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Aberdeen Reorganizes And Liquidates Arden Funds

Aberdeen, the new owner of institutional fund-of-hedge-funds firm Arden Asset Management, is shutting down and liquidating the Arden Alternative Strategies Fund (MUTF: ARDNX ) that Arden launched nearly three-and-a-half years ago. In addition, Aberdeen has reorganized a sister fund, the Arden Alternative Strategies Fund II, into the Aberdeen Multi-Manager Alternative Strategies Fund II (MUTF: ARDWX ). These moves come as the consequence of Aberdeen Asset Management’s acquisition of Arden, which was announced in August 2015 and completed on the last day of 2015. Early Success When the Arden Alternative Strategies Fund originally launched in November 2012, Fidelity Investments was the fund’s sole client. This proved to be a fruitful relationship as the fund grew to a peak of nearly $1.2 billion in assets in November 2014. With a strategic relationship in hand and outperformance in 2013 – beating the category by 416 basis points, with a return of +6.58% for the year – Arden launched a second fund in early 2014, the Arden Alternative Strategies Fund II, which was open to all investors. The original fund posted returns of -0.49% in 2014 and -3.44% in 2015, while the new fund returned +1.20% from its February 3, 2014 launch through the end of that year, followed by gains of 0.07% in 2015. Through February 29, 2016, the funds had respective returns of -2.27% and -1.14%. The Winding Down The underperformance of the original fund, along with likely re-allocations by Fidelity, caused its assets under management to fall from its peak of nearly $1.2 billion to $852 million as of the end of February 2016. While many firms would be delighted with assets at this level, Aberdeen decided to liquidate the fund. According to a February 24 filing with the Securities and Exchange Commission (“SEC”), the Arden Alternative Strategies Fund ceased taking money from new investors on February 29 and is expected to be fully liquidated by the end of March 2016. The fund’s Board of Trustees’ stated reasons for liquidating the fund were concerns over its “long-term sustainability.” As witnessed with other funds, single client risk, or client concentration, often looms large, and can result the liquidation of a fund on fairly short notice. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.

Bracketology – An Investing Lesson From The NCAA

“Bracketology,” a term coined by ESPN, is the study of the annual NCAA college basketball tournament. Interestingly the art or science of filling out an NCAA tournament bracket also provides insight into how investors select investment assets. Before explaining, we present you with a question: When filling out an NCAA bracket do you A) start by picking the expected national champion and work backward or B) analyze each matchup, and pick winners starting at the earliest rounds, working toward the championship game? In A, one has a pre-determined idea for which team is the best in the country and disregards the path that team must take to become champions. Those using B’s methodology look at each game and consider the participants, compare their respective records, their strengths of schedule, demonstrated strengths and weaknesses, record against common opponents and even how travel and geography could affect performance. In a methodical, rigorous evaluation, the result is a conclusion about which team can win 6 consecutive games and become the national champion. Outcome vs Process Outcome-based investors start with an expected outcome, typically based on prior results, and select assets accordingly. How many times do we hear the gurus of Wall Street preach that stocks return 7% on average and therefore a well-diversified portfolio should expect the same thing this year? Many investors take the bait and few question the rather simple approach that drives the expected outcome and ultimately the investment selection process. Process-based investing, on the other hand, is a tactic to better determine how assets should perform. The method may be based on macroeconomic expectations, technical analysis or a bottom-up assessment of individual companies to name a few. Process investors do not just assume that yesterday’s winners will be tomorrow’s winners nor do they diversify just for the sake of diversification. They create a procedure to help them forecast which assets are likely to provide the best risk/reward prospects and deploy capital opportunistically. “The past is no guarantee of future results” is a common investment disclaimer. However, it is this same outcome-based methodology that many investment managers use to allocate their assets. Process driven investors employ thoughtful analysis to determine what investments should perform the best. Potential outcomes are the ending point of their analysis not the starting point of their work. A or B? So, why would people use a less rigorous process in investing than the one they use in filling out their NCAA tournament brackets? Starting at the final game and selecting a national champion, is similar to identifying a return goal of, for example, 10%. How that goal is achieved is subordinated to the idea that one will achieve it. In such an outcome based approach, decision making is predicated on an expected result. Considering each of the 67 possible match-ups in the NCAA tournament to ultimately determine the winner applies a process-oriented approach. Each decision is based on the evaluation of comparative strengths and weaknesses between teams. The expected outcome is a result of the analysis of factors required to achieve the outcome. Summary Very few filling out brackets this year will pick Duke solely because they won the tournament last year. Many investors, however, will select investments based on what performed well last year. The following table (courtesy invest-assist.blogspot.com and Koch Capital) is a great reminder that building a portfolio based on last year’s performance is a surefire way to ensure you are not making the most out of your portfolio. Click to enlarge Winning or losing a basketball pool has benefits like bragging rights and potentially winning some money. Managing a client’s investments deserves much more thoughtfulness. Those who apply a well thought out process-oriented approach provide their clients a much more rigorous, durable and time-tested method to consistent performance. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

