Portfolio Management 101 Portfolio Management 101 Portfolio - - PowerPoint PPT Presentation

Portfolio Management 101 Portfolio Management 101

Jeff Gerson Business Practice Mgmt

Portfolio Management Institute 2006 PMI Forum Chicago, IL

Kurt Meyer Equities Paul Davis Marketing Al Derosa, CFA Fixed Income

Running a Successful PM Business Running a Successful PM Business

Jeffrey S. Gerson

Senior Portfolio Management Director Senior Vice President – Wealth Management Director’s Council Portfolio Management Institute 2006 PMI Forum Chicago, IL

Introduction Introduction

Always look at the big picture People don't move mountains, ideas move

mountains

Find a need and fill it.

Step 1 Step 1

Definition of Sales: The transfer of one’s conviction to another

Be Positive – Clients find it infectious Be Confident – Clients will listen better The Secret to Success is Not Knowing you Can’t

Do It

Your Goals Your Goals

Become your client’s default FA Position yourself as a Financial

Professional, not the guy who sells people stocks

Try never to lose a client Always prospect for new clients Get existing clients to add to their accounts

Investing In Your Business Investing In Your Business

10% of your income should flow back into

your business

Time Technology Support Client Appreciation

Time Time

Write a Business Plan Hold daily /weekly meetings with your assistant and/or Team For Teams

– Set aside time to have team nights away from the office

Attend business building seminars Get involved in the community Learn the systems that SB has in place

– Next Gen – FC Linx – SSB Access

Time Management Time Management

Single Practitioners Single Practitioners

Partition your day

– Prospect – Client Service – Portfolio Research and Management

Time Management Time Management

Teams Teams

2 types of structures

– Vertical

Senior Decision Maker

– Horizontal

Consensus Decision Making

Time Management Time Management

Teams (cont…) Teams (cont…)

– Joint Marketing – Delegation of Roles and Responsibilities – Conveys Depth to Clients – Think Tank – Smoothing of Peak and Trough Periods

Gerson Guarino & Meisel Group Gerson Guarino & Meisel Group

Jeff Gerson –

– Inside – New Business Development & Marketing – Outside – Senior Wealth Strategist

Chris Guarino

– Inside – Senior Portfolio Manager – Outside – Senior Portfolio Manager

Greg Meisel

– Inside – Team Manager / Sales Manager – Outside – Relationship Manager

Shawn Landau

– Inside – Planning / Marketing Follow-up / Sales – Outside – Estate, Retirement and Financial Planning

Gerson Guarino & Meisel Group Gerson Guarino & Meisel Group

Support Staff Support Staff

Lisa Guzman

– Lead Administrative Assistant – Executive Services, Trust Accounts – Administrative Delegation

Laura Micelli

– New Accounts – PM Lead Assistant

Mike Gammarati

– Sales Support – Common Proposal, HNW Fixed Income – Cash Book – Alternative Investments

Team Work Team Work

Nobody works for you, they work with you Incentives for your sales assistant

– With Money – With Praise

Enlist those more skilled to help close business

– Firm Professionals – Seasoned FAs

Keep your manager/sales manager in the loop

Technology Technology

Contact Management Presentation Materials E-Mail – Internal & External The Internet Multimedia Proposals Remote Computing SB Access / FA Profile Web Page Blackberry / Treo – be reachable

The Next Level of Service The Next Level of Service

Newsletters Custom Brochures Informational e-mails Birthday Calls / Cards Holiday Cards Personalized Calenders Holiday Gifts ($100 maximum) Recognize what’s important to your client

Generating Business Generating Business

Harness Centers of Influence Provide Services to Accountants, Business

Managers, Attorneys, etc…

Be Accessible Get Involved with your clients on a level other

than the market

Ask for introductions

Building a Fee Building a Fee-

• Based

Based Business Business

Create an Annuity For Yourself

Hypothetical Growth of a Fee Based Business Hypothetical Growth of a Fee Based Business

