Educating Clients in the Search for Yield

Stuart Quint, Investment Insights PodcastStuart P. Quint, CFA, Senior Investment Manager and International Strategist

We were proud to be Premier Sponsors of this year’s Financial Services Institute’s OneVoice conference. We participated on multiple panels while there and had the opportunity to network and hear from many industry experts to learn about the latest within the industry.

I participated on the panel, Educating Clients in the Search for Yield, that addressed the issue of whether or not alternatives provide a legitimate and sustainable source of income. After a great discussion, we concluded that investors need to understand what they are buying and should consider these issues when doing their due diligence:

  • There is a variety of alternatives that come with lower (but not zero) correlation to traditional asset classes (equities and bonds) absolute return, real asset, BDC, private equity strategies have different return and risk profiles; liquid and illiquid structures.
  • It is important to be aware of the risk components within strategy: interest rate, credit, operational, funding risk.
  • Don’t stretch for promise of high yield as high yield is only one part of total return.

Click here to listen to the audio recording.

Yale Endowment Proves, Once Again, That A Free Lunch is Not a Thing of the Past

Sue BerginSue Bergin, President, S Bergin Communications

In 1952, Harry Markowitz, an unknown 25-year old graduate student at the University of Chicago, defined risk mathematically for the first time. He also explained how investors could lower volatility while preserving expected returns if they incorporated different investments that are not highly correlated. He went on to explain, “diversification is a kind of free lunch at which you can combine a group of risky securities with high expected returns into a relatively low-risk portfolio, so long as you minimize the covariances, or correlations, among the returns of the individual securities.”

YaleThe most prominent institutional investor in developing the multi-asset class investment model was, and remains, David Swensen, chief investment officer of the Yale University Investment Office. The power of diversification to act as a free lunch is described in his book Pioneering Portfolio Management. Swensen, the long-term Chief Investment Officer at Yale University and father of the Yale Endowment Model, believed in avoiding liquidity rather than seeking it, since it comes at a cost of lower returns. The Yale Endowment Model emphasizes broad diversification and makes the case for allocating only a small amount to traditional U.S. equities and bonds and more to alternative investments.

Today, multi-class investing means different things to different people. Initially the Yale Model was based on an asset class composition that included six asset classes. It currently uses seven asset classes: domestic equity, foreign equity, fixed income, absolute return, natural resources, real estate, and private equity.

When it comes to achieving purity of asset class composition, Swensen had to say this:

Purity of asset class composition represents a rarely achieved ideal. Carried to an extreme, the search for purity results in dozens of asset classes, creating an unmanageable multiplicity of alternatives. While market participants disagree on the appropriate number of asset classes, the number should be large enough so that portfolio commitments make a difference, yet small enough so that portfolio commitments do not make too much of a difference. Committing less than 5 percent or 10 percent of a fund to a particular type of investment makes little sense; the small allocation holds no potential to influence overall portfolio results. Committing more than 25 percent or 30 percent to an asset class poses danger of overconcentration. Most portfolios work well with around a half a dozen of asset classes [1].

Swensen’s views on diversification and asset allocation continue to pay off. According to the preliminary 2014 results of the NACUBO-Commonfund Study of Endowments, larger, better-diversified endowments have outperformed their smaller, equity heavy peers.

On average, the 426 university and college endowments in the study returned 15.8%, while endowments with more than $1 billion returned on average 16.8%, and endowments with between $500 million and $1 billion, saw investment returns of 16.2%.

Free LunchYale University led the group, posting 20.2% gains. Further proof that the free lunch concept is alive in well in 2014.

The principles and benefits of diversification are well supported by academic thought. When selecting an investment manager, advisors and investors should consider a firm that believes in the value of the free lunch by taking a multi-asset class investment approach.

[1] Swensen, D. (2009). Asset Allocation. In Pioneering Portfolio Management (p. 101). New York: Simon and Schuster.

The views expressed are those of Brinker Capital and are for informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Embracing Innovation: Envestnet Advisor Summit Wrap-up

VradenburgGreg Vradenburg, Managing Director, Investment Services

Last week we were honored to be one of the Premier Sponsors at the Envestnet Advisor Summit in Chicago. The theme of the event was “the next big thing” and it was evident everywhere. Envestnet Chairman and CEO Judson Bergman opened up the conference by talking about how advisors need to be disruptive innovators in order to succeed and overcome looming industry challenges. He stressed the importance of embracing technology, building brand and perfecting marketing and reminded us of past giants such as MySpace, BlackBerry and Blockbuster that did not take these steps and were not aware of happenings in the new markets and seemingly fell behind.

