#1 App – Fad or Fiction?

Content provided by Kostya Etus, CFA, CLS Portfolio Manager

You knew this was coming sooner or later, and who better to report on it than the resident gamer himself (which is me if you were not sure).

The Pokémon Go app has been #1 on the Apple App Store since launch on July 6th. It has more daily active users than Twitter and a higher daily engagement rate than Facebook, Snapchat, and Instagram. It is setting all kinds of records, including being the biggest U.S. mobile game EVER – after only a few weeks in existence it has exceeded 21 million daily active users and 30 million downloads in the U.S. alone, more than any game in history. Over the last couple of weeks it has been rolled out to other countries and it just launched in its home country of Japan a week ago!

What the heck is it? In case you have been living under a rock, you know that it is a game that actually requires you to interact with the “real world” to play, a revolutionary idea with endless possibilities… for making money for large corporations. Yes, you actually have to travel to various locations outside of your house (following a grid curiously resembling Google Maps) in order to capture imaginary monsters and store them in your pocket… Pocket Monsters… Pokémon… you get it. There are stops along the way that give you free rewards located at key locations  in the area (curiously many restaurants and shops) – I can see so many dollar signs popping up above shop owners’ heads.

What makes it so great? Pokémon is not something new. It has been around since the mid 90’s and has presented the world with a long running television show, almost 20 movies, multiple console video games, the physical card game craze, and many other things that have fizzled out. The popularity of this new game may actually have little to do with the franchise and more to do with the current generation wanting to:

  • Socialize (think Twitter)
  • Be more health conscious (think Fitbit)
  • Have simplicity (think any Apple product)
  • Be rewarded for doing very little (think about Yourself)

Who is benefiting? If you have looked at Nintendo’s stock price over the last three weeks, you would think that they were the sole owner of everything related to this game (posting over a 100% return at one point as seen in the price chart below). But in fact this is not the case. There is a complex ownership web behind this game and I’m going to attempt to sort it out (you can use the chart below from to try and follow along):

  • Pokémon Go was developed by The Pokémon Company and Niantic
  • Nintendo owns a 32% stake in The Pokémon Company
  • The rest of The Pokémon Company is owned by Game Freak and Creatures, but Nintendo owns 10% of Creatures
  • Niantic spun off from Alphabet (you know, Google) and is now Venture Capital backed by Nintendo, The Pokémon Company, and Google as some of the larger investors (with unknown ownership shares)

Is your head spinning yet?? Here is the main point: the game has reported earnings of about $35 million at this point, let’s say under a third of it may actually be going to Nintendo… is that a lot for a multi-billion dollar company? Probably not enough to make its price trade at over 150 times earnings… perhaps the price jump may not have been completely warranted (as can already be apparent by the more recent downward movement in price). But are there also some areas which may be benefiting that are not getting the recognition they deserve:

  • Apple – projected to make $3 Billion in revenue from this game through the App Store
  • McDonald’s – announced they will be distributing Pokémon toys with Happy Meals
  • Wireless Carriers – are going to get record levels of data usage as people venture outside of Wi-Fi range
  • Magic Leap – a company heavily funded by Google and Alibaba is building a headset that projects images into users’ eyes so digital images appear in real life (Microsoft is developing a similar display called HoloLens)

Pokemon Go Infographic

“Augmented reality” in general may be the next phenomenon, aside from Magic Leap and Microsoft, there are over 100 companies working in this space. As we know Apps have a fairly short shelf life due to the extremely low barriers to entry (when is the last time you played Candy Crush). So expect many new iterations of this new innovation in the months to come. Good or bad, this is only the beginning!

If you haven’t seen people playing it, here is an example of what it looks like: LINK

Nintendo Stock Chart


Adding Alpha to Income

Various asset types in a shopping cart. An ideal investment that diversifies every assets in a portfolio to minimize unsystematic risk as low as possible. Asset allocation and diversification concept.

Various asset types in a shopping cart. An ideal investment that diversifies every assets in a portfolio to minimize unsystematic risk as low as possible. Asset allocation and diversification concept.

Content provided by Josh Jenkins, CFA, CLS Portfolio Manager

Income investors have struggled to find yield since the financial crisis when the Federal Reserve (Fed) instituted a zero interest-rate policy. Even the move by the Fed last December to raise the benchmark rate for the first time in seven years has offered no relief. In fact, things are now arguably worse. The yield on the 10-year Treasury bond has fallen nearly 1%. With traditional asset classes, such as U.S. stocks and investment-grade bonds, yielding somewhere in the neighborhood of 2% – 2.25%, where are income investors to turn?