One Two Three Four Five Beginning Value $5,000,000 $5,400,000 $10,832,000 $16,698,560 $23,034,445 Growth at 8% $400,000 $432,000 $866,560 $1,335,885 $1,842,756 New Assets $0 $5,000,000 $5,000,000 $5,000,000 $5,000,000 End of Year Value $5,400,000 $10,832,000 $16,698,560 $23,034,445 $29,877,200 Fee 2.00% 2.00% 2.00% 2.00% 2.00% Annual Gross $108,000 $216,640 $333,971 $460,689 $597,544 Six Seven Eight Nine Ten Beginning Value $29,877,200 $37,267,376 $45,248,767 $53,868,668 $63,178,161 Growth at 8% $2,390,176 $2,981,390 $3,619,901 $4,309,493 $5,054,253 New Assets $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 End of Year Value $37,267,376 $45,248,767 $53,868,668 $63,178,161 $73,232,414 Fee 2.00% 2.00% 2.00% 2.00% 2.00% Annual Gross $745,348 $904,975 $1,077,373 $1,263,563 $1,464,648

Year-By-Year Analysis of How Assets = Gross at 2% Fee

Hypothetical Growth of a Fee Based Business Hypothetical Growth of a Fee Based Business

One Two Three Four Five Beginning Value $5,000,000 $5,400,000 $10,832,000 $16,698,560 $23,034,445 Growth at 8% $400,000 $432,000 $866,560 $1,335,885 $1,842,756 New Assets $0 $5,000,000 $5,000,000 $5,000,000 $5,000,000 End of Year Value $5,400,000 $10,832,000 $16,698,560 $23,034,445 $29,877,200 Fee 1.50% 1.50% 1.50% 1.50% 1.50% Annual Gross $81,000 $162,480 $250,478 $345,517 $448,158 Six Seven Eight Nine Ten Beginning Value $29,877,200 $37,267,376 $45,248,767 $53,868,668 $63,178,161 Growth at 8% $2,390,176 $2,981,390 $3,619,901 $4,309,493 $5,054,253 New Assets $5,000,000 $5,000,000 $5,000,000 $5,000,000 $5,000,000 End of Year Value $37,267,376 $45,248,767 $53,868,668 $63,178,161 $73,232,414 Fee 1.50% 1.50% 1.50% 1.50% 1.50% Annual Gross $559,011 $678,731 $808,030 $947,672 $1,098,486

Year-By-Year Analysis of How Assets = Gross at 1.5%

Hypothetical Growth of a Fee Based Business Hypothetical Growth of a Fee Based Business

One Two Three Four Five Beginning Value $5,000,000 $5,400,000 $10,832,000 $17,948,560 $27,196,945 Growth at 8% $400,000 $432,000 $866,560 $1,435,885 $2,175,756 New Assets $0 $5,000,000 $6,250,000 $7,812,500 $9,765,625 End of Year Value $5,400,000 $10,832,000 $17,948,560 $27,196,945 $39,138,325 Fee 1.50% 1.50% 1.50% 1.50% 1.50% Annual Gross $81,000 $162,480 $269,228 $407,954 $587,075 Six Seven Eight Nine Ten Beginning Value $39,138,325 $54,476,423 $74,093,326 $99,094,278 $130,863,678 Growth at 8% $3,131,066 $4,358,114 $5,927,466 $7,927,542 $10,469,094 New Assets $12,207,031 $15,258,789 $19,073,486 $23,841,858 $29,802,322 End of Year Value $54,476,423 $74,093,326 $99,094,278 $130,863,678 $171,135,095 Fee 1.50% 1.50% 1.50% 1.50% 1.50% Annual Gross $817,146 $1,111,400 $1,486,414 $1,962,955 $2,567,026

Year-By-Year Analysis of How Assets = Gross at 1.5% Assuming you raise 25% more assets than you did during the Previous Year

Building the Fee Building the Fee-

• Based Book

Based Book

Life of a PM Business

$0 $10,000,000 $20,000,000 $30,000,000 $40,000,000 $50,000,000 $60,000,000 $70,000,000 $80,000,000 One Two Three Four Five Six Seven Eight Nine Ten Years Assets under Management New Assets Growth at 8% Beginning Value

Evergreen Income Evergreen Income

Annual Gross $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 One Two Three Four Five Six Seven Eight Nine Ten Years Fees Annual Gross

Why PM is good for your Clients? Why PM is good for your Clients?

