4. How has the investment process changed? Have there been any enhancements to the research efforts Has the portfolio construction philosophy been impacted Are there any new risk management techniques being utilized 5. What created the results? What were positive and negative drivers of performance What transactions were made during the time period

13 The Current Structure of My Moderate Growth Strategy Moderate Growth Strategy Implementation 15.0% to a Large & Mega Cap Quality Growth Strategy 15.0% to a Free Cash Flow Generation Strategy 12.5% to an Opportunistic Valuation & Catalyst Driven Strategy 15.0% to a Global High Dividend Paying Strategy 15.0% to Intermediate Tax Exempt or Investment Grade Bonds 4.0% to High Yield Bonds 23.5% to Money Market Instruments I am currently analyzing opportunities in the following areas: Global Hard Assets, Oil Services, Distressed Debt, TIPS and Frontier Markets