The American Association of Variable Star Observers Proposal for Investment Advisory Services Paul B, Toom ey Duncan W. Gillan First Vice President – Investm ent Officer First Vice President – Investm ent Officer paul.toom ey@w ellsfargoadvisors.com duncan.gillan@w ellsfargoadvisors.com (617) 854-1944 (617) 723-3200 Jeffrey E. Rakes, CIMA, CIS Senior Vice President - Investm ents jeffrey.rakes@w ellsfargoadvisors.com (540) 983-1346 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. January 2013
Institutional Consulting - Key Areas • Introduction – Team, Process, Review Meeting Format • Review of Current Situation • Portfolio Recommendation • Summary of Annual Fees 2 2 2
Investment Consulting Team Lead Consultants Paul Toom ey Duncan Gillan Support Team : W ells Fargo Advisors Resources Manager Advisory Alternative I nstitutional Strategy Group Services Group Strategy Group Group ( 1 5 Professionals) ( 1 3 Professionals) ( 1 3 Professionals) ( 1 2 Professionals) Greg Sigmund - Dir. Adam Taback – Pres. Lee Batten - Dir. Mike Havey – Dir. Bob Franklin Paul Christopher Todd Noel Jeff Rakes Gary Thayer Hazlitt Gill Terry Czerniewski Tom Wald James Sweetman Stuart Freeman 9 Investment 9 Manager 10 Performance 11 Manager Research Analysts Strategists Research Analysts Analysts
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 4 4 4
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 organization 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. 5 5 5
Steps In The Investment Consulting Process Rebalance Monitor and Supervise I m plem ent Policy Form alize Step 5 I nvestm ent Concise Reports Policy Step 4 Custom ized to your needs Design Diligent Optim al Application of Step 3 Process Portfolio Harnessing the Analyze Analysis and Pow er of W ells Current Confirm ation of Fargo Advisors’ I nvestm ent Position Consulting Step 2 Guidelines and Platform Risk Param eters Modern Portfolio Theory, Re-Sam pled Step 1 Efficiency, Experience, and Review Capital Professional Markets I ntuition Risk Posture Assessm ent Process
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 7 7 7
Performance Reporting Analytics 8 8 8
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 9 9 9
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 10 10 10
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. 11 11 11
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