The American Association of Variable Star Observers Proposal for - - PowerPoint PPT Presentation

The American Association of Variable Star Observers

Proposal for Investment Advisory Services

January 2013

Wells Fargo Advisors is the trade name under which Wells Fargo Corporation provides brokerage services. Wells Fargo Advisors is a member NYSE/ SIPC, and a separate non-bank affiliate of Wells Fargo Corporation.

Duncan W. Gillan

First Vice President – Investm ent Officer duncan.gillan@w ellsfargoadvisors.com (617) 723-3200

Paul B, Toom ey

First Vice President – Investm ent Officer paul.toom ey@w ellsfargoadvisors.com (617) 854-1944

Jeffrey E. Rakes, CIMA, CIS

Senior Vice President - Investm ents jeffrey.rakes@w ellsfargoadvisors.com (540) 983-1346

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Institutional Consulting - Key Areas

• Introduction – Team, Process, Review Meeting Format
• Review of Current Situation
• Portfolio Recommendation
• Summary of Annual Fees

Investment Consulting Team

Lead Consultants Paul Toom ey Duncan Gillan Manager Strategy Group ( 1 5 Professionals) Advisory Services Group ( 1 3 Professionals) Alternative Strategy Group ( 1 3 Professionals) I nstitutional Group ( 1 2 Professionals) Support Team : W ells Fargo Advisors Resources Lee Batten - Dir. Jeff Rakes Terry Czerniewski 10 Performance Analysts Adam Taback – Pres. Bob Franklin Hazlitt Gill James Sweetman 9 Manager Research Analysts Greg Sigmund - Dir. Paul Christopher Gary Thayer Stuart Freeman 9 Investment Strategists Mike Havey – Dir. Todd Noel Tom Wald 11 Manager Research Analysts

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Institutional Consulting Group

• The Institutional Consulting Group provides advisory consulting services to

associations, corporations, private and public retirement plans, Taft- Hartley plans, municipalities, foundations and endowments

• Institutional consulting services are provided to over 500 clients with

approximately $40 billion in assets under advisement

• Of the total institutional client base, we serve over 20 universities/ colleges

representing $400 million in assets under advisement

• The Institutional Consulting Group has been providing comprehensive

consulting to institutional clients since 1976

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Our Investment Consulting Process

Our investment consulting engagements begin with conducting a risk posture assessment. This process distills the unique elements of risk associated with each client’s situation into two broad dimensions: 1. capacity to take risk as determined by a set of quantitative metrics related to time horizon, funded status and the current operating environment of the

• rganization and, 2. the Board’s willingness to apply that capacity determined through a

comprehensive survey of Board members. Once completed, the risk posture assessment indicates the appropriate equity range for the portfolio and serves as a risk framework for the asset allocation study to follow. Elements of the Risk Posture Assessment analysis are directly incorporated into the Investment Policy Statement to provide a historical context for how risk is to be applied to the portfolio. Using insights gained from the Risk Posture Assessment, we conduct an asset allocation study resulting in an array of sample portfolios for consideration. We use analytical tools such as Morningstar Encorr Asset Allocation Software to determine the most appropriate asset mix for specific return objectives and risk tolerances. To aid clients in choosing an allocation we provide statistical data which frames the likely behavioral characteristics of each portfolio considered. Monte Carlo analysis provides clients with a range of possible returns and risk associated with these portfolios and allows for stress testing worst case

• scenarios. On an ongoing basis, these tools in conjunction with performance analytics help

us to monitor portfolio progress and navigate changing investment environments.

Steps In The Investment Consulting Process

Analyze Current Position Design Optim al Portfolio Form alize I nvestm ent Policy I m plem ent Policy Monitor and Supervise

Step 1 Review Capital Markets Risk Posture Assessm ent Process Step 2 Modern Portfolio Theory, Re-Sam pled Efficiency, Experience, and Professional I ntuition Step 3 Analysis and Confirm ation of I nvestm ent Guidelines and Risk Param eters Step 4 Diligent Application of Process Harnessing the Pow er of W ells Fargo Advisors’ Consulting Platform Step 5 Concise Reports Custom ized to your needs

Rebalance

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Performance Reporting Features

• Comprehensive and customized client reporting that employs three levels of

risk monitoring

• Investor Force, Compustat, Manager Research
• Access to over 4,000 indices
• Economic commentary
• Executive summary
• Current versus target allocation
• Industry standard time-weighted rate of returns net of all expenses
• Benchmark decisions are based upon manager strategy, returns-based and

holdings based analysis

• Performance reports are delivered electronically and in hard copy
• Dedicated staff of twelve performance analysts

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Performance Reporting Analytics

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Meeting Attendance

• We Propose Developing a team-oriented partnership with the AAVSO Board

Monthly

• Conference calls to discuss administrative issues, capital markets and flash

performance reports Quarterly

• Attendance at all regular and special meetings
• Conference calls with portfolio managers and economists
• Market update, asset allocation discussion, attribution and style analysis,

and customized performance analysis

• Manager research/ due diligence
• Manager searches, as needed
• Ongoing cost analysis and manager fee negotiation
• White papers and client education, as needed