Process vs. Product You Buy High Quality Securities Diversification Charge No Commissions Pre-Established Costs Even Playing Field

Why PM is Good for You? Why PM is Good for You?

Leverage Client Management Predictable Earnings Stream Differentiates you from the Competition Breaks The 80/20 Rule

Why Did We Start Doing PM Business? Why Did We Start Doing PM Business?

Client’s Were Demanding It We needed a way to differentiate my business

from the 200,000 brokers We compete with.

We did not like having to oversell clients We did not like charging commissions We wanted to be paid for holding good companies We wanted to run my business like a business

Marketing to Existing Clients Marketing to Existing Clients

Commission to Fee

– Emphasize the alignment of your interests with client’s

Explain how PM gives us more flexibility to manage their

account

Instead of calling clients, you spend time managing money Discuss realities of running a successful business If possible, insist that the client must allow you to handle

the portfolio that way

Quarterly Reviews, Newsletters and Periodic Meetings Ask for introductions

Marketing To Prospective Clients Marketing To Prospective Clients

Discuss Only PM

– Do not compromise, stick to your guns – You are the professional, they are the clients – You are a Portfolio Manager, you are not a “broker”

Avoid the Performance Discussion

– Discuss Quality, not Performance

Detail benefits of PM vs. Mutual Funds

– including costs and Taxes

Ask for Introductions at the Close

Rules to Live By Rules to Live By

Don’t Sell Performance Try not to lose clients money more than you

try to make clients money.

Let your winners run and cut your losers

short.

The “Funnel” Effect The “Funnel” Effect

PM Opens The Floodgates For Referrals PM Opens The Floodgates For Referrals

PM Client PM Manager

Most Products and Services Most Products and Services

Can Be Bought Elsewhere Can Be Bought Elsewhere

PM Client PM Manager Other Firm Other Firm

The “Funnel” Effect The “Funnel” Effect “ “If People Want To Be Like Their Happy Friend,

If People Want To Be Like Their Happy Friend, They Have To Be Introduced to You” They Have To Be Introduced to You”

PM Client PM Manager Other Firm Other Firm

Portfolio Management I nstitute Portfolio Management I nstitute

PM 101 Fixed Income Management

Al DeRosa, CFA

Portfolio Management Director

U.S. Treasury Securities U.S. Treasury Securities Government Agency Securities Government Agency Securities

On or Off the run Treasury availability Typical daily Agency offerings

– Over 100 offerings – Maturity range 1 to 30 years – Coupon range 2.50% to 7.00% – Callable and non-callable No position limit

Sample Offerings Sample Offerings

Sample Agency offerings (daily)

Issuer Coupon Maturity Spread Benchmark Treasury Yield Dollar Price FNMA 4.250% 7/15/2007 19 2 YR 4.88% 99.189 FNMA 6.625% 10/15/2007 19 2 YR 4.88% 102.627 FNMA 3.250% 11/15/2007 16 2 YR 4.85% 97.459 FNMA 3.250% 1/15/2008 17 2 YR 4.86% 97.200 FNMA 5.750% 2/15/2008 18 2 YR 4.87% 101.589 FHLMC 2.750% 3/15/2008 18 2 YR 4.87% 96.001 FNMA 6.000% 5/15/2008 19 2 YR 4.88% 102.271 FNMA 2.500% 6/15/2008 18 2 YR 4.87% 94.997 FNMA 3.250% 8/15/2008 18 2 YR 4.87% 96.342 FHLMC 5.125% 10/15/2008 25 3 YR 5.00% 100.295 FNMA 3.375% 12/15/2008 23 3 YR 4.98% 95.913 FNMA 5.250% 1/15/2009 24 3 YR 4.99% 100.673 FNMA 3.250% 2/15/2009 25 3 YR 5.00% 95.298 FHLMC 5.750% 3/15/2009 26 3 YR 5.01% 102.039 FNMA 4.250% 5/15/2009 26 3 YR 5.01% 97.792 FHLMC 4.250% 7/15/2009 25 3 YR 5.00% 97.716 FNMA 6.375% 6/15/2009 27 3 YR 5.02% 104.010

