Investment Insights Video: Responding to Rising Interest Rates

In May, Federal Reserve Chairman, Ben Bernanke, announced the possibility that they will begin tapering in the upcoming months. As that notion looms, so too does the prospective of rising interest rates.

We sat down with Bill Miller, Chief Investment Officer, and Jeff Raupp, Senior Portfolio Manager to discuss how Brinker is prepared to respond to the upcoming policy changes.  In this installment of Investment Insights, Bill and Jeff will give financial advisors and investors a clearer understanding of the tools available to Brinker Capital and how our portfolios can manage the impending environment of rising interest rates.

 

Products and Solutions are Not Interchangeable Terms

Sue BerginSue Bergin

In an attempt to appear as holistic financial service providers, many advisors have stopped using the word product.   Solutions is the new phrase darling.

Now a retirement solutions cloak drapes annuity sales. Income protection solutions describe disability insurance.  It all sounds remarkably client-centric and needs based oriented, but often the advisor is simply recommending a product that fulfills a niche need.

The term product has gotten a bad rap because theoretically:

  1. Clients live happily ever after with solutions providers but have limited expectations of product salespeople.  They consider a product sales person as one-dimensional professional who meets a need then moves on to the next client.
  2. Products are implicit commission generating vehicles, whereas solutions are holistic and in the client’s best interest.

The products have not changed.  The sales, servicing and payment to the advisor have not changed.  The only difference in many cases is that whenever the client is in earshot, products are referred to as solutions.

The approach might work when writing brochure copy, but it leaves gaping holes in a client’s quest to achieve financial goals.

Product and solution are not interchangeable terms.  A product may solve a problem, or it may be just one component to a solution.  More often than not, a solution involves more than one product and includes other services or features.

Brinker Capital’s income solutions, for example, go well beyond product.  Both our Crystal Diversified Income Strategy and our Destinations Balanced Income Strategy have income distribution features.

We also offer customized income distribution services.  We deliver “paychecks” to clients for a specified period, while managing reserves to cover their long-term capital growth needs.  We also generate reports that include a spending analysis and notify clients if their portfolios are in jeopardy of falling short of stated goals.

You can only offer solutions when you analyze client needs holistically and extend your offering to include products, services and technology that address the problem on all levels.

Our Destinations, Crystal Suite, Personal Portfolios and Core Asset Manager products all solve specific client needs.  On the other hand, our Personal Distribution Strategy, Dollar Value Averaging, and Asset Class Strategies are holistic solutions that combine product, services and technologies that address client problems on all levels.

Staying Ahead of the Curve Despite Recent Volatility

After a strong surge in global financial markets in the first quarter of 2012, risk assets – equities, commodities, corporate credit – have sold off thus far in the second quarter. Uncertainties over global growth and Europe have reentered markets. At Brinker Capital, we are not surprised that some of the euphoria is being worked off. We would not be surprised to see further consolidation.

Several of our fundamental and technical indicators were showing signs of concern earlier this spring. At the end of the first quarter, the various Brinker discretionary portfolios reduced exposure to risk assets. Future signposts suggest the volatility could continue.

For those of you who follow our market outlook and quarterly portfolio calls, this might be familiar material. Some of the indicators we monitor were flashing warning signals:

  • Event risk – European elections, particularly in France and Greece, along with stalling reform initiatives in Spain and Italy.
  • Market fundamentals – economic indicators such as consumer and CEO confidence and economic surprises appeared to be peaking. The S&P 500 appeared to have discounted a lot of good news in valuations.
  • Sentiment – though investors maintained bullish sentiment (low levels of short interest), corporate insiders were selling stock in 2012, a change from insider purchases seen last fall.

As a result, we reduced risk exposures across our various discretionary portfolios.

  • Destinations and Personal Portfolios reduced exposure to risk assets and were positioned underweight risk compared to a neutral positioning.
  • Crystal Strategy I reduced its portfolio beta from positive to now a modestly negative beta by reducing risk and adding inverse exposures designed to rise in falling markets.

We will continue to monitor the following signposts over the near term and actively manage our broadly diversified portfolios as appropriate.

  • U.S. – Fed meetings later in June and prospects for further Quantitative Easing. Later this summer, we need progress on addressing the massive fiscal cliff to be reached early in 2013, regardless of the outcome in November elections.
  • Europe – second round of Greek elections on June 17 and progress (or absence thereof) regarding further European integration (bank deposit guarantee, adding capital to weak banks, stabilization in bond yields).
  • China – further, but moderate, monetary and fiscal stimulus, enough to avert a hard landing, but not enough to bail out weak global growth or produce sizzling China growth. The government is happy to see cooling in property markets.