Annually

• Asset allocation analysis
• Investment policy statement review
• Client education event/ fiduciary updates
• Develop plan for next year

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Observations

• Transparency & Cost – Mutual Funds vs. Separately Mgd. Accounts
• Mutual Funds Est. Cost of Transactional / Non-Disclosed Fees –

(see slide 12)

• Cost of Size – funds with larger assets – cost to buy/ sell large

blocks

• Active Versus Passive - 70 bps of cost – (see slides 13-14)
• Active Share – “Getting What You Pay For”
• Sourcing Beta – using ETFs to lower cost
• Un-tether active managers to try to create Alpha
• Investment Policy Review – see slide 11
• Municipals vs. Corporate/ Taxable
• Alternatives – Allocation / Cost / Limitations
• Emerging Markets & Cash

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Review of Current Investment Policy

• Current use of Municipal fixed income compromises return potential for fixed

income as 501(C)(3) derives no benefit from the tax exemption.

• The Portfolio has Limited diversification to mitigate equity volatility. In a

year such as 2008, the portfolio would be vulnerable to excessive downside

• risk. We believe Alternative Investments should be employed to a greater

degree provided that it is consistent with the Board’s comfort level.

• While the investment Policy does allow for Alternative Investments in the

form of mutual funds, it implicitly precludes limited partnership vehicles for this asset class. We believe this constraint may unduly restrict the field of candidates and ultimately the return potential of the Alternative asset class.

• We believe that a more intentional allocation to Emerging Market

International Equity in the investment policy statement is preferable to simply making the allowance that the international manager has the discretion to invest in Emerging Markets.

• In the fixed income sector of the portfolio, we believe that the allocation to

cash in the target portfolio is unnecessary and compromising to return

• potential. Given ample notice (2 weeks typically), a fixed income manager

can easily raise cash in a separate account without compromising returns.

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Current Investment Program Cost Analysis

EXP Distr.

• Est. Trans Advisory

Total Total Cost Name Symbol Amount Ratio % Cost % Cost % Cost % Cost % Amount Loomis Sayles Bond Fund LSBDX 503,309.00 $ 0.68 0.05 0.22 0.95 4,781.44 $ PIMCO Foreign Bond Fund PFORX 330,200.00 $ 1.14 0.53 0.22 1.89 6,240.78 $ Templeton Global Bond TGBAX 317,823.00 $ 0.69 0.13 0.22 1.04 3,305.36 $ Templeton Global Bond C TEGBX 7,215.00 $ 0.69 0.70 0.13 0.22 1.74 125.54 $ Vanguard GNMA Fund VFIJX 114,967.00 $ 0.09 0.02 0.17 0.22 0.50 574.84 $ Vanguard Hi-Yld Corp Bd VWEAX 20,451.00 $ 0.12 0.02 0.07 0.22 0.43 87.94 $ Vanguard Infl-Protected. VAIPX 143,410.00 $ 0.09 0.03 0.03 0.22 0.37 530.62 $ Vanguard Interm Inv Grade VFIDX 302,925.00 $ 0.08 0.03 0.13 0.22 0.46 1,393.46 $ Vanguard Short-Term Bond VBSSX 25,176.00 $ 0.08 0.03 0.10 0.22 0.43 108.26 $ Ishare 0-5 TIPS STIP 60,301.00 $ 0.20 0.22 0.42 253.26 $ iShares TIPS TIP 188,119.00 $ 0.20 0.22 0.42 790.10 $ DFA US Micro Cap DFSCX 548,165.00 $ 0.50 0.03 0.10 0.22 0.85 4,659.40 $ DFA US SCV DFSVX 534,598.00 $ 0.58 0.36 0.22 1.16 6,201.34 $ iShares S&P 500 IVV 1,113,324.00 $ 0.07 0.22 0.29 3,228.64 $ Ishares S&P Mid cap IJH 722,337.00 $ 0.15 0.22 0.37 2,672.65 $ Vanguard 500 VIFSX 411,745.00 $ 0.05 0.03 0.03 0.22 0.33 1,358.76 $ Vanguard Dividend Appr VIG 895,200.00 $ 0.13 0.22 0.35 3,133.20 $ DFA Emerging Mkts Core DFCEX 25,589.00 $ 0.75 0.20 0.22 1.17 299.39 $ DFA Emrging Mkts Value DFEVX 331,811.00 $ 0.61 0.20 0.22 1.03 3,417.65 $ DFA International SCV DISVX 570,011.00 $ 0.78 0.29 0.22 1.29 7,353.14 $ DFA International Sm Co. DFISX 420,032.00 $ 0.60 0.20 0.22 1.02 4,284.33 $