PM Fixed I ncome Guidelines PM Fixed I ncome Guidelines

Corporate and Municipal Issues

– Maximum portfolio position 25% in any one issue – Up to 25% appreciation per issue – Credit rating B or better (S&P) OR B2 or better (Moody’s)

Typical daily Corporate offerings

– Over 60 offerings – Maturity range 1 to 30 years – Coupon range 3.00% to 7.50%

Sample Offerings Sample Offerings

Corporate offerings (daily)

QUANTITY NAME OF ISSUER COUPON MATURITY SPREAD YIELD DOLLAR RATING 3,500M Morgan Stanley 6.1 4/15/2006 +8 4.00 100.160 AA3/A+ 2,750M SBC Communications 5.75 5/2/2006 +10 4.25 100.179 A2/A 5,000M Walmart 5.45 8/1/2006 +5 4.55 100.320 AA2/AA 3,550M Coca-Cola Enterprises 5.375 8/15/2006 +15 4.76 100.239 A2/A 2,500M Household Finance Corp 5.75 1/30/2007 +25 4.98 100.640 A1/A+ 4,100M Morgan Stanley 5.8 4/1/2007 +35 5.08 100.715 AA3/A+ 6,500M Pepsico Inc 3.2 5/15/2007 +20 4.93 98.058 AA3/A+ 3,000M General Electric Cap. Corp 5 6/15/2007 +28 5.01 99.976 AAA/AAA 4,500M Proctor & Gamble 4.75 6/15/2007 +18 4.91 99.798 AA3/AA- 2,250M Walmart 4.375 7/12/2007 +17 4.90 99.325 AA2/AA 5,500M Dupont 3.375 11/15/2007 +20 4.93 97.535 AA3/AA- 2,000M Merrill Lynch 4 11/15/2007 +35 5.08 98.287 AA3/A+ 5,200M American Express 3.75 11/20/2007 +30 5.03 97.954 A1/A+ 7,450M Goldman Sachs 4.125 1/15/2008 +38 5.07 98.364 AA3/A+ 7,500M Target Corp 3.375 3/1/2008 +38 5.07 96.878 A2/A+ 5,000M Wells Fargo & Co 4.125 3/10/2008 +36 5.05 98.277 AA1/AA-

PM Fixed I ncome Guidelines PM Fixed I ncome Guidelines

Convertible Securities

– Convertible bonds are considered fixed income and fixed income guidelines apply – Convertible preferreds are considered equity and equity guidelines apply

Preferred Securities

– Straight preferreds are considered fixed income and fixed income guidelines apply

Fixed I ncome Model Portfolios Fixed I ncome Model Portfolios

Government 1-5 years (conservative/moderate) Government 3-7 years (conservative/moderate) Government 7-10 years (conservative/moderate) Corporate 1-5 years (moderate) Corporate 3-7 years (moderate) Corporate 1-5 years (moderate)

Call the PM Bond Desk Best effort to match the portfolio

Fixed I ncome I ndex Funds Fixed I ncome I ndex Funds

iShares Lehman Aggregate Bond Fund iShares Lehman 1-3 Year Treasury Bond Fund iShares Lehman 7-10 Year Treasury Bond Fund iShares Lehman 20+ Year Treasury Bond Fund iShares Lehman TIPS Bond Fund iShares GS $ InvesTop Corporate Bond Fund

No position limit

Bond Funds Bond Funds

Smith Barney Advisor Funds

– Bond funds eligible in Smith Barney Advisor are considered fixed income and fixed income guidelines apply

