4Q 2012 Asset Management Letter

April 5, 2013   ·   By cfgadmin   ·   Comments Off on 4Q 2012 Asset Management Letter   ·   Posted in Asset Management Letter Archive, News

January 21, 2013

If you are reading this letter then we escaped the Mayan Apocalypse, the Storm of the Century and the fiscal cliff last year. In a strange turn of events, the S&P 500 clocked a 15.8% rate of return while fire and brimstone fell from the sky. (Okay, maybe that was just in Washington D.C. as our esteemed leaders found middle ground.) At the same time small cap stocks, vis-à-vis the Russell 2000, were up 16.7% and international stocks ( MSCI EAFE) were up 18.6%. The fixed income benchmark, Barclay’s Aggregate Bond Index, also returned a positive 4.21%.

We mention the headlines above with a goal of reminding clients how difficult the investment atmosphere was during 2012. In particular we note this as the Hedge Fund–Fund of Fund Composite Index, ostensibly composed of the smartest active managers in the business was only up 5.25%. The  flexible managers we hire were up significantly more with Pimco All Asset All Authority up 17.66%, Ivy Asset Strategy up 19.60%, FPA Crescent up 10.33%, Marketfield up 13.50%, Wasatch Long Short up 8.67, TFS Market Neutral up 7.80% and Wells Fargo Absolute Return up 10.01%. Please understand this is not to brag about the mutual funds we use versus hedge funds or plea to charge their exorbitant management fees. It is instead meant to reinforce our belief that the use of flexible managers will encourage our clients to remain invested in the market so they can pursue a goal of earning a reasonable rate of return against a backdrop of uncertainty. With inflation (as measured by CPI) running at 1.8% through November 2012 and a ten year treasury bond yielding 1.87%, we feel certain you will need something besides 100% treasuries to make ends meet.

On the subject of flexible managers, one of the managers we use, TFS Market Neutral, was selected by Morningstar as the first “Alternatives Fund Manager of the year”. In Morningstar’s words, “the team far outpaced its market-neutral category rivals on both an absolute and risk-adjusted basis (as measured by its Sharpe ratio)… the fund’s 7.9% annualized gain since its September 2004 inception through December 2012 tops the category on a Morningstar Risk-Adjusted basis and bests both the Russell 2000 and S&P 500, with roughly half the volatility (as measured by standard deviation).” Another facet that helped us choose to use TFS over its rivals is that the fund’s advisor, TFS Capital, mandates that each portfolio manager invests at least 50% of their personal liquid net worth in TFS funds. In addition to that, we highly respect that management has closed the fund to new investors several times, allowing the fund to stay agile enough to invest in their best ideas. (At $1.8 billion in assets, it is currently closed to retail investors but still open to Creative clients.) Specifically this fund invests in the small cap sector and if they get too big, then they are unable to navigate the small cap arena nimbly.

In addition, two of the other managers we frequently use, Mainstay Marketfield and Pimco All Asset All Authority were nominated for the same award in the Alternatives Fund Manager of the year and Allocation Fund Manager of the year, respectively. We contacted Morningstar to ask if they could further clarify why they chose one manager instead of another, and the short version is, that once they get to the final round the final choices are all very good and  the winner comes down to a comparison of returns, stewardship, expenses, organizational strength, and risk.. Suffice it to say, that if you make it to the final rounds, you are invested in a very capable manager.

We realize we have spent more time on a few of our names than normal, but we feel this is necessary in the current market. Global pontificating about interest rates and macro concerns is something we do quite often, but we realize it can become boring to most investors. We have seen our friends glaze over at cocktail parties when we start discussing detailed economic analysis. The world has always had risk and always will. You took a risk walking out the mailbox to retrieve this letter. Our charge is to navigate through the obstacles and allow you a comfortable return. Your job is to make it back from the mailbox. Please call us when you make it back if you have any questions.

Sincerely,

General Compliance Disclosures

Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions.

Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI.

Investment products and services provided by Synovus are offered through Synovus Securities, Inc, Synovus Trust Company, N.A., GLOBALT, Inc. and Creative Financial Group. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.