Tag Archives: portfolio

Manning & Napier Pro-Blend Conservative Term Series S, September 2015

Objective and strategy The fund’s first objective is preservation of capital. Its secondary concerns are to provide income and long-term growth of capital. The fund invests primarily in fixed-income securities. It tilts toward shorter-term, investment grade issues, while having the ability to go elsewhere when the opportunities are compelling. It also invests in foreign and domestic stocks, with a preference for dividend-paying equities. Finally, it may invest a bit in a managed futures strategy as a hedge. In general, though, bonds are 55-85% of the portfolio. In the past five years, stocks have accounted for 25-35% of the portfolio, though they might be about 10% higher or lower if conditions warrant. Adviser Manning & Napier (NYSE: MN ). Manning & Napier was founded in 1970 by Bill Manning and Bill Napier. They’re headquartered near Rochester, NY, with offices in Columbus, OH, Chicago and St. Petersburg. They serve a diversified client base of high-net worth individuals and institutions, including 401(k) plans, pension plans, Taft-Hartley plans, endowments and foundations. It’s a publicly traded company with $43 billion in assets under management. Of that, about $18 billion are in their team-managed mutual funds and the remainder in a series of separately managed accounts. Manager The fund is managed by a seven-person team headed by Jeffrey Herrmann and Marc Tommasi. Both of them have been with the fund since its launch. The same team manages all of Manning & Napier’s Pro-Blend and Target Date funds. Management’s stake in the fund We generally look for funds where the managers have placed a lot of their own money to work beside yours. The managers work as a team on about 10 funds. While few of them have any investment in this particular fund, virtually all have large investments between the various Pro-Blend and Lifestyle funds. Opening date November 1, 1995. Minimum investment $2,000. That is reduced to $25 if you sign up for an automatic monthly investing plan. Expense ratio 0.87% on $1.5 billion in assets as of August 2015. That’s about average for funds of this type. Comments Pro-Blend Conservative offers many of the same attractions as the Vanguard STAR Fund (MUTF: VGSTX ), but does so with a more conservative asset allocation. Here are three arguments on its behalf. First, the fund invests in a way that is broadly diversified and pretty conservative . The portfolio holds something like 200 stocks and 500 bonds, plus a few dozen other holdings. Collectively, those represent perhaps 25 different asset classes. No stock position occupies as much as 1% of the portfolio, and it currently has much less direct foreign investment than its peers. Second, Manning & Napier is very good . The firm does lots of things right, and they’ve been doing it right for a long while. Their funds are all team-managed, which tends to produce more consistent, risk-conscious decisions. Their staff’s bonuses are tied to the firm’s goal of absolute returns, so if investors lose money, the analysts suffer too. The management teams are long-tenured – as with this fund, 20-year stints are not uncommon – and most managers have substantial investments alongside yours. Third, Pro-Blend Conservative works . Their strategy is to make money by not losing money. That helps explain a paradoxical finding: they might make only half as much as the stock market in a good year, but they managed to outperform the stock market over the past 15. Why? Because they haven’t had to dig themselves out of deep holes first. The longer a bull market goes on, the less obvious that advantage is. But once the market turns choppy, it reasserts itself. At the same time, the fund has the ability to become more aggressive when conditions warrant. It just does so carefully. Chris Petrosino, one of the managing directors at Manning, explained it this way: We have the ability to be more aggressive. For us, that’s based on current market conditions, fundamentals, pricing and valuations. It may appear contrarian, but valuations dictate our actions. We use those valuations that we see in various asset classes (not only in equities), as our road map. We use our flexibility to invest where we see opportunities, which means that our portfolio often looks very different than the benchmark. Bottom Line The Pro-Blend Conservative Term Series S Fund has been a fine performer since launch. It has returned over 6% since launch and 5.4% annually over the past 15 years. That’s about 1% per year better than the total stock market and its conservative peers. In general, the fund has managed to make between 4-5% each year; more importantly, it has made money for its investors in 19 of the past 20 years. It is an outstanding first choice for cautious investors.