Envestnet President Bill Crager also talked about how the role of the advisor will become increasingly important in the next five years. As older advisors begin to exit the business, Crager projects that the average advisors assets will increase from $90 million today to $145 million in 2020. (Source: “9 Takeaways from the Envestnet Advisor Summit”, Financial Planning, May 20, 2014)

Conference attendees were also introduced to the Envestnet Institute, an online advisor education portal that features white paper, videos and webinars. Brinker Capital is proud to be one of the contributing content partners for this exciting new unified education portal.

Finally we were pleased by the informative “Liquid Alternatives Panel” that our CIO, Bill Miller, participated in. All panelists agreed the education around alternatives is key for both clients and advisors. Alternatives firmly fill a role in a portfolio by providing greater portfolio diversification as well as access to unique opportunities and strategies; however, they are just a piece of the overall pie.

Our thanks go out to Envestnet for hosting such a great event that allowed us to network with colleagues, investment professionals and Envestnet representatives! We look forward to next year’s Advisor Summit!

Brinker Capital at the Envestnet Advisor Summit 2014 Conference

Jean LynchJean Lynch, Managing Director

Brinker Capital is pleased to be one of Envestnet’s Platinum Sponsors for 2014 and to be supporting the Advisor Summit 2014 for the third year in a row! Envestnet’s Advisor Summit is a great venue to network with our clients who access our investment strategies on the Envestnet platform, other investment professionals, and the Envestnet team. This year’s conference is focused on “The Next Big Idea” and the agenda is packed with innovative sessions that will help advisors elevate their business to the next level.

Brinker Capital’s latest “Big Idea” is the introduction of three new 40-Act liquid alternative mutual funds that leverage the strength of our 25+ years on investment management insight and expertise and more than a decade of embracing alternative investments.  These funds – Crystal Strategy Absolute Income Fund, Crystal Strategy Absolute Return Fund, and Crystal Strategy Leveraged Alternative Fund – are designed to mirror the investment strategy of our Crystal Strategy suite of global macro funds.  While each of these funds have their own specific investment strategies and places within an investment portfolio, they do share certain characteristics including broad asset class exposure, diverse strategies, highly-focused stock selection, portfolio hedging and risk management.  For more information on the funds visit, www.crystalstrategyfunds.com.

If you happen to be at the Advisor Summit, be sure to attend the Liquid Alts and Their Growing Role in Portfolio Construction panel on Thursday, May 15 from 2:00pm – 3:00pm to hear from Brinker Capital’s Chief Investment Officer, Bill Miller, as he discusses how our approach to incorporating liquid alternatives into our investment philosophy may help advisors potentially create better outcomes for clients.


Important Information
Please note that investing in alternative strategies involves a high level of risk and is not suitable for all investors. The Crystal Strategy Funds are subject to investment risks, including possible loss of the principal amount invested and therefore are not suitable for all investors. The Funds may not achieve their objectives. Diversification does not ensure a profit or guarantee against loss.

An investor should carefully consider investment objectives, risks, charges, and expenses before investing. To obtain this and other information about the Crystal Strategy Funds, see the Prospectus available from your financial advisor, visit www.crystalstrategyfunds.com, or call (855) 572-1722. Read the Prospectus carefully before investing.

The Crystal Strategy Family of Funds is distributed by ALPS Distributors, Inc., 1290 Broadway, Ste. 1100, Denver, CO 80203.  Separately managed accounts and related investment advisory services are provided by Brinker Capital. ALPS is not affiliated with Brinker Capital and does not distribute separately managed accounts. The Crystal Strategy Family of Funds is new and has limited operating history.

Not FDIC Insured – No Bank Guarantee – May Lose Value.

Investment Risks
Alternative Investment Risk. The Team will seek to manage the Fund to balance the potential risks and rewards that we believe are present at any given time and given market. Due to the use of leverage, the Fund will be more aggressive in nature. Likewise, due to the underlying investment process, we believe that there is a strong likelihood that the Fund will perform notably different than traditional strategies with comparable levels of volatility. Similarly, despite the ability to hedge and shift Fund exposures, due to the leveraged nature of the Fund, risks will be magnified and compounded.

Asset Allocation Risk. Portfolio management may favor one or more types of investments or assets that underperform other investments, assets, or securities markets as a whole. Anytime portfolio management buys or sells securities in order to adjust the Fund’s asset allocation, this adjustment will increase portfolio turnover and generate transaction costs.