• DFA. Lg Cap Int'l

DFALX 50,544.00 $ 0.33 0.05 0.22 0.60 303.26 $ iShares ACWI - Ex US ACWX 129,987.00 $ 0.34 0.22 0.56 727.93 $ Scout International Fund UMBWX 581,770.00 $ 1.09 0.31 0.22 1.62 9,424.67 $ Vanguard Emgng Mkts ETF VWO 292,248.00 $ 0.2 0.22 0.42 1,227.44 $ Absolute Ops Fund AOFOX 333,614.00 $ 2.93 3.65 0.22 6.80 22,685.75 $ AQR MGd Futures AQMIX 434,110.00 $ 1.40 1.98 0.22 3.60 15,627.96 $ Caldwell & Orkin Mkt Oppty COAGX 381,087.00 $ 1.32 2.65 0.22 4.19 15,967.55 $ DFA Global Real Estate DFGEX 545,958.00 $ 0.46 0.20 0.22 0.88 4,804.43 $ Credit Suisse Commodity CRSOX 601,779.00 $ 1.40 0.78 0.22 2.40 14,442.70 $ Cash 242,528.00 $ 0.22 0.22 533.56 $ Totals 11,180,333.00 $ Tota Weighted Cost: 1.26% 140,545.33 $

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AAVSO Sample Investment Portfolio - All Active Program

Style/Manager Asset Class/Style Sample Allocation Annual $ bps Large Cap Growth Equity 16% Navellier Lg Growth ‐ Active 6.00% 720,000 $ 3,600 $ 50 SPY ‐ S&P 500 Lg Cap Blend ‐ Passive 10.00% 1,200,000 $ 1,080 $ 9 Large Cap Value Equity 17% Columbia Lg Value ‐ Active 7.00% 840,000 $ 4,200 $ 50 SPY ‐ S&P 500 Lg Cap Blend ‐ Passive 10.00% 1,200,000 $ 1,080 $ 9 Small to Mid Cap Equity 14% PNC Small Cap Core Sm Core ‐ Active 5.00% 600,000 $ 3,000 $ 50 Anchor Mid Value Mid Value ‐ Active 6.00% 720,000 $ 3,600 $ 50 VXF ‐ Vanguard Index SMID SMID ‐ Passive 3.00% 360,000 $ 1,800 $ 16 International Equities 13% Hansberger Intl Gr Int Growth‐ Active 5% 600,000 $ 3,000 $ 50 VEA Vanguard MSCI EAFE International ‐ Passive 8% 960,000 $ 1,152 $ 12 Emerging Markets 5% Virtus Vontobel Emg Mkts ‐ Activve 5% 600,000 $ 5,220 $ 87 Domestic Fixed Income 17% Breckenridge Muni? 10% 1,200,000 $ 3,000 $ 25 LQD ‐ iBoxx Ishares Inv Grade Investment Grade 7% 840,000 $ 1,260 $ 15 Hedge Funds 8% Pinehurst Fund of Funds 2.7% 324,000 $ 3,240 $ 100

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Mesirow Fund of Funds 2.6% 312,000 $ 3,900 $ 125

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Aurora Diversified Fund of Funds 2.7% 324,000 $ 3,240 $ 100

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Real Estate 5% VNQ ‐ vanguard REIT Rea lEstate ‐ Active 5% 600,000 $ 720 $ 12 Cash 5% Wells Fargo 90 Day T‐Bills 5% 600,000 $ 1,020 $ 17 12,000,000 $ 44,112 $ 0.37%

1 Master Fund Management Fee: 1.00%, 5% performance fee subject to a hurdle rate of 5% 2 Master Fund Management Fee: 1.25% advisory fee, no performance fee 3 Master Fund Management Fee: 1.00%, 10% performance fee subject to high water mark

Estimated Fees

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Summary of Annual Fees

All costs associated with travel, materials, special projects, etc. are included in the above stated fees. There are no additional fees or compensation received in connection with this proposal including commissions and third party compensation.

Estimated Annual Fees for $12,000,000 Investment Portfolio Sample Program ‐ Active Program: Consulting Fee 20 bps $ 24,000 Manager Fees 37 bps $ 44,112 Custody 0 bps $ All Other (e.g., separate brokerage, etc.) 0 bps $ Total Estimated Fees 57 bps $ 68,112 Fiduciary Role: We would act as a fiduciary in this relationship regarding :

• Risk Posture Assessment .
• Asset Allocation.
• Manager/investment selection.
• Developmentof effective investment strategies in the face of rapidly changing global capital market environments.
• Hiring/implementing competent, professional investment managers / solutions.
• Monitoring the progress of fund assets relative to risk adjusted goals.
• Making changes as managers evolve or goals change.
• Reviewing or developing an Investment Policy Statement .
• Interpreting quarterly performance reports on the managers hired.

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Disclosures

Past performance is not an indication of future results. Although we use reliable information sources, all data used by us may not be free from error. Sample recommendations and reports are for illustration only; actual recommendations or reports may be different. For additional information about Wells Fargo Advisors and our services, please see our Form ADV, Part II available at http: / / www.adviserinfo.sec.gov.