Fortunately, there are still opportunities for savvy investors who can tolerate some market risk. One such opportunity comes from a relatively small and unloved segment of the investment world, closed-end funds (CEF). (For a brief explanation of CEFs, please check out the description at the bottom of this post.) Aside from a general focus on high-income-generating assets within the CEF space (the average taxable CEF has a yield of roughly 9%), the CEF structure offers a few additional benefits for income investors. For instance, some CEFs utilize leverage (increasing the investable assets through borrowing). Others provide access to various income-centric strategies, such as covered call writing. Finally, CEFs typically trade at a discount to their net asset value (NAV). This allows investors to purchase an income stream at a cheaper price, effectively increasing the yield. For example, investors can purchase a $10 asset that pays a $0.50 per-year distribution for a yield of 5%. If investors could instead purchase that asset at a 10% discount ($9), the yield becomes 5.56% ($0.50/$9).

Indeed one of the most valuable aspects of CEFs may be the potential to purchase them at attractive prices relative to their NAVs; but buyer beware. If investors are not careful, they could end up paying much more for a fund than they would otherwise have to. A heightened level of due diligence is certainly required.

This type of due diligence is something CLS is accustomed to, and we have a strategy that seeks to take advantage of this very opportunity: Active Income X. In a nutshell, Active Income X is a series of five globally diversified, multi-asset, income-focused portfolios. Each portfolio is comprised of ETFs and CEFs and targets a specific yield, which ranges from 3% to 7% net of fees (more info here).

In addition to providing a healthy boost to yield, purchasing assets at a larger-than-normal discount to NAV provides the potential for increased price appreciation. Over the last year, taxable CEFs have traded at an average discount to NAV of about 8.5%. If an investor purchased a basket of CEFs at the beginning of last year, he or she would have scooped them up at an attractive discount of approximately 9.7%. Over the following 12 months, that discount shrunk to just 6.4%. This would equate to a roughly 3.3% return for the investor, without the underlying investments necessarily changing in price. Despite that positive outcome, CEFs are still trading at a larger discount than they have on average over the last five years. This means there is still some potential for continued benefit, though it is by no means a certainty.

Active Income X has definitely benefited from this market movement.

Taxable CEF Discounts

A closed-end fund is a publicly traded investment, such as an open-ended mutual fund or ETF. Like an ETF, CEFs trade intra-day on an exchange. Unlike an ETF or mutual fund, a CEF has a fixed number of shares. In addition, share prices for a CEF may substantially deviate from the fund’s net asset value (NAV). When demand for shares exceeds the supply, the share prices may trade at a premium (above NAV). When supply exceeds demand, share prices may trade at a discount (below NAV).



How to Easily ‘Deliver’ What Your Clients Want

This week, we've got updates to talk about for our most in-demand app, Trends. We're also rolling out new training events and our next Fuse judge profile with J.D. Bruce.

The post How to Easily ‘Deliver’ What Your Clients Want appeared first on Orion Advisor Services.


Understanding the Nuances of Omnibus Accounts

Alma Piscitello, SVP, Head of Strategic Relationships for Northern Lights Distributors was recently quoted in the Fund Operations article, “Understanding the Nuances of Omnibus Accounts”. The article discusses the rise of omnibus accounts in the mutual fund industry and how that has spurred a new operational role, one that focuses on intermediary relationships and fee structures in an intensely regulated environment.

“Managers are asking how intermediaries monitor these transactions, what kind of reporting they are doing, and how they comply with Rule 22c2,” Piscitello said. “Funds have a responsibility to ask the intermediary how they’re going to help. Investment companies still need to have policies in place to monitor trading activity, show the audit trail, and from a compliance point of view, show that they have oversight at a client level.”

To read the full article click here.





Using Email to Stay in Constant Contact

constant contact

Using email is a great way to stay in constant contact with your clients, but you need to use it in a way that delivers valuable and timely information.

The post Using Email to Stay in Constant Contact appeared first on Orion Advisor Services.


The Importance of an Investment Philosophy (The Second P of Money Manager Due Diligence)

Business people having meeting in office building

Content provided by Rusty Vanneman, CFA, CLS Chief Investment Officer

In a recent commentary, I wrote about the “Five P’s” of the money manager’s due diligence process:

  • People
  • Philosophy
  • Process
  • Performance
  • Positioning

I followed that commentary with a more focused blog on the most important P: People.

In this commentary, I will discuss the next P: Philosophy. What is meant by an investment philosophy? In short, what does an investment manager believe about the markets and investing? About managing money? What is his or her ultimate goal? When picking managers, it’s important to understand their philosophies for several reasons, including:

  1. it will help you understand how and why they manage money the way they do
  2. it will help make sure you are comfortable with that philosophy

At CLS, our investment philosophy can be summarized this way: To help investors succeed, we believe in Risk-Budgeted, globally balanced ETF portfolios. Let’s break this statement down into more detail.