What (Returns) To Expect When You’re Expecting

Investing decisions should always be made in the context of your overall financial plan. And although we know short-term forecasts are futile , a retirement plan needs to include some assumptions about returns and risk over the long term. To help with this important task, my colleague Raymond Kerzérho , PWL Capital ‘s director of research, has just updated our white paper, Great Expectations: How to estimate future stock and bond returns when creating a financial plan . As we explain in the paper, there are two main approaches to estimating future stock returns. The first is to rely on a historical premium: over the last 50 years, stocks have delivered returns of about 5% above inflation, so one could simply expect that to continue. The second approach raises or lowers that expected premium depending on whether stocks are currently undervalued or overvalued. You can apply similar methods to expected bond returns, using either the long-term premium (about 2.7% over inflation) or the current yield on a benchmark index. Both methods are flawed, but an average of the two is likely to be a useful estimate. Imagine that you are doing retirement projections going out 30 years. Using an expected return of 4.5% for bonds based on their long-term average seems wildly optimistic. But on the other hand, assuming bonds will yield just 2% for the next 30 years (based on their yield today) seems unnecessarily conservative. An average of these two estimates (3.3%) is a reasonable compromise. You can dig into the paper for all the details, but here are the numbers we’re using for inflation, bonds and stocks in our plans these days: Estimated long-term returns (as of December 2015) Asset class Expected return Inflation 1.80% Canadian bonds 3.30% Canadian equities 7.10% U.S. equities 6.30% International developed equities 7.20% Emerging markets equities 9.80% Source: PWL Capital And here’s how those numbers combine in various balanced portfolios. In the table below, we’ve also included the standard deviation (a measure of volatility) for each asset mix, and the maximum drawdown (or cumulative decline) experienced in similar portfolios since 1988: Expected return and risk of various portfolios Equities/Bonds Expected Return Standard Deviation Cumulative Decline 0% / 100% 3.30% 3.90% -11% 10% / 90% 3.60% 3.80% -10% 20% / 80% 4.00% 4.00% -10% 30% / 70% 4.40% 4.50% -10% 40% / 60% 4.80% 5.30% -14% 50% / 50% 5.10% 6.20% -18% 60% / 40% 5.50% 7.20% -23% 70% / 30% 5.90% 8.20% -28% 80% / 20% 6.30% 9.20% -33% 90% / 10% 6.70% 10.30% -39% 100% / 0% 7.00% 11.40% -44% Sources: PWL Capital, Morningstar Direct How low can you go? In this new edition of our paper (which was first published almost two years ago), we’ve added a postscript to help put these numbers in context. If you’ve looked at the returns of a balanced portfolio over the long term , you may be surprised (and disappointed) by the expectations we describe in the paper. Even since the late 1980s, traditional index portfolios delivered annualized returns in excess of 7% or 8%, even with a conservative asset mix, compared with our expectation of just 5.1% for a portfolio of half stocks and half bonds. Why so gloomy? The first important point is that over the last 20 to 30 years, bonds enjoyed a long bull market as interest rates trended steadily downward (10-year Government of Canada bonds yielded close to 10% in 1988). This cannot be expected going forward, so we think it’s reasonable to plan for conservative portfolios to deliver significantly lower returns in the foreseeable future. It’s also reasonable to expect equity returns to be lower than they have been since 1988. By traditional valuation measures, stocks are relatively more expensive today: for example, the S&P 500 had a price-to-earnings ratio of 14 at the beginning of 1988, compared with 24 at the end of 2015. Finally, inflation was 4% in 1988, compared with just 1.4% in 2015. The numbers in the tables above are nominal returns, which are not adjusted for inflation. Remember that a 6% return with 2% inflation is very similar to an 8% return with 4% inflation. When viewed in terms of purchasing power, the gap between historical returns and expected future returns is not as wide as it first appears. Disclosure: Holdings include: ZRE, HXT, XRB, XMD, VAB, VTI, VXUS.