The Importance Of Your Time Horizon

I ran across two interesting articles today: Both articles are exercises in understanding the time horizon over which you invest. If you are older, you may not have the time to recover from market shortfalls, so advice to buy dips may sound hollow when you are nearer to drawing on your assets. Thus the idea that volatility, presumably negative, doesn’t hurt unless you sell. Some people don’t have much choice in the matter. They have retired, and they have a lump sum of money that they are managing for long-term income. No more money is going in, money is only going out. What can you do? You have to plan before volatility strikes. My equity only clients had 14% cash before the recent volatility hit. Over the past week I opportunistically brought that down to 10% in names that I would like to own even if the “crisis” deepened. That flexibility was built into my management. (If the market recovers enough, I will rebuild the buffer. Around 1300 on the S&P, I would put all cash to work, and move to the alternative portfolio management strategy where I sell the most marginal ideas one at a time to raise cash and reinvest into the best ideas.) If an older investor would be hurt by a drawdown in the stock market, he needs to invest less in stocks now, even if that means having a lower income on average over the longer-term. With a higher level of bonds in the portfolio, he could more than proportionately draw down on bonds during a crisis, which would rebalance his portfolio. If and when the stock market recovered, for a time, he could draw on has stock positions more than proportionately then. That also would rebalance the portfolio. Again, plans like that need to be made in advance. If you have no plans for defense, you will lose most wars. One more note: often when we talk about time horizon, it sounds like we are talking about a single future point in time. When the time for converting assets to cash is far distant, using a single point may be a decent approximation. When the time for converting assets to cash is near, it must be viewed as a stream of payments, and whatever scenario testing, (quasi) Monte Carlo simulations, and sensitivity analyses are done must reflect that. Many different scenarios may have the same average rate of return, but the ones with early losses and late gains are pure poison to the person trying to manage a lump sum in retirement. The same would apply to an early spike in inflation rates followed by deflation. The time to plan is now for all contingencies, and please realize that this is an art and not a science, so if someone comes to you with glitzy simulation analyses, ask them to run the following scenarios: run every 30-year period back as far as the data goes. If it doesn’t include the Great Depression, it is not realistic enough. Run them forwards, backwards, upside-down forwards, and upside-down backwards. (For the upside-down scenarios normalize the return levels to the right side up levels.) The idea here is to use real volatility levels in the analyses, because reality is almost always more volatile than models using normal distributions. History is meaner, much meaner than models, and will likely be meaner in the future… we just don’t know how it will be meaner. You will then be surprised at how much caution the models will indicate, and hopefully those who can will save more, run safer asset allocations, and plan to withdraw less over time. Reality is a lot more stingy than the models of most financial Dr. Feelgoods out there. One more note: and I know how to model this, but most won’t – in the Great Depression, the returns after 1931 weren’t bad. Trouble is, few were able to take advantage of them because they had already drawn down on their investments. The many bankruptcies meant there was a smaller market available to invest in, so the dollar-weighted returns in the Great Depression were lower than the buy-and-hold returns. They had to be lower, because many people could not hold their investments for the eventual recovery. Part of that was margin loans, part of it was liquidating assets to help tide over unemployment. It would be wonky, but simulation models would have to have an uptick in need for withdrawals at the very time that markets are low. That’s not all that much different than some had to do in the recent financial crisis. Now, who is willing to throw *that* into financial planning models? The simple answer is to be more conservative. Expect less from your investments, and maybe you will get positive surprises. Better that than being negatively surprised when older, when flexibility is limited. Disclosure: None

How Do You Manage Risk?

By Andy Hyer That is the question that has been top of mind for many investors over the past several weeks as the markets have done their best imitation of the Twisted Colossus at 6-Flags. As it relates to our family of separately managed accounts, the answer really differs by portfolio. Here is the overview of the approach to risk management for our 7 Systematic Relative Strength portfolios: Aggressive Owns 20-25 U.S. mid and large cap stocks. Buys stocks out of the top decile of our ranks, and sells them when they fall out of the top quartile of our ranks. Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure, so if a sector is weak, it is possible that we have zero exposure to that sector. Fully invested at all times. Core Owns 20-25 U.S. mid and large cap stocks. Buys stocks out of the top quartile of our ranks, and sells them when they fall out of the top half of our ranks. Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure, so if a sector is weak, it is possible that we have zero exposure to that sector. Fully invested at all times. Growth Owns up to 25 U.S. mid and large cap stocks. Buys highly ranked stocks, and sells when they fall out of the top half of our ranks or have sufficient trend or technical attribute deterioration. Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure, so if a sector is weak, it is possible that we have zero exposure to that sector. Can raise up to 50% cash as dictated by market conditions. International Owns 30-40 small, mid, and large cap ADRs from both developed and emerging markets. Buys stocks out of the top quartile of our ranks, and sells them when they fall out of the top half of our ranks. Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure, so if a sector is weak, it is possible that we have zero exposure to that sector. Fully invested at all times. Balanced Owns 20-25 U.S. mid and large cap stocks and U.S. Treasurys in an approximately 60% equities / 40 % fixed income weight. Buys stocks out of the top quartile of our ranks, and sells them when they fall out of the top half of our ranks. Fixed income exposure to intermediate U.S. Treasurys. Overweights sectors up to approximately 2x the weight of that sector in the broad universe; no minimum required sector exposure, so if a sector is weak, it is possible that we have zero exposure to that sector. Fully invested at all times. Global Macro Owns 10 ETFs from a broad range of asset classes, including U.S. equities, International equities, Inverse equities, Currencies, Commodities, Real Estate, and Fixed Income. No minimum constraints in asset class exposure, so that if an asset class is weak, it is possible for us to have zero exposure to that asset class. Strict buy and sell discipline based on relative strength. Tactical Fixed Income Owns 2-6 Fixed Income ETFs from a broad range of sectors of Fixed Income, including U.S. Treasurys, TIPs, Corporate Bonds, Emerging Market Bonds, High Yield, and Convertible Bonds. 40% of the portfolio will always remain invested in some form of U.S. Treasurys (Short-Term, Long-Term or TIPs). Strict buy and sell discipline based on relative strength. The chart below is based on Dorsey Wright’s opinion of the likely relationship between volatility and return in each of the different strategies over a long period of time. The actual results may differ from these expectations. Greater volatility may result in greater gains and greater losses. (click to enlarge) Life is full of trade-offs, and the financial markets are no different. Good results are likely to be achieved when a caring financial advisor takes the time to understand their clients’ needs and risk tolerance, and then to build the right allocation for that client. For those advisors using our SMAs as part of that allocation, they will find that these 7 portfolios have very different approaches to risk management. All of them employ some form of risk management. Even the fully invested portfolios are managing risk through individual position management (i.e., cutting them back when they become too large a percentage of the portfolio, or completely selling them when dictated by relative strength rank) and through sector exposure. Others, like “Growth”, can raise up to 50% cash to seek to mitigate some of the downside risk. “Balanced” benefits from the time-tested benefits of combining equities and fixed income. “Global Macro” is our “go anywhere” portfolio that can completely shift away from weak asset classes if needed. Share this article with a colleague