Helping Investors Succeed

Our ultimate goal is helping investors reaching their financial objectives. To accomplish that, we believe global, balanced, Risk-Budgeted ETF portfolios along with clear and consistent communication and investor education will help investors achieve success.

Risk Budgeting

At CLS, we build Risk-Budgeted portfolios. We believe for investors to reach their goals they need to assume risk and the best way to do so is to measure and manage it via Risk Budgeting. We also believe this is a better way to build balanced portfolios.

CLS uses Risk Budgeting because of three core beliefs:

  • All investors have a capacity to bear risk, and the best way to control risk is to measure it, rather than relying on a traditional stock-to-bond ratio.
  • Over the long term, investors are rewarded for bearing risk; having too little risk hurts investor returns.
  • Investment methodologies should be designed to pair a disciplined risk management system with a flexible approach to asset allocation. Doing so enables CLS’s portfolio management team put together risk-appropriate portfolios by looking at the broadest set of choices.


We are global investors, investing not just in domestic securities but also overseas. We believe diversification across domestic and international assets provides improved risk-adjusted returns over time.


We believe asset allocation — and keeping the proper balance between assets — works for investors. Investors stay in balanced portfolios longer than other portfolios and they have smaller “behavior gaps” (differences between investment returns and investor returns). Balanced portfolios offer a better experience for all parties involved.


Though CLS does manage some mutual fund portfolios, our preference is to use ETFs whenever possible. We believe ETFs provide numerous benefits for investors, including lower costs, tax efficiency, and investment precision.


In the end, empowering advisors to help investors succeed is our ultimate goal. Whether it is through sound investment management by building reliable portfolios or through investment education and counseling through our communication, we want investors to be comfortable and stay the course.

P.S. On every weekly meeting agenda, the CLS Investment Team includes this list of what we believe:

We Believe:

  • We believe our ultimate goal is to help advisors and investors reach their investment objectives. This is accomplished through our relationships, portfolios, and communication/education.
  • We believe in risk-managed portfolios (especially those that are Risk Budgeted).
  • We believe in globally diversified, balanced portfolios.
  • We believe in the power of
  • We believe in client service and communication that is accessible, honest, and educational. “Plain talk; simple talk.”
  • We believe in constant professional growth. We are always trying to improve.
  • We believe in the power of teamwork. We help each other and hold each other accountable.
  • We believe that every basis point of performance matters. We play to win.



New Updates to One of Our Most In-demand Apps

This week, we've got updates to talk about for our most in-demand app, Trends. We're also rolling out new training events and our next Fuse judge profile with J.D. Bruce.

The post New Updates to One of Our Most In-demand Apps appeared first on Orion Advisor Services.


Mind the Gap

Standing by a mind the gap notice

Content provided by Case Eichenberger, CIMA, CLS Client Portfolio Manager

As I write this, markets are reaching new highs again in the U.S., which is great news for investors who were able to put emotions aside the last year and stay invested.  Easier said than done.

At CLS, we routinely see clients trying to time the market. Unfortunately, it typically does not end well. Preventing this inevitable return gap (known as the behavior gap) and coaching clients to stay put in their portfolios is how financial advisors and CLS earn their fees. That said, advisors need coaching from time-to-time too. Yes, some advisors also like to try to time the market and are prone to the same emotions and behavioral biases as investors. CLS tries to prevent emotion-driven investing through an investment philosophy known as Risk Budgeting (RB).

A study I conducted on a CLS client and a CLS advisor, who we will call “John Smith,” illustrates the pitfalls of the behavior gap. John has the ability to alter Risk Budgets and move to cash for his clients. Recently, after the emotional fallout over Brexit, John moved some clients to cash. One of those clients’ investment experiences is shown below.

CD - Benchmark Performance - John Smith

As you can see, the blue line (benchmark 70 RB*) ends much higher than the green line (client).

Here’s the experience of another client, who remained in a 70 RB portfolio.

CD - Benchmark Performance - Jane Smith

The client (green line) was much better off by staying the course and letting the RB do its thing.

Below are total returns over the time period.

Behavior gap client:

CE - Behavior Gap Client

Invested client:

CE - Invested Client

The returns show a difference of approximately 5% that could continue to compound and grow over time.

I can’t stress enough the importance of good advice in the marketplace, and there has been no shortage of studies that show market timing does not add value. Investing is emotional, and we believe the Risk Budget is the best tool we have to enhance the investor experience and keep the client comfortable and invested. After all, isn’t that the goal of the Risk Budget in the first place? A client’s RB number represents a portfolio that he or she is comfortable with in all environments; it should not be used as a timing tool to move from one to the other.

Click here for a study from Envestnet that takes this anecdotal evidence to another level. I’m just showing one CLS account here, Envestnet examined thousands, and the result was the same. Tactical timing to cash and back is harmful to the client’s bottom line performance.