Borrowing Risk. Borrowing creates leverage. It also adds to Fund expenses and at times could cause the Fund to sell securities when it otherwise might not want to.

Concentration Risk – Investment Companies. Any investment company that  concentrates in a particular segment of the market (such as commodities, gold-related investments, infrastructure-related companies and real estate securities) will generally be more volatile than a fund that invests more broadly. Any market price movements, regulatory or technological changes, or economic conditions affecting the particular market segment in which the investment company concentrates will have a significant impact on the investment company’s performance. While the Fund does not concentrate in a particular industry, it may hold a significant position in an investment company, and there is risk for the Fund with respect to the aggregation of holdings of investment companies. The aggregation of holdings of investment companies may result in the Fund indirectly having significant exposure to a particular industry or group of industries, or in a single issuer. Such indirect concentration may have the effect of increasing the volatility of the Fund’s returns. The Fund does not control the investments of the investment companies, and any indirect concentration occurs as a result of the investment companies following their own investment objectives and strategies.

Derivatives Risk. The Fund’s use of derivatives (which may include options, futures, swaps and credit default swaps) may reduce the Fund’s returns and/or increase volatility. A risk of the Fund’s use of derivatives is that the fluctuations in their values may not correlate perfectly with the overall securities markets. Additional, derivatives are subject to liquidity risk, interest rate risk, market risk, credit risk and management risk.

Short Sale Risk. If the Fund sells a security short and subsequently has to buy the security back at a higher price, the Fund will lose money on the transaction. Any loss will be increased by the amount of compensation, interest or dividends and transaction costs the Fund must pay to a lender of the security. The amount the Fund could lose on a short sale is theoretically unlimited (as compared to a long position, where the maximum loss is the amount invested). The use of short sales, which has the effect of leveraging the Fund, could increase the exposure of the Fund to the market, increase losses and increase the volatility of returns.

Investment Objectives
Absolute Income Fund:  The Fund seeks to provide current income and downside protection to conventional equity markets, with absolute (positive) returns over full market cycles as a secondary objective.

Absolute Return Fund:  The Fund seeks to provide positive (absolute) return over full market cycles.

Leveraged Alternative Fund:  The Fund seeks to provide long-term positive absolute return with reduced correlation to conventional equity markets as a secondary objective.

Bridging the Alternative Investment Information Gap

Sue BerginSue Bergin, President, S Bergin Communications

The groundswell of interest in alternative investments continues to build, creating a thirst for clear, comprehensive and client-facing educational materials.

According to Lipper, alternative mutual funds saw the biggest percentage growth of any fund group, with assets under management increasing 41% to $178.6 billion in 2013. A recent report by Goldman Sachs projects liquid alternatives are in the early stage of a growth trend that could produce $2 trillion in assets under management in the next 10 years. In order for this to happen, however, investors must gain a better understanding of how alternative investments work, how they function within a portfolio, and where potential benefits and risks could occur.[1]

EducateAlternative investment strategies are a separate beast than the traditional methods of investing and traditional asset classes that most investors are familiar with. From divergent performance objectives, to the use of leverage, correlation to markets, liquidity requirements and fees, a fair amount about alternatives is different from traditional investments. Understandably, investors have many questions before they can decide whether to and how much of their portfolio to dedicate to alternative investments.

The task of educating investors about alternatives is falling largely on the shoulder of the advisory community. Well over half (60%) of the high-net-worth investors recently surveyed by MainStay Investments, indicated financial advisors as the top resource for alternative investment ideas. Trailing advisors was internet-based research (41%), research papers and reports (35%), and financial service companies (30%).[2]

Historically, advisors have shied away from recommending alternative investment strategies because they are too difficult to explain. The conundrum they now face is that 70% of those advisors surveyed also acknowledge the need to use new portfolio strategies to manage volatility and still seek positive.[3]

Bridge the Education GapIt’s important that advisors start to value the use of alternatives and find ways to bridge the information gap for investors. The good news is that investors have tipped their hands in terms of what they really want to know. According to the MainStay survey, clients want more information in the following areas:

 

  • Explaining the risks associated with alternative investments (73%)
  • Learning about how alternatives work (71%)
  • Finding out who manages the investments (54%)
  • Charting how alternatives affect returns (46%)

[1] http://www.imca.org/pages/Fundamentals-Alternative-Investments-Certificate

 [2] “HNW Investors Turn to Advisors For Alternative Investment Guidance,” InsuranceNewsNet, April 3, 2014.

[3]Few advisers recommend alternative investments: Respondents to a Natixis survey said that they stick to strategies that can be explained to clients more easily,” InvestmentNews, October 24, 2013

The views expressed are those of Brinker Capital and are for informational purposes only.