Closed End Bond Funds

– Subject to CIR rating 1 or 2 – Closed end bond funds are considered fixed income and fixed income guidelines apply

Managing Balanced Accounts Managing Balanced Accounts

Risk Tolerance Efficient Frontier Target Asset Allocation Default Risk Interest Rate Risk Market Risk

Marketing PM Balanced Accounts Marketing PM Balanced Accounts

Asset Allocation in one account Dedicated Portfolio Structure Immunize a liability stream Manage Duration

– Fixed Income allocation managed for income and safety, not against a benchmark

Value added – spread over Treasuries

2006 PMI Forum 2006 PMI Forum

Equity Portfolio Management Portfolio Management 101

Kurt Meyer Senior Portfolio Manager

Equity Portfolio Management Equity Portfolio Management

Building a Successful Equity Portfolio Start by writing your investment policy:

– Define your investment objectives – Develop your investment strategy and process – Determine your investment style and stock universe – Equity portfolio management tools – Develop a daily ritual – Critically review your investment decisions and your management

• versight-define an appropriate portfolio benchmark

Define Your Investment Objectives Define Your Investment Objectives

Write your investment policy (sample)

We believe that superior risk-adjusted returns can be achieved through investment in high-quality companies purchased at reasonable prices. We use a disciplined fundamental research approach to identify companies with global dominance, excellent management, financial strength, and consistent growth. We add value through our extensive internal research process whereby we gain a thorough understanding of the companies in which we invest. Key Elements of our Investment Philosophy and Approach: Bottom-up stock selection In-depth, independent fundamental research High-quality companies with sustainable competitive advantages Disciplined valuation approach applying multiple valuation measures Long-term vision, resulting in low portfolio turnover Our investment process involves three distinct steps: Screening, Research, and Portfolio Construction

The Meyer Group at Smith Barney The Meyer Group at Smith Barney Investment Objectives Investment Objectives

Equity Growth Portfolio:

We invest in global multicap companies with the primary objective of

• utperforming the S&P 500 index over a complete market cycle; with

a secondary objective of obtaining positive absolute annual returns. When building a diversified equity portfolio we target companies with earnings growth rates in excess of 15% annually. We invest in companies we believe will benefit from the current economic environment, demographic themes, and relative technical strength within their industry classification. We monitor market and portfolio data and adjust or tilt allocations accordingly. Cash commitments are adjusted to defend against market down-turns and decrease portfolio volatility.

Developing Your Investment Strategy Developing Your Investment Strategy

Portfolio Construction & Design

Asset Allocation

A study by landmark Brinson, Hood and Beebower, "Determinants of Portfolio Performance" (1986, 1991) argues that investment policy accounts for 94% of the variation in returns in a portfolio, leaving market timing and stock selection to account for only 6%.

An overwhelming amount of evidence shows that there is little advantage in attempting either to time markets or select individual equities. Such efforts instead result in additional cost, additional risk and lower returns over time.

Developing Your Investment Developing Your Investment Strategy Strategy

Define Strategic Allocation

– Stocks, bonds, cash (max, min)

Sector weights (industry, sub-industry, country) Market capitalization weights Style weights Individual stock weights (# of positions)

– Tactical Allocation-tilting

We should use our intellect to adapt our portfolio management behavior to the present environment

Determine your investment style Determine your investment style and stock universe and stock universe

Investment Strategy- Your Process

– Finding stocks

– Economic and Demographic themes (top down) – Fundamental research (bottom up) – Relative Strength themes – Trade publications – Index positions – Screen stocks using fundamental characteristics – Other trusted equity managers

– Create your Buy Universe-Define your Style

Equity Portfolio Management Equity Portfolio Management Tools Tools

Analytical Tools

– Fundamental

Baseline, S&P, Zacks, Analyst reports, etc.