“Try to be more patient” is the best financial advice that no one wants to hear, like the doctor saying “eat better and go for a run.” — Morgan Housel

The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC. This information is prepared for general information only. Past performance is not a guide to future performance.

The Risk Budget 70 benchmark is comprised of 42% Russell 3000 Index, 28% MSCI ACWI ex –U.S. Index, and 30% 1-3 month U.S. Treasury Index.  The Russell 3000 Index is an unmanaged index considered representative of the U.S. stock market. The MSCI ACWI ex US Index is an index considered representative of stock markets of developed and emerging markets, excluding those of the US.  The Barclay’s Capital 1-3 Month U.S. Treasury Bill® Index includes all publicly issued zero-coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and more than 1 month, are rated investment grade, and have $250 million or more of outstanding face value.


An index is an unmanaged group of stocks considered to be representative of different segments of the stock market in general.  You cannot invest directly in an index.




Fuse 2016 Judges Profile: J.D. Bruce

Learn more about what to expect from Fuse 2016 and see what J.D Bruce hopes to see from this year's event in today's judge profile.

The post Fuse 2016 Judges Profile: J.D. Bruce appeared first on Orion Advisor Services.


A Man’s World

Content provided by Robyn Murray, Freelance Writer

Jessica Golson often finds herself the only woman at the table. A trading manager at CLS, Golson works in an industry dominated by men. So much so, that a 2014 study by recruiting firm Vettery, found a full 77.5% of first-year analysts on Wall Street were men. How women fare in investment firms nationwide is not as well documented, but the ratio of senior-level men to women is even more disproportionate across the industry.

Golson, however, has never let a boy’s club bother her.

“The only girl in the room”

Born and raised in Omaha, Golson has always enjoyed the challenge and logic of numbers. “I always liked math,” she said. “And I remember seeing tickers going across the TV screen and wanting to know what that meant someday.”

After high school, Golson enrolled at the University of Nebraska at Omaha as a business administration major. She excelled at accounting, and her teachers pushed her in that direction. “I liked accounting because I was good at it, and it was numbers,” she said, “they were all right there.” But the subject didn’t challenge her enough. “In accounting, there’s just one answer,” she said. “You can get to it a lot of different ways, but there’s still just one.”

Golson tried out a class on investing and, coincidentally, CLS Portfolio Manager Scott Kubie was her first teacher. “You could tell he knew a lot,” she recalled with a laugh. “He still likes to teach me things.” Golson remembers Kubie encouraged her to think beyond the surface and dig deeper to get the real data. She soon discovered finance was far more fascinating than straightforward calculations. “There are just so many different variables that come into play,” she said.

Golson decided to continue in finance and enrolled at Creighton University, where she was one of a handful of female students. “[The investment industry] is totally dominated by men,” she said. “But I grew up with two older brothers, so I’ve just never been intimidated by being the only girl in the room.”

JessG Bio pic

Jessica, with her brothers Eric (left) and Tim (right).

Golson credited her mother with making sure she always knew she could do anything her brothers could do. She said she’s never viewed being in the minority as a hurdle or a reason for hesitation, but she understands how it could be. “I think the biggest thing is you have to not be afraid of challenges,” she said. “Take them on and make decisions. You just have to be able to take it and get over being concerned with what people think.”

Golson earned her master’s degree in securities analysis at Creighton, and today, as the only female operations manager at CLS, she believes she offers a different perspective, and at times, a more empathetic stance. She recalls an experience that still influences her decisions. As a financial advisor — her first position after college — she counseled investors through the financial crash of 2008. She recalls one man in particular, who was her father’s age, ready to retire. His wife had recently been diagnosed with breast cancer, and he’d just lost everything in his retirement savings. “He’d done everything right, saving for so long,” Golson said, “and then when it came time to do something, he couldn’t do it.” The client was crying in her office, she recalled, and that made everything she’d learned in the classroom suddenly very real. Golson keeps that experience in mind when she’s making decisions based on data, and she believes that type of empathy in this industry is crucial. “It’s really easy to just look at numbers,” she said, “but that’s someone’s actual life savings.” Golson said CLS prioritizes the individuals behind the numbers, and that’s why its role is so important.

Golson recently began assisting the Portfolio Analyst and Management Team a few hours a week. It’s a new challenge, and she’s not yet sure where it will lead her. Her original goal after college was portfolio management, but she’s intrigued by the many areas of specialty available to her. CLS, which puts a premium on diversity, is encouraging her to rise through the ranks. Whatever she decides, she won’t let being the only woman in the room stop her.

“I do care about people first and foremost,” she said. “But I’m also not afraid to stand my ground and take charge.”