Monthly Market and Economic Outlook: April 2014

Amy MagnottaAmy Magnotta, CFA, Senior Investment Manager, Brinker Capital

The full quarter returns masked the volatility risk assets experienced during the first three months of the year. Markets were able to shrug off geopolitical risks stemming from Russia and the Ukraine, fears of slowing economic growth in the U.S. and China, and a transition in Federal Reserve leadership. In a reversal of what we experienced in 2013, fixed income, commodities and REITs led global equities.

The U.S. equity market recovered from the mild drawdown in January to end the quarter with a modest gain. S&P sector performance was all over the map, with utilities (+10.1%) and healthcare (+5.8%) outperforming and consumer discretionary (-2.9%) and industrials (+0.1%) lagging. U.S. equity market leadership shifted in March. The higher growth-Magnotta_Market_Update_4.10.14momentum stocks that were top performers in 2013, particularly biotech and internet companies, sold off meaningfully while value-oriented and dividend-paying companies posted gains. Leadership by market capitalization also shifted as small caps fell behind large caps.

International developed equities lagged the U.S. markets for the quarter; however, emerging market equities were also the beneficiary of a shift in investor sentiment in March. The asset class gained more than 5% in the final week to end the quarter relatively flat (-0.4%). Performance has been very mixed, with a strong rebound in Latin America, but with Russia and China still weak. This variation in performance and fundamentals argues for active management in the asset class. Valuations in emerging markets have become more attractive relative to developed markets, but risks remain which call into question the sustainability of the rally.

After posting a negative return in 2013, fixed income rallied in the first quarter. The yield on the 10-year U.S. Treasury note fell 35 basis points to end the quarter at 2.69% as fears of higher growth and inflation did not materialize. After the initial decline from the 3% level in January, the 10-year note spent the remainder of the quarter within a tight range. All fixed income sectors were positive for the quarter, with credit leading. Both investment-grade and high-yield credit spreads continued to grind tighter throughout the quarter. Within the U.S. credit sector, fundamentals are solid and the supply/demand dynamic is favorable, but valuations are elevated, especially in the investment grade space. We favor an actively managed best ideas strategy in high yield today, rather than broad market exposure.

While we believe that the long-term bias is for interest rates to move higher, the move will be protracted. Fixed income still plays an important role in portfolios as protection against equity market volatility. Our fixed income positioning in portfolios—which includes an emphasis on yield-advantaged, shorter-duration and low-volatility absolute return strategies—is designed to successfully navigate a rising or stable interest rate environment.

Magnotta_Market_Update_4.10.14_2We approach our macro view as a balance between headwinds and tailwinds. We believe the scale remains tipped in favor of tailwinds as we begin the second quarter, with a number of factors supporting the economy and markets over the intermediate term.

  • Global monetary policy remains accommodative: Even with the Fed tapering asset purchases, short-term interest rates should remain near zero until 2015. In addition, the ECB stands ready to provide support if necessary, and the Bank of Japan continues its aggressive monetary easing program.
  • Global growth stable: U.S. economic growth has been slow and steady. While the weather appears to have had a negative impact on growth during the first quarter, we still see pent-up demand in cyclical sectors like housing and capital goods. Outside of the U.S. growth has not been very robust, but it is still positive.
  • Labor market progress: The recovery in the labor market has been slow, but we have continued to add jobs. The unemployment rate has fallen to 6.7%.
  • Inflation tame: With the CPI increasing just +1.1% over the last 12 months and core CPI running at +1.6%, inflation is below the Fed’s 2% target. Inflation expectations are also tame, providing the Fed flexibility to remain accommodative.
  • U.S. companies remain in solid shape: U.S. companies have solid balance sheets with cash that could be reinvested, used for acquisitions, or returned to shareholders. Corporate profits remain at high levels, and margins have been resilient.
  • Less drag from Washington: After serving as a major uncertainty over the last few years, there has been some movement in Washington. Fiscal drag will not have a major impact on growth this year. Congress agreed to both a budget and the extension of the debt ceiling. The deficit has also shown improvement in the short term.
  • Equity fund flows turned positive: Continued inflows would provide further support to the equity markets.