– Technical

Dorsey Wright, O’Neil, etc (relative strength)

– Fundamental forecasting poor – Illusion of knowledge-doesn’t lead accurate decision – Meeting companies-bias – Thinking you’re smarter- over confident – Short term-Overtrading – Believing all you read-too good/not that bad – Group based decisions-conforming

Investment Strategy and Process Investment Strategy and Process

• Building the portfolio-Create a Model

– Existing Account

Buying up/Selling down positions Initializing new positions

– New Account Options

Matching 100% model immediately (market direction dependent or not) Getting % invested immediately and building remainder

– Building positions based upon stock price 1% like stock; average price 2% like stock; good price 2% love stock; average price 2.5% love stock; good price 3.0% love stock; great price – Consider total sector weight, number of positions, and beta/ correlation effect of each new position or weight.

Daily Ritual Daily Ritual

Time management

– Block daily PM time – Create structure to review

Allocation Positions Buy/sell/add/trim decisions Research

– Use Mates

Personal Thoughts Personal Thoughts

Bounded Rationality-we can handle only limited

information

Sell losers and hold/add to winners Stocks with little or no news have lesser risk than

stocks that are in the news

Earnings surprise is the greatest factor influencing

single stock performance

Asset mix and position weight have greatest impact on

portfolio performance

Remain Logical, methodical, systematic, and

unemotional

Get away from the office and think

Review your portfolio management decisions Review your portfolio management decisions

“Experience isn’t what happens to you; experience is what you do with what happens to you.”

Aldous Huxley

CG Style analysis of yourself – Orion, Zephyr, performance attribution

– Past years buys and sells (good/bad decisions). Why? – List holdings in weight order, performance order – Turnover- “more we trade; more we loose”-Dr. Odean – Accept constructive criticism – Review your process and adapt

Would you hire this manager?

Team Members Team Members

Years of Experience

Craig Nicholson - FA

26

Roger Metz - FA

23

Paul Davis - FA

14

Kathy Breen - Operations/Client Services

15

Lisa Jackson - Client Services

8

Whitney Nystrom – Computer Operator

2 Total Years of Experience: 88

Assets Assets

$270,000,000 Total $30,000,000 Consulted On 62% Business – Managed

74% Of Managed is PM

Evolution to PM Evolution to PM

Early adopters of CG business Dabbled in PM Followers of Louise Yamada & Alan Shaw

In 1998 - 2000: Became disillusioned with the CG process

CG Asks Money Manager

• Style Specific
• Fully Invested
• High R2
• Low Dispersion
• Provide Alpha if possible

Clients Ask Us

• Manage Risk
• Buy Securities that Go Up
• More than the Market

Evolution to PM ( Evolution to PM (con’t con’t) )

2001-2002: Began to apply technical analysis to PM portfolios – Keeping official track records – Converting CG business to non-style specific management – Running PM accounts the same

2003: Marketing to Conversion of 2003: Marketing to Conversion of Existing Book & Prospects Existing Book & Prospects

►Weekly Research 40+ Indicators reviewed every Wednesday ►Weekly Newsletter Updated supply & demand with current

markets

Used as a method of constant

communication, education, & marketing

2003: Marketing to Conversion of 2003: Marketing to Conversion of Existing Book & Prospects ( Existing Book & Prospects (con’t con’t) )

►Bi-Monthly Office Luncheons

Marketed in Newsletter Held in office conference room Only 10 people allowed to attend Encouraged clients to bring guest Sack lunch began at 12 ended at 1 “Roll up your sleeves” workshop Information ONLY on process & current market

environment

Office Luncheon Topics Office Luncheon Topics

• How Supply & Demand affects equities
• How to use Supply & Demand to look at current

trends in the market

• How we apply those trends to our portfolios

Follow Follow-

• Up

Up

Review Current Portfolios Compare to Current

Research

Outside Marketing Outside Marketing

Began having luncheons for other FA’s and

their clients

Began offering luncheons to other FA’s as an

avenue to use us for market research & management

What’s New? What’s New?

Hired Marketing Coach

Helps with referrals & management processes

We are happy and have found this to be very useful thus far