However, risks facing the economy and markets remain, including:

  • Fed tapering/tightening: If the Fed continues at its current pace, quantitative easing should end in the fourth quarter. Historically, risk assets have reacted negatively when monetary stimulus has been withdrawn; however, this withdrawal is more gradual, and the economy appears to be on more solid footing this time. Should economic growth and inflation pick up, market participants may become more concerned about the timing of the Fed’s first interest rate hike.
  • Significantly higher interest rates: Rates moving significantly higher from current levels could stifle the economic recovery. Should mortgage rates move higher, it could jeopardize the recovery in the housing market.
  • Emerging markets: Slower growth and capital outflows could continue to weigh on emerging markets. While growth in China is slowing, there is not yet evidence of a hard landing.
  • Geopolitical Risks: The events surrounding Russia and Ukraine are further evidence that geopolitical risks cannot be ignored.

Risk assets should continue to perform if real growth continues to recover; however, we could see volatility as markets digest the continued withdrawal of stimulus by the Federal Reserve. Economic data will be watched closely for signs that could lead to tighter monetary policy earlier than expected. Valuations have certainly moved higher, but are not overly rich relative to history, and may even be reasonable when considering the level of interest rates and inflation. Credit conditions still provide a positive backdrop for the markets.

Magnotta_Market_Update_4.10.14_3

Source: Brinker Capital

Our portfolios are positioned to take advantage of continued strength in risk assets, and we continue to emphasize high-conviction opportunities within asset classes, as well as strategies that can exploit market inefficiencies.

Data points above compiled from FactSet, Standard & Poor’s, MSCI, and Barclays. The views expressed are those of Brinker Capital and are for informational purposes only. Holdings subject to change.

Trust, but Verify

John CoyneJohn Coyne, Vice Chairman

I recently had the opportunity to participate in the 2014 FSI OneVoice conference in Washington, D.C. on a panel centered on issues related to both liquid and traditional alternative investments.  Our nation’s capital proved to be a great venue for the discussion as it called to mind the signature quote that Ronald Reagan used in his discussions with the Soviet Union, “Trust, but verify.”

As the former chief compliance officer here at Brinker Capital, I was impressed by the thoroughness of the due diligence process outlined by the audience of compliance gatekeepers during their discussions about the products circulating through their companies in both the liquid and illiquid space.  It was clear that while they maintain excellent relationships with their product sponsor partners (no, they do not treat them like the evil empire), they have really elevated their game, particularly in understanding the advisor/investor motivations in determining the appropriateness of a particular investment.  It is clear that many eyes are on the investment decision as it winds its way through the Broker/Dealer pipeline.

Financial Services InstituteFSI is providing the type of farsighted stewardship that recognizes that the product manufacturers, custodians, Broker/Dealer’s and the advisors must have a common communion around the needs of the client.  Events like the OneVoice conference demonstrate that their fostering and encouragement of an effective dialogue among all these parties creates the best potential for success.

Taking care of the client…the Gipper would be proud.

Brinker Capital at the Financial Services Institute OneVoice 2014 Conference

Noreen BeamanNoreen Beaman, Chief Executive Officer

In June, we announced Brinker Capital as a Premier Sponsor of the Financial Services Institute (FSI), a voice of independent financial services firms and independent financial advisors.  FSI’s mission is to ensure that all individuals have access to competent and affordable financial advice, products and services.

FSI’s OneVoice 2014 Conference kicks off next week in Washington, D.C. where Brinker Capital is proud to be a Premier Sponsor as well as a presenter.  OneVoice is FSI’s annual conference for the independent broker/dealer community to network and gain knowledge of the latest within the industry.

FSI OneVoice Conference 2014We are honored to have our Vice Chairman, John Coyne, chosen as a panelist for the Alternative Investment panel; our Vice President of Business Administration, Brendan McConnell, as a panelist to share insight on the latest technology tools to help advisors gain efficiencies; and behavioral finance expert, Dr. Daniel Crosby, as a presenter on understanding investor behavior.

This year’s conference promises to be a good one as FSI celebrates 10 years of advocacy for independent financial service advisors and firms.  We look forward to seeing many of you there!

Brinker Capital on Fox Business News

Brinker Capital’s Vice Chairman, John Coyne, joins Lori Rothman on Fox Business News to discuss the changing sentiment of financial advisors and the drive towards alternative investments, like absolute return.

Coyne_FBN_500x298

The Brinker Barometer: Absolute Return Strategies On The Rise

Each quarter, we conduct a survey among financial advisors to gauge their confidence and sentiment regarding the economy, retirement savings, investing and market performance.  In our most recent Brinker Barometer, we asked respondents to reflect on key financial issues, including their clients’ retirement readiness, investing and the nation’s debt problems.

Click here for the official press release

Below is an infographic that sums up the results of the latest Brinker Barometer survey:

Brinker_Barometer_